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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                                                                                     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                                     
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2003        
|or        
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from           to

Commission file number 1-75

Household Finance Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                             |  |                                                   
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|                                                                                            
|Delaware(State of incorporation)                                                             |  | 36-1239445(I.R.S. Employer Identification
    No.)
|                                                                                            
|                                                                                            
|2700 Sanders Road
    Prospect Heights, Illinois(Address of principal executive
    offices) |  | 60070(Zip Code)                                   

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

Securities registered pursuant to
Section 12(b) of the Act:

|                                  |  |                                          
|--------------------------------- |  | -----------------------------------------
|Title of Each Class               |  | Name of Each Exchange on Which Registered
|                                  |  |                                          
|6 3/4% Notes, due May 15, 2011    |  | New York Stock Exchange                  
|6.875% Notes due January 30, 2033 |  | New York Stock Exchange                  
|6% Notes due November 30, 2033    |  | New York Stock Exchange                  

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 þ     No o

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. þ

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

As of February 27, 2004, 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



|                                                                                                                                |                                                                                                |                           |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------- |  |  |  |  |  | 
|PART I                                                                                                                         
|                                                                                                                                | Item 1. Business.                                                                             
|                                                                                                                                |                                                                                                | Introduction             
|                                                                                                                                |                                                                                                | General                  
|                                                                                                                                | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II                                                                                                                        
|                                                                                                                                | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                
|                                                                                                                                | Item 6. Selected Financial Data.                                                              
|                                                                                                                                | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|APPLICATION OF CRITICAL ACCOUNTING POLICIES                                                                                    
|FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                                  
|CREDIT QUALITY                                                                                                                 
|LIQUIDITY AND CAPITAL RESOURCES                                                                                                
|OFF-BALANCE-SHEET ARRANGEMENTS (INCLUDING SECURITIZATIONS AND COMMITMENTS), SECURED FINANCINGS AND CONTRACTUAL CASH OBLIGATIONS
|RISK MANAGEMENT                                                                                                                
|NEW ACCOUNTING PRONOUNCEMENTS                                                                                                  
|GLOSSARY OF TERMS                                                                                                              
|                                                                                                                                | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|                                                                                                                                | Item 9A. Controls and Procedures.                                                             
|PART III                                                                                                                       
|                                                                                                                                | Item 10. Directors and Executive Officers of the Registrant.                                  
|                                                                                                                                | Item 11. Executive Compensation.                                                              
|                                                                                                                                | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Matters.  
|                                                                                                                                | Item 13. Certain Relationships and Related Transactions.                                      
|                                                                                                                                | Item 14. Principal Accountant Fees and Services.                                              
|PART IV                                                                                                                        
|                                                                                                                                | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                    
|                                                                                                                                |                                                                                                | (a) Financial Statements.
|                                                                                                                                |                                                                                                | (b) Reports on Form 8-K. 
|                                                                                                                                |                                                                                                | (c) Exhibits.            
|SIGNATURES                                                                                                                     
|EXHIBIT INDEX                                                                                                                  
|Computation of Ratio of Earnings to Fixed Charges                                                                              
|Consent of KPMG LLP                                                                                                            
|Certification of CEO and CFO Pursuant to Sec. 302                                                                              
|Certification of CEO and CFO Pursuant to Sec. 906                                                                              
|Ratings of Household Finance Corp and Subsidiaries                                                                             



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TABLE OF CONTENTS

|              |            |  |  |                                                                                           |                                                    |  |     |     | 
|------------- | ---------- |  |  | ----------------------------------------------------------------------------------------- | -------------------------------------------------- |  | --- | --- | 
|PART/Item No. |            |  |  | Page                                                                                     
|              |            |  |  |                                                                                          
|              | PART I     |  |  |                                                                                           |                                                    |  |     |    
|              | Item 1.    |  |  | Business                                                                                  |                                                    |  | 2   |    
|              |            |  |  |                                                                                           | Introduction                                       |  |     | 2   | 
|              |            |  |  |                                                                                           | General                                            |  |     | 2   | 
|              |            |  |  |                                                                                           | Regulation                                         |  |     | 4   | 
|              |            |  |  |                                                                                           | Cautionary Statement on Forward-Looking Statements |  |     | 5   | 
|              |            |  |  |                                                                                           | Corporate Governance                               |  |     | 7   | 
|              | Item 2     |  |  | Properties                                                                                |                                                    |  | 7   |    
|              | Item 3     |  |  | Legal Proceedings                                                                         |                                                    |  | 7   |    
|              | Item 4     |  |  | Omitted                                                                                   |                                                    |  | 9   |    
|             
|              | PART II    |  |  |                                                                                           |                                                    |  |     |    
|              | Item 5     |  |  | Omitted                                                                                   |                                                    |  | 9   |    
|              | Item 6     |  |  | Selected Financial Data                                                                   |                                                    |  | 10  |    
|              | Item 7     |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                    |  | 12  |    
|              | Item 7A    |  |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |                                                    |  | 66  |    
|              | Item 8     |  |  | Financial Statements and Supplementary Data                                               |                                                    |  | 66  |    
|              | Item 9     |  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |                                                    |  | 114 |    
|              | Item 9A    |  |  | Controls and Procedures                                                                   |                                                    |  | 114 |    
|             
|              | PART III   |  |  |                                                                                           |                                                    |  |     |    
|              | Item 10    |  |  | Omitted                                                                                   |                                                    |  | 115 |    
|              | Item 11    |  |  | Omitted                                                                                   |                                                    |  | 115 |    
|              | Item 12    |  |  | Omitted                                                                                   |                                                    |  | 115 |    
|              | Item 13    |  |  | Omitted                                                                                   |                                                    |  | 115 |    
|              | Item 14    |  |  | Principal Accountant Fees and Services                                                    |                                                    |  | 115 |    
|             
|              | PART IV    |  |  |                                                                                           |                                                    |  |     |    
|              | Item 15    |  |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |                                                    |  | 116 |    
|              |            |  |  |                                                                                           | Financial Statements                               |  |     | 116 | 
|              |            |  |  |                                                                                           | Reports on Form 8-K                                |  |     | 116 | 
|              |            |  |  |                                                                                           | Exhibits                                           |  |     | 116 | 
|              | Signatures |  |  | 118                                                                                       |                                                   

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PART I




Item 1.     Business.






Introduction


Household Finance Corporation (HFC)
is a wholly owned subsidiary of Household International, Inc.
(Household or the parent company). On
March 28, 2003, Household was acquired by HSBC Holdings plc
(HSBC) by way of merger with H2 Acquisition
Corporation (H2), a wholly owned subsidiary of HSBC,
in a purchase business combination. Following the merger, H2 was
renamed Household International, Inc. Effective
January 1, 2004, HSBC transferred its ownership interest in
Household to a wholly owned subsidiary, HSBC North America
Holdings Inc., who subsequently contributed Household to its
wholly owned subsidiary, HSBC Investments (North America) Inc.
As a result of the merger and subsequent transfers,
Households equity is no longer publicly traded. However,
as wholly owned subsidiaries of HSBC, Household and HFC will
continue to file periodic reports with the United States
Securities and Exchange Commission (the SEC) in a
reduced disclosure format in accordance with SEC rules.




General

HFC offers real estate secured loans, auto
finance loans, MasterCard* and Visa* credit card loans, private
label credit card loans, 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 treasury and corporate activities which include fair value
adjustments related to purchase accounting and related
amortization, are included under the All Other
caption within our segment disclosure.

We generally serve non-conforming and nonprime
consumers. Such customers are individuals who have limited
credit histories, modest incomes, high debt-to-income ratios,
high loan-to-value ratios (for real estate secured products) or
have experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other credit
related actions.

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®). We also supplement
internally-generated receivable growth with portfolio
acquisitions and, prior to 2003, purchases from an affiliate.

2003
Developments



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 28, 2003, HSBC completed its
    acquisition of Household by way of merger with H2, acquiring
    100% of the voting equity interest of Household in a purchase
    business combination. Households acquisition by HSBC on
    March 28, 2003 has resulted in a new basis of accounting




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

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reflecting the fair market value of our assets
and liabilities for the successor period beginning
March 29, 2003. Information for all predecessor
periods prior to the merger is presented using our historical
basis of accounting, which impacts comparability to our
successor period beginning March 29, 2003.
During 2003, the predecessor period contributed
$460.7 million of net income and the successor
period contributed $1.4 billion of net income. To assist in
the comparability of our financial results and to make it easier
to discuss and understand our results of operations, the
predecessor period (January 1 to March 28,
2003) has been combined with the successor period
(March 29 to December 31, 2003) in the following
discussion and in Managements Discussion and Analysis to
present combined results for the year ended
December 31, 2003.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our net income was $1.9 billion in 2003,
    $1.6 billion in 2002 and $1.7 billion in 2001.
    Operating net income was $2.0 billion in 2002. Operating
    net income is a non-GAAP financial measure which excludes the
    settlement charge and related expenses of $333.2 million,
    after-tax, in 2002. Operating net income declined from the prior
    year due to higher operating expenses to support receivables
    growth; increased legal and compliance costs; higher
    amortization of intangibles arising from the acquisition by
    HSBC; lower initial securitization activity as a result of the
    use of alternative funding sources including HSBC subsidiaries
    and customers; and higher provision for credit losses as a
    result of higher charge-offs. Partially offsetting these
    decreases were higher net interest margin and fee income due to
    receivable growth and lower funding costs. Net income during
    2003 was positively impacted by purchase accounting adjustments,
    including adjustments to the cost of our funding to reflect
    lower credit spreads which was partially offset by higher
    amortization of intangibles arising from the acquisition by
    HSBC, and by the discontinuation of the shortcut method of
    accounting for our interest rate swaps under SFAS No. 133,
    all of which were the result of the HSBC merger. In 2003,
    amortization of purchase accounting adjustments increased net
    income by $98.6 million and the loss of the shortcut method
    of accounting increased net income by $51.7 million. We
    have restructured our interest rate swap portfolio to regain use
    of the shortcut method of accounting and to reduce the potential
    volatility of future earnings.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Households acquisition by HSBC has improved
    our access to the capital markets and reduced our funding costs.
    It also gave us the ability to use HSBCs liquidity to
    partially fund our operations and reduce our overall reliance on
    the debt markets. In addition, our affiliation with HSBC has
    expanded our access to a worldwide pool of potential investors.
    In 2003, tightened credit spreads relative to treasuries have
    resulted in approximately $125 million in cash funding
    expense savings compared to the funding costs we would have
    incurred using average spreads from the first half of 2002.
    Amortization of purchase accounting fair value adjustments
    applied to our external debt obligations, including derivative
    financial instruments, as a result of the HSBC merger reduced
    interest expense by $797.6 million in 2003.                                                                                                                                                                                     
|
| |  | Following completion of the merger with HSBC,
    Standard & Poors upgraded our long-term debt rating to
    A and our short-term debt rating to A-1;
    Moodys Investors Service (Moodys) placed
    our long-term debt ratings on review for possible upgrade and
    Fitch Ratings confirmed our debt ratings and removed us from
    Ratings Watch Evolving. In June 2003, Moodys
    upgraded our senior debt rating from A2 to A1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | On December 31, 2003, we sold
    $2.8 billion of our higher quality non-conforming real
    estate secured receivables to HSBCs U.S. banking
    subsidiary (HSBC Bank USA) to utilize HSBC
    liquidity. We recorded a pre-tax gain of $16.0 million in
    connection with this sale. We anticipate selling approximately
    $1.0 billion of additional similar receivables to HSBC Bank
    USA in the first quarter of 2004. In the future, similar real
    estate secured loan originations from correspondents will be
    purchased directly by HSBC Bank USA. Pursuant to a service level
    agreement, we will source, underwrite and price such purchases
    for HSBC Bank USA and we will be paid a fee for each such loan
    purchased by HSBC Bank USA. Under a separate servicing
    agreement, we have agreed to service all real estate secured
    loans sold to HSBC Bank USA including all future business they
    purchase from correspondents. We currently estimate that in 2004
    new volume of approximately $3.0 billion will be recorded
    at HSBC

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| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bank USA rather than at HFC and our net income
    will be reduced by approximately $80 million, or
    4 percent of 2003 net income, as a result of these loan
    sales and reduced future volume.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Subject to receipt of regulatory and other
    approvals, we also intend to transfer substantially all of our
    private label credit card portfolio and our General Motors and
    Union Privilege MasterCard and Visa portfolios to HSBC Bank USA.
    We currently estimate that $10 billion in private label
    receivables ($15 billion on a managed basis) and
    $4 billion in MasterCard and Visa receivables
    ($13 billion on a managed basis) will be transferred to
    HSBC Bank USA in 2004. Upon completion of the initial sale of
    receivables, additional volume will be sold to HSBC Bank USA on
    a daily basis. As a result of these contemplated sales, our net
    interest margin and fee income will be substantially reduced,
    but our other income will substantially increase as we record
    gains from these sales. Contingent upon receiving regulatory
    approval for these asset transfers in 2004, we would also expect
    to adopt charge-off, loss provisioning and account management
    guidelines in accordance with the Uniform Retail Credit
    Classification and Account Management Policy issued by the
    Federal Financial Institutions Examination Council
    (FFIEC) for those MasterCard and Visa and private
    label credit card receivables which will remain on our balance
    sheet. We cannot predict with any degree of certainty the timing
    as to when or if regulatory approval may be received and,
    therefore, when the related asset transfers will be completed.
    As a result, it is not possible to quantify the financial impact
    to HFC for 2004 at this time. Additional information on the
    financial impact of these proposed asset transfers will be
    reported as the regulatory approval process progresses and the
    amount becomes quantifiable.

Regulation

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

There also continues to be a significant amount
of legislative activity, nationally, locally and at the state
level, aimed at curbing lending practices 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 avoid these abusive practices while
allowing our 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 About
Us  Customer Commitment. As part of
Households agreement with the state attorneys general and
regulators, we also agreed to provide simplified and improved
lending disclosures and additional compliance controls over the
loan closing process. Notwithstanding these efforts, it is
possible that broad legislative initiatives will be passed which
will impose additional costs and rules on our businesses.
Although we have the ability to react quickly to new laws and
regulations, it is too early to estimate the effect, if any,
these activities will have on us in a particular locality or
nationally.

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Banking Institution.Our banking institution originates receivables in our
MasterCard, Visa, and private label credit card businesses.
Deposits in the credit card banking subsidiary are insured by
the Federal Deposit Insurance Corporation (FDIC), as
a result, the FDIC has jurisdiction over the credit card bank
and remains actively involved in reviewing the credit card
banks financial and managerial strength.

Our credit card banking subsidiary is subject to
capital requirements, regulations and guidelines imposed by the
Office of the Comptroller of the Currency (OCC) and
the FDIC. 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.

As a result of Households acquisition by
HSBC, Household and its subsidiaries became part of a bank
holding company and subject to supervision by the Board of
Governors of the Federal Reserve System (the FRB).
The Bank Holding Company Act limits the type of non-banking
activities in which a bank holding company and its subsidiaries
may engage. All permissible activities have been enumerated by
the FRB. The permissible activities do not limit our historical
or anticipated 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.

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.

5



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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 or targeted initiatives aimed at
    lenders operating in consumer lending markets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | 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 changes as may be required by regulatory
    agencies or the Financial Accounting Standards Board;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | changes to operational practices from time to
    time, such as determinations to sell receivables from our
    mortgage services business and the proposed MasterCard and Visa
    and private label receivable sales, the proposed adoption in
    2004 of charge-off, loss provisioning and account management
    guidelines in accordance with the Uniform Retail Credit
    Classification and Account Management Policy issued by the FFIEC
    for those MasterCard and Visa and private label credit card
    receivables which will not be transferred to HSBC Bank USA,
    structuring more securitizations as secured financings, or
    changes to our customer account management policies and
    practices and risk management/collection practices;
|
| |  | 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 or unanticipated difficulties in further
    assimilation with HSBC;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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
    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;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | the ability to attract and retain qualified
    personnel to support the underwriting, servicing, collection and
    sales functions of our businesses;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | failure to obtain expected funding from HSBC
    subsidiaries and clients; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | the inability of HFC to manage any or all of the
    foregoing risks as well as anticipated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

6



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##### Table of Contents



Corporate Governance

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. Our website also contains our parent
companys Corporate Governance Standards and committee
charters for the Audit, Compensation, Executive and Nominating
and Governance Committees of its Board of Directors. We will
provide printed copies of this information at no charge upon
written request. Requests should be made to Household
International, Inc., 2700 Sanders Road, Prospect Heights,
Illinois 60070, Attention: Corporate Secretary.

Certifications

In addition to certifications from our Chief
Executive Officer and Chief Financial Officer pursuant to
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
(attached to this Form 10-K as Exhibits 31 and 32), we
have also filed a certification with the New York Stock Exchange
(the NYSE) from our Chief Executive Officer
certifying that he is not aware of any violation by HFC of the
NYSE corporate governance listing standards in effect as of
February 27, 2004.

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 Mt. Prospect, Illinois,
and Chesapeake, Virginia. We believe that such properties are in
good condition and meet our current and reasonably anticipated
needs.

Item 3.     Legal
Proceedings.

GeneralWe 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
certain states and the large awards obtained from juries in
those states (Alabama and Mississippi are illustrative). Like
other companies in this industry, some of our subsidiaries are
involved in a number of lawsuits pending against them in these
states. The Alabama and Mississippi cases, in particular,
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 these states
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 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 HFC
and Beneficial Corporation and their subsidiaries conducting
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

7



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##### Table of Contents



collectively as the Multi-State Settlement
Agreement, which became effective on December 16,
2002. Pursuant to the Multi-State Settlement Agreement, we
funded a $484 million settlement fund that was divided
among the states (and 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. No fines, penalties or punitive
damages were assessed by the states pursuant to the Multi-State
Settlement Agreement.


In August 2003, notices of a claims procedure
were distributed to holders of approximately 591,000 accounts
identified as having potential claims. As of February 1,
2004, approximately 80 percent of affected customers had
accepted funds in settlement and had executed a release of all
civil claims against us relating to the specified consumer
lending practices. The bulk of the checks were mailed in
December 2003. 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.

In addition, on November 25, 2003, Household
announced the proposed settlement of nationwide class action
litigation with the Association of Community Organizations for
Reform Now (ACORN) and certain borrowers relating to
the mortgage lending practices of HFCs retail branch
consumer lending operations (the ACORN Settlement
Agreement). Pursuant to the ACORN Settlement Agreement,
HFC will provide monetary relief for certain class members who
did not participate in the settlement with the state attorneys
general and regulatory agencies, as described above, and
non-monetary relief for all class members, including those who
participated in the settlement, amongst other relief. We do not
expect the agreed upon relief will have a material impact to our
financial condition or operating model. The ACORN Settlement
Agreement is expected to become effective upon approval by the
United States District Court for the Northern District of
California, which is expected in the second quarter of 2004.

Securities Litigation.In August 2002, we restated previously
reported consolidated financial statements. The restatement
related 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 auditor, KPMG LLP, advised us that, in its view, these
payments should have either been charged against earnings at the
time they were made or amortized over a shorter period of time.
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, and other corporate
events, including, e.g., the Multi-State Settlement Agreement,
Household, and its directors, certain officers and former
auditors, have been involved in various legal proceedings, some
of which purport to be class actions. A number of these actions
allege violations of federal securities laws, were filed between
August and October 2002, and seek to recover damages in respect
of allegedly false and misleading statements about
Households common stock. To date, none of the class claims
has been certified. These legal actions have been consolidated
into a single purported class action, Jaffe v. Household
International, Inc., et al., No. 02 C 5893 (N.D.
Ill., filed August 19, 2002), and a consolidated and
amended complaint was filed on March 7, 2003. The amended
complaint purports to assert claims under the federal securities
laws, on behalf of all persons who purchased or otherwise
acquired Household securities between October 23, 1997 and
October 11, 2002, arising out of alleged false and
misleading statements in connection with Households sales
and lending practices, the Multi-State Settlement Agreement, the
restatement and the HSBC merger. The amended complaint, which
also names as defendants Arthur Andersen LLP, Goldman, Sachs
& Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc.,
fails to specify the amount of damages sought. In May 2003, we
filed a motion to dismiss the complaint. The parties are
awaiting a ruling on the motion.

Other actions arising out of the restatement,
which purport to assert claims under ERISA on behalf of
participants in Households Tax Reduction Investment Plan,
have been consolidated into a single purported class action,
In re Household International, Inc. ERISA Litigation,
Master File No. 02 C 7921 (N.D. Ill). A
consolidated and amended complaint was filed against Household,
William Aldinger and individuals on the Administrative
Investment Committee of the plan. The consolidated complaint
purports to assert claims under ERISA that are similar to the
claims in the Jaffe case. Essentially, the plaintiffs
allege that the

8



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##### Table of Contents



defendants breached their fiduciary duties to the
plan by investing in Household stock and failing to disclose
information to Plan participants. A motion to dismiss the
complaint was filed in June 2003. The parties are awaiting a
ruling on the motion.


On June 27, 2003, a case entitled, West
Virginia Laborers Pension Trust Fund v. Caspersen,
et al., was filed in the Chancery Division of the
Circuit Court of Cook County, Illinois as case number 03CH10808.
This purported class action names as defendants the directors of
Beneficial Corporation at the time of the 1998 merger of
Beneficial Corporation into a subsidiary of Household, and
claims that those directors due diligence of Household at
the time they considered the merger was inadequate. The
Complaint claims that as a result of some of the securities law
and other violations alleged in the Jaffe case,
Households common shares lost value. Under the merger
agreement with Beneficial Corporation, Household assumed the
defense of this litigation. In September of 2003, the defendants
filed a motion to dismiss. Plaintiffs are conducting limited
discovery relating to the jurisdictional issues raised in the
defendants motion to dismiss. The insurance carriers for
Beneficial Corporation have been notified of the action.

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






|        |                                                         
|------- | --------------------------------------------------------
|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. Consequently, there is no public
market in HFCs common stock.

9



---



##### Table of Contents








|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

On March 28, 2003, HSBC Holdings plc
(HSBC) acquired Household International, Inc.
(Household). This has resulted in a new basis of
accounting reflecting the fair market value of our assets and
liabilities for the successor period beginning
March 29, 2003. Information for all predecessor
periods prior to the merger is presented using our historical
basis of accounting, which impacts comparability to our
successor period. To assist in the comparability of
our financial results, the predecessor period
(January 1 to March 28, 2003) has been combined with
the successor period (March 29 to
December 31, 2003) to present combined results
for the year ended December 31, 2003.

|                                                 |  |                                             |          |              |  |               |         |                         |  |               |         |  |  |   |          |  |  |   |         | 
|------------------------------------------------ |  | ------------------------------------------- | -------- | ------------ |  | ------------- | ------- | ----------------------- |  | ------------- | ------- |  |  | - | -------- |  |  | - | ------- | 
|                                                 |  |                                             |          | March 29     |  | January 1     |         |                        
|                                                 |  | Year ended                                  |          | through      |  | through       |         | Year ended December 31,
|                                                 |  | December 31,                                |          | December 31, |  | March 28,     |         |                        
|                                                 |  | 2003                                        |          | 2003         |  | 2003          |         | 2002                    |  | 2001         
|                                                 |  |                                             |          |              |  |               |         |                         |  |              
|                                                 |  | (Combined)                                  |          | (Successor)  |  | (Predecessor) |         | (Predecessor)           |  | (Predecessor)
|                                                 |  |                                            
|                                                 |  | (All dollar amounts are stated in millions)
|Owned Basis Statement of Income Data             |  |                                             |          |              |  |               |         |                         |  |               |         |  |  |   |          |  |  |   |         | 
|Net interest margin and other revenues           |  | $                                           | 10,817.1 |              |  | $             | 8,224.8 |                         |  | $             | 2,592.3 |  |  | $ | 10,130.9 |  |  | $ | 8,662.7 | 
|Provision for credit losses on owned receivables |  |                                             | 3,705.6  |              |  |               | 2,784.9 |                         |  |               | 920.7   |  |  |   | 3,463.7  |  |  |   | 2,606.4 | 
|Operating expenses                               |  |                                             | 3,905.5  |              |  |               | 3,006.3 |                         |  |               | 899.2   |  |  |   | 3,350.5  |  |  |   | 3,110.5 | 
|Policyholders benefits                          |  |                                             | 288.2    |              |  |               | 217.1   |                         |  |               | 71.1    |  |  |   | 305.2    |  |  |   | 268.1   | 
|Settlement charge and related expenses           |  |                                             |         |              |  |               |        |                         |  |               |        |  |  |   | 525.0    |  |  |   |        | 
|Income taxes                                     |  |                                             | 1,007.7  |              |  |               | 767.1   |                         |  |               | 240.6   |  |  |   | 850.0    |  |  |   | 949.8   | 
|                                                 |  |                                             |          |              |  |               |         |                         |  |               |         |  |  |   |          |  |  |   |         | 
|Net income(1)                                    |  | $                                           | 1,910.1  |              |  | $             | 1,449.4 |                         |  | $             | 460.7   |  |  | $ | 1,636.5  |  |  | $ | 1,727.9 | 
|                                                 |  |                                             |          |              |  |               |         |                         |  |               |         |  |  |   |          |  |  |   |         | 

|                                                      |  |                         |       |               |  |               |       |   |  |  |       |  
|----------------------------------------------------- |  | ----------------------- | ----- | ------------- |  | ------------- | ----- | - |  |  | ----- | -
|                                                      |  |                        
|                                                      |  | Year ended December 31,
|                                                      |  |                        
|                                                      |  | 2003                    |       | 2002          |  | 2001         
|                                                      |  |                         |       |               |  |              
|                                                      |  | (Combined)              |       | (Predecessor) |  | (Predecessor)
|Selected Financial Information and
    Ratios:        |  |                         |       |               |  |               |       |   |  |  |       |  
|Owned Basis:                                          |  |                         |       |               |  |               |       |   |  |  |       |  
|Return on average owned assets(1)                     |  |                         | 1.98  | %             |  |               | 1.99  | % |  |  | 2.56  | %
|Return on average common shareholders
    equity (1) |  |                         | 15.6  |               |  |               | 16.9  |   |  |  | 20.7  |  
|Net interest margin                                   |  |                         | 8.37  |               |  |               | 8.24  |   |  |  | 8.59  |  
|Efficiency ratio(1)                                   |  |                         | 37.1  |               |  |               | 39.4  |   |  |  | 37.1  |  
|Consumer net charge-off ratio                         |  |                         | 4.22  |               |  |               | 4.10  |   |  |  | 3.72  |  
|Reserves as a percent of net charge-offs              |  |                         | 105.3 |               |  |               | 109.0 |   |  |  | 109.5 |  
|Managed Basis:(2)                                     |  |                         |       |               |  |               |       |   |  |  |       |  
|Return on average managed assets(1)                   |  |                         | 1.60  | %             |  |               | 1.59  | % |  |  | 2.01  | %
|Net interest margin                                   |  |                         | 9.11  |               |  |               | 9.07  |   |  |  | 9.05  |  
|Efficiency ratio(1)                                   |  |                         | 30.7  |               |  |               | 33.2  |   |  |  | 32.9  |  
|Consumer net charge-off ratio                         |  |                         | 4.84  |               |  |               | 4.58  |   |  |  | 4.12  |  
|Reserves as a percent of net charge-offs              |  |                         | 116.6 |               |  |               | 114.3 |   |  |  | 108.6 |  

10



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##### Table of Contents



|                                                                          |  |                         |           |               |  |               |           |   |  |   |          |  
|------------------------------------------------------------------------- |  | ----------------------- | --------- | ------------- |  | ------------- | --------- | - |  | - | -------- | -
|                                                                          |  |                        
|                                                                          |  | Year ended December 31,
|                                                                          |  |                        
|                                                                          |  | 2003                    |           | 2002          |  | 2001         
|                                                                          |  |                         |           |               |  |              
|                                                                          |  | (Successor)             |           | (Predecessor) |  | (Predecessor)
|Selected Financial Information and
    Ratios:                            |  |                         |           |               |  |               |           |   |  |   |          |  
|Owned Basis:                                                              |  |                         |           |               |  |               |           |   |  |   |          |  
|Total assets                                                              |  | $                       | 102,959.9 |               |  | $             | 88,372.9  |   |  | $ | 74,529.5 |  
|Total receivables                                                         |  |                         | 82,404.2  |               |  |               | 75,209.7  |   |  |   | 67,341.6 |  
|Equity to owned assets                                                    |  |                         | 13.33     | %             |  |               | 11.36     | % |  |   | 11.58    | %
|Consumer two-month-and-over contractual
    delinquency ratio             |  |                         | 5.48      |               |  |               | 5.38      |   |  |   | 4.81     |  
|Reserves as a percent of receivables                                      |  |                         | 4.30      |               |  |               | 4.20      |   |  |   | 3.62     |  
|Reserves as a percent of nonperforming loans                              |  |                         | 95.7      |               |  |               | 97.6      |   |  |   | 93.3     |  
|Managed Basis:(2)                                                         |  |                         |           |               |  |               |           |   |  |   |          |  
|Total assets                                                              |  | $                       | 128,038.1 |               |  | $             | 111,795.1 |   |  | $ | 94,288.8 |  
|Total receivables                                                         |  |                         | 107,482.4 |               |  |               | 98,631.9  |   |  |   | 87,100.9 |  
|Tangible shareholders equity to tangible
    managed assets (TETMA)(3) |  |                         | 7.69      | %             |  |               | 8.70      | % |  |   | 8.14     | %
|Consumer two-month-and-over contractual
    delinquency ratio             |  |                         | 5.48      |               |  |               | 5.29      |   |  |   | 4.75     |  
|Reserves as a percent of receivables                                      |  |                         | 5.39      |               |  |               | 4.86      |   |  |   | 4.02     |  
|Reserves as a percent of nonperforming loans                              |  |                         | 120.0     |               |  |               | 114.7     |   |  |   | 105.4    |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The following non-GAAP financial information is
    provided for comparison of our operating trends only and should
    be read in conjunction with our owned basis GAAP financial
    information. See Basis of Reporting and
    Reconciliations to GAAP Financial Measures for
    additional discussion and quantitative reconciliations to the
    equivalent GAAP basis financial measure.

|                                                  |  |                                             |         |               |  |               |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------------- | ------- | ------------- |  | ------------- | ------- | - |  | - | ------- | -
|                                                  |  |                                            
|                                                  |  | Year ended December 31,                    
|                                                  |  |                                            
|                                                  |  | 2003                                        |         | 2002          |  | 2001         
|                                                  |  |                                             |         |               |  |              
|                                                  |  | (Combined)                                  |         | (Predecessor) |  | (Predecessor)
|                                                  |  |                                            
|                                                  |  |                                            
|                                                  |  | (All dollar amounts are stated in millions)
|Net income                                        |  | $                                           | 1,910.1 |               |  | $             | 1,636.5 |   |  | $ | 1,727.9 |  
|Settlement charge and related expenses, after-tax |  |                                             |        |               |  |               | 333.2   |   |  |   |        |  
|                                                  |  |                                             |         |               |  |               |         |   |  |   |         |  
|Operating net income                              |  | $                                           | 1,910.1 |               |  | $             | 1,969.7 |   |  | $ | 1,727.9 |  
|                                                  |  |                                             |         |               |  |               |         |   |  |   |         |  
|Return on average owned assets                    |  |                                             | 1.98    | %             |  |               | 2.40    | % |  |   | 2.56    | %
|Return on average common shareholders equity     |  |                                             | 15.6    |               |  |               | 20.4    |   |  |   | 20.7    |  
|Owned basis efficiency ratio                      |  |                                             | 37.1    |               |  |               | 34.1    |   |  |   | 37.1    |  
|Return on average managed assets                  |  |                                             | 1.60    |               |  |               | 1.91    |   |  |   | 2.01    |  
|Managed basis efficiency ratio                    |  |                                             | 30.7    |               |  |               | 28.7    |   |  |   | 32.9    |  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We monitor our operations and evaluate trends on
    both an owned basis as shown in our financial statements and on
    a managed basis. Managed basis reporting (a non-GAAP financial
    measure) assumes that securitized receivables have not been sold
    and are still on our balance sheet. Managed basis information is
    intended to supplement, and should not be considered a
    substitute for, owned basis reporting and should be read in
    conjunction with reported owned basis results. See Basis
    of Reporting and Reconciliations to GAAP Financial
    Measures for additional discussion and quantitative
    reconciliations to the equivalent GAAP basis financial measure.
|   
|(3) | TETMA is a non-GAAP financial measure that is
    used by HFC management to evaluate capital adequacy. Excluding
    the impact of push-down accounting on our assets and
    common shareholders equity, TETMA would have been
    9.37 percent at December 31, 2003. See Basis of
    Reporting and Reconciliations to GAAP Financial
    Measures for additional discussion and quantitative
    reconciliations to the equivalent GAAP basis financial measure.                                                                                                                                                                                                                                      

11



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##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

EXECUTIVE OVERVIEW

Household Finance Corporation (HFC)
is a wholly owned subsidiary of Household International, Inc.
(Household or the parent company).
Household is a wholly owned subsidiary of HSBC Holdings plc
(HSBC). HFC may also be referred to in
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) as
we, us, or our. Effective
January 1, 2004, HSBC transferred its ownership interest in
Household to a wholly owned subsidiary, HSBC North America
Holdings Inc., who subsequently contributed Household to its
wholly owned subsidiary, HSBC Investments (North America) Inc.

Households acquisition by HSBC on
March 28, 2003 has resulted in a new basis of accounting
reflecting the fair market value of our assets and liabilities
for the successor period beginning March 29,
2003. Information for all predecessor periods prior
to the merger is presented using our historical basis of
accounting, which impacts comparability to our
successor period beginning March 29, 2003.
During 2003, the predecessor period contributed
$460.7 million of net income and the successor
period contributed $1.4 billion of net income. To assist in
the comparability of our financial results and to make it easier
to discuss and understand our results of operations,
Managements Discussion and Analysis combines the
predecessor period (January 1 to March 28,
2003) with the successor period (March 29 to
December 31, 2003) to present combined results
for the year ended December 31, 2003.

Through its subsidiaries, HFC provides
middle-market consumers with real estate secured loans, auto
finance loans, MasterCard* and Visa* credit card loans, private
label credit card loans and personal non-credit card loans. We
also offer tax refund anticipation loans (RALs) in
the United States and credit and specialty insurance products in
the United States and Canada. We generate cash to fund our
businesses primarily by collecting receivable balances; issuing
commercial paper, medium and long term debt; borrowing from HSBC
subsidiaries and customers; securitizing and selling consumer
receivables and borrowing under secured financing facilities. We
use the cash generated to invest in and support receivable
growth, to service our debt obligations and to pay dividends to
our parent.

In addition to owned basis reporting, we also
monitor our operations and evaluate trends on a managed basis (a
non-GAAP financial measure), which assumes that securitized
receivables have not been sold and are still on our balance
sheet. See Basis of Reporting for further discussion
of the reasons we use this non-GAAP financial measure.

In measuring our results, managements
primary focus is on receivable growth and operating net income
(a non-GAAP financial measure which excludes non-recurring
items.) See Basis of Reporting for further
discussion of operating net income. Operating net income was
$1.9 billion in 2003 compared to $2.0 billion in 2002.
Operating net income declined in 2003 primarily due to higher
operating expenses to support receivable growth; increased legal
and compliance costs; higher amortization of intangibles arising
from the acquisition by HSBC; lower initial securitization
activity as a result of the use of alternative funding sources
and higher provision for credit losses as a result of higher
charge-offs. Net income during 2003 was positively impacted by
purchase accounting adjustments, including adjustments to the
cost of our funding to reflect lower credit spreads which was
partially offset by higher amortization of intangibles arising
from the acquisition by HSBC, and by the discontinuation of the
shortcut method of accounting for our interest rate swaps under
SFAS No. 133, all of which were the result of the HSBC
merger. In 2003, amortization of purchase accounting adjustments
increased net income by $98.6 million and the loss of the
shortcut method of accounting increased net income by
$51.7 million. We have restructured our interest rate swap
portfolio to regain use of the shortcut method of accounting and
to reduce the potential volatility of future earnings.






|  |                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|* | MasterCard is a registered trademark of
    MasterCard International, Incorporated and VISA is a registered
    trademark of VISA USA, Inc.

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Owned receivables increased to $82.4 billion
at December 31, 2003. Growth was strongest in our real
estate secured portfolio despite a $2.8 billion loan sale
to HSBCs U.S. banking subsidiary (HSBC Bank
USA) to utilize HSBC liquidity. Real estate secured
receivables also reflect whole loan sales of $2.7 billion
in 2002 pursuant to our liquidity management plans. We currently
estimate that in 2004 we will sell an additional
$1.0 billion of real estate secured receivables to HSBC
Bank USA (subject to receipt of regulatory approval) and
$3.0 billion of new real estate secured volume will be
recorded at HSBC Bank USA rather than at HFC and that our net
income will be reduced by approximately $80 million, or
4 percent of 2003 net income, as a result of these loan
sales and reduced future volume.

Subject to receipt of regulatory and other
approvals, we also intend to transfer substantially all of our
private label credit card portfolio and General Motors and Union
Privilege MasterCard and Visa portfolios to HSBC Bank USA. We
currently estimate that $10 billion in private label
receivables ($15 billion on a managed basis) and
$4 billion in MasterCard and Visa receivables
($13 billion on a managed basis) will be transferred to
HSBC Bank USA in 2004. Upon completion of the initial sale of
receivables, additional volume will be sold to HSBC Bank USA on
a daily basis. As a result of these contemplated sales, our net
interest margin and fee income will be substantially reduced,
but our other income will substantially increase as we record
gains from these sales. Contingent upon receiving regulatory
approval for these asset transfers in 2004, we would also expect
to adopt charge-off, loss provisioning and account management
guidelines in accordance with the Uniform Retail Credit
Classification and Account Management Policy issued by the
Federal Financial Institutions Examination Council
(FFIEC) for those MasterCard and Visa and private
label credit card receivables which will remain on our balance
sheet. We cannot predict with any degree of certainty the timing
as to when or if regulatory approval will be received for our
proposed asset transfers and, therefore, when the related asset
transfers will be completed. As a result, it is not possible to
quantify the financial impact to HFC for 2004 at this time.
Additional information on the financial impact of these proposed
asset transfers will be reported as the regulatory approval
process progresses and the amount becomes quantifiable.

Our continued success and prospects for growth
are dependent upon access to the global capital markets.
Numerous factors, both internal and external, may impact our
access to, and the costs associated with, these markets. These
factors may include our debt ratings, overall economic
conditions, overall capital markets volatility and the
effectiveness of our management of credit risks inherent in our
customer base. Households acquisition by HSBC has improved
our access to the capital markets and reduced our funding costs.
It also has given us the ability to use HSBCs liquidity to
partially fund our operations and reduce our overall reliance on
the debt markets. Our affiliation with HSBC has also expanded
our access to a worldwide pool of potential investors.

Our results are also impacted by general economic
conditions, primarily unemployment, underemployment and interest
rates, which are largely out of our control. Because we
generally lend to customers who have limited credit histories,
modest incomes and high debt-to-income ratios or who have
experienced prior credit problems, our customers are generally
more susceptible to economic slowdowns than other consumers. As
unemployment and underemployment increase, as they have in
recent years, a higher percentage of our customers default on
their loans and our charge-offs increase. Changes in interest
rates affect both the rates that we charge to our customers and
the rates that we must pay on our borrowings. In recent years,
both the interest rates we have charged to our customers as well
as those that we pay on our debt have decreased. Our ability to
adjust our pricing on many of our products reduces our exposure
to an increase in interest rates. The primary risks and
opportunities to achieving our business goals in 2004, which are
largely dependent upon economic conditions, include loan volume,
charge-off levels and net interest margin.

ACQUISITION OF HOUSEHOLD

On March 28, 2003, HSBC acquired Household
by way of merger with H2 Acquisition Corporation
(H2), a wholly owned subsidiary of HSBC, in a
purchase business combination (see Note 2 to the
accompanying consolidated financial statements). Following the
merger, H2 was renamed Household International, Inc.
In accordance with the guidelines for accounting for business
combinations, the purchase price paid by HSBC plus related
purchase accounting adjustments have been
pushed-down and recorded in

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our financial statements for periods subsequent
to March 28, 2003, resulting in a new basis of accounting
for the successor period beginning March 29,
2003. As of the acquisition date, we recorded our assets and
liabilities at their estimated fair values. We made subsequent
adjustments to our preliminary fair value estimates as
additional information, including third party valuation data,
was obtained. Information for all predecessor
periods prior to the merger is presented on the historical basis
of accounting which impacts its comparability to our
successor periods.


To assist in the comparability of our financial
results and to make it easier to discuss and understand our
results of operations, Managements Discussion and Analysis
combines the predecessor period (January 1 to
March 28, 2003) with the successor period
(March 29 to December 31, 2003) to present
combined results for the year ended
December 31, 2003.

At the time of the merger, Household identified
several items as near term priorities to maximize the benefits
of the merger. Since the merger, numerous integration teams have
been established and the following progress has been made:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Funding benefits  As of
    December 31, 2003, we had received $9.9 billion in
    HSBC related funding as detailed below. We also implemented a
    $2.5 billion revolving credit facility with HSBC.

|                                                                        |                                        |               |     |     | 
|----------------------------------------------------------------------- | -------------------------------------- | ------------- | --- | --- | 
|                                                                        |                                        | (in billions)
|                                                                        |                                        |              
|Debt issued to HSBC subsidiaries:                                       |                                        |               |     |    
|                                                                        | Short-term borrowings                  |               | $   | 2.6 | 
|                                                                        | Term debt                              |               |     | 1.3 | 
|                                                                        |                                        |               |     |    
|                                                                        | Total debt issued to HSBC subsidiaries |               |     | 3.9 | 
|                                                                        |                                        |               |     |    
|Debt issued to HSBC clients:                                            |                                        |               |     |    
|                                                                        | Euro commercial paper                  |               |     | 2.8 | 
|                                                                        | Term debt                              |               |     | .4  | 
|                                                                        |                                        |               |     |    
|                                                                        | Total debt issued to HSBC clients      |               |     | 3.2 | 
|Cash received on sale of real estate secured
    loans to HSBC Bank USA |                                        |               | 2.8 |    
|                                                                        |                                        |               |     |    
|Total HSBC related funding                                              |                                        | $             | 9.9 |    
|                                                                        |                                        |               |     |    



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently anticipate that we will continue to
    use HSBCs liquidity to partially fund our operations. This
    will reduce our reliance on the debt markets. Because we are now
    a subsidiary of HSBC, our credit spreads relative to treasuries
    have tightened since the merger. In 2003, these tightened credit
    spreads have resulted in cash funding expense savings of
    approximately $125 million compared to the funding costs we
    would have incurred using average spreads from the first half of
    2002. It is anticipated that these tightened credit spreads and
    other funding synergies will eventually enable HSBC to realize
    annual cash funding expense savings, including external fee
    savings, in excess of $1 billion per year as our existing
    term debt matures over the course of the next few years. The
    portion of these savings to be realized by HFC will depend in
    large part upon the amount and timing of the proposed private
    label and MasterCard and Visa credit card receivable transfers
    to HSBC Bank USA and other initiatives between HFC and HSBC
    subsidiaries. Amortization of purchase accounting fair value
    adjustments applied to our external debt obligations, including
    derivative financial instruments, as a result of
    Households merger with HSBC reduced interest expense by
    $797.6 million in 2003.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Technology integration and other
    synergies  Significant progress has been made in
    integrating HFC and HSBC technology teams and systems, including
    initiatives to consolidate the data centers and to convert HSBC
    credit card portfolios onto our loan processing system. Based on
    the joint strength of HSBC and HFC, we have also renegotiated a
    wide range of contracts, including telecommunications. Also,
    efficiency savings have been achieved in a number of other areas
    through the integration of various functions including
    purchasing, human resources, facilities and finance.
|
| |  | Using our consumer credit business models and
    other practices in HSBCs operations  Good
    progress has been made on using our consumer credit business
    models and other practices in HSBCs                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | operations, both in the U.S. and
    internationally. Shared practices include HFCs credit risk
    management, credit card management, collections, retail services
    and customer focused technology.                                                                                                                                                                                                                                                                                                     
|
| |  | Expanding business opportunities  A
    number of initiatives are being developed including cross
    referral of consumer finance/ banking and retail services
    customers between HFC and HSBC and combining credit card and
    auto finance management. We have also developed more
    prime-like products to provide customers a
    full spectrum of options.                                                                                                                                    
|
| |  | Cross border payments  In liaison with
    HSBCs Mexican subsidiary, an initiative is being developed
    to provide a remittance capability between customers in the
    U.S. and their families and friends in Mexico. This
    initiative will include a web-based option in which the
    recipient is able to access the funds via an ATM using a stored
    value card and a remittance service via HSBC branches and kiosks
    in Mexico. Both services will provide cross-selling
    opportunities.
|
| |  | Global processing opportunities 
    Processing costs have been reduced in our consumer lending and
    auto finance businesses by utilizing HSBCs processing
    centers in India.                                                                                                                                                                                                                                                                                                                          

BASIS OF REPORTING

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). 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.

Households acquisition by HSBC on
March 28, 2003 has resulted in a new basis of accounting
reflecting the fair value of our assets and liabilities for the
successor period beginning March 29, 2003.
Information for all predecessor periods prior to the
merger are presented using our historical basis of accounting,
which impacts comparability with the successor
period beginning March 29, 2003. To assist in the
comparability of our financial results and to make it easier to
discuss and understand our results of operations,
Managements Discussion and Analysis combines the
predecessor period (January 1 through
March 28, 2003) with the successor period
(March 29 through December 31, 2003) to present
combined results for the year ended
December 31, 2003.

In addition to the GAAP financial results
reported in our consolidated financial statements, MD&A
includes reference to the following information which is
presented on a non-GAAP basis:

Operating Results, Percentages and
RatiosCertain percentages and ratios
have been presented on an operating basis and have been
calculated using operating net income, a non-GAAP
financial measure. Operating net income is net
income excluding certain nonrecurring items. These nonrecurring
items are also excluded in calculating our operating basis
efficiency ratios. We believe that excluding nonrecurring items
helps readers of our financial statements to understand better
the results and trends of our underlying business.

|                                                                       |  |               |         |      |  |   |         | 
|---------------------------------------------------------------------- |  | ------------- | ------- | ---- |  | - | ------- | 
|                                                                       |  | 2003          |         | 2002
|                                                                       |  |               |         |     
|                                                                       |  |              
|                                                                       |  | (In millions)
|Net income                                                             |  | $             | 1,910.1 |      |  | $ | 1,636.5 | 
|Attorney general settlement charge and related
    expenses, after-tax |  |               |        |      |  |   | 333.2   | 
|                                                                       |  |               |         |      |  |   |         | 
|Operating net income                                                   |  | $             | 1,910.1 |      |  | $ | 1,969.7 | 
|                                                                       |  |               |         |      |  |   |         | 

Net income during 2003 was positively impacted by
purchase accounting adjustments and by the discontinuation of
the shortcut method of accounting for our interest rate swaps
under SFAS No. 133, both of which were the result of the
HSBC merger. In 2003, amortization of purchase accounting
adjustments increased net income by $98.6 million and the
loss of the shortcut method of accounting increased net income
by $51.7 million. We have restructured our interest rate
swap portfolio to regain use of the shortcut method of
accounting and to reduce the potential volatility of future
earnings. See Developments and Trends for further
discussion of 2003 results and related trends.

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Managed Basis
ReportingWe monitor our operations
and evaluate trends on a managed basis (a non-GAAP financial
measure), which assumes that securitized receivables have not
been sold and are still on our balance sheet. We manage and
evaluate 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.

When reporting on a managed basis, net interest
margin, provision for credit losses and fee income related to
receivables securitized are reclassified from securitization
revenue in our owned statements of income into the appropriate
caption. Additionally, charge-off and delinquency associated
with these receivables are included in our managed basis credit
quality statistics.

Debt analysts, rating agencies and others also
evaluate our operations on a managed basis for the reasons
discussed above and have historically requested managed basis
information from us. We believe that managed basis information
enables investors and other interested parties to better
understand the performance and quality of our entire managed
loan portfolio and is important to understanding the quality of
originations and the related credit risk inherent in our owned
portfolio.

Equity RatiosTangible shareholders equity to tangible managed assets
(TETMA) is a non-GAAP financial measure that is used
by HFC management to evaluate capital adequacy. This ratio may
differ from similarly named measures presented by other
companies. Because they include investor obligations to purchase
HSBC ordinary shares in 2006, our Adjustable Conversion-Rate
Equity Security Units, which exclude purchase accounting
adjustments, are considered equity in the TETMA calculation. The
most directly comparable GAAP financial measure is common equity
to owned assets.

We also monitor TETMA excluding the impact of
purchase accounting adjustments. We do so because we believe
that the purchase accounting adjustments represent non-cash
transactions which do not affect our business operations, cash
flows or ability to meet our debt obligations.

Quantitative Reconciliations of Non-GAAP
Financial Measures to GAAP Financial
MeasuresFor a reconciliation of
managed basis net interest margin, fee income and provision for
credit losses to the comparable owned basis amounts, see
Note 19, Segment Reporting, to the accompanying
consolidated financial statements. For a reconciliation of our
owned loan portfolio by product to our managed loan portfolio,
see Note 4, Receivables, to the accompanying
consolidated financial statements. For additional quantitative
reconciliations of non-GAAP financial measures to the equivalent
GAAP basis financial measure see Reconciliations to GAAP
Financial Measures.




APPLICATION OF CRITICAL ACCOUNTING
POLICIES

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States. 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, which affect
the reported amounts of assets, liabilities, revenues and
expenses, are complex and involve significant judgment by our
management, including the use of estimates and assumptions. We
recognize the different inherent loss characteristics in each of
our loan products as well as the impact of operational policies
such as customer account management policies and practices and
risk management/collection practices. As a result, changes in
estimates, assumptions or operational policies could
significantly affect our financial position or our results of
operations. We base and establish our accounting estimates 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, customer account
management policies and practices, risk management/collection
practices or conditions as discussed below.

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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, including the
underlying estimates and assumptions, with the audit committee
of Households Board of Directors.

Credit Loss ReservesBecause 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, but not
excessive, 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 for the following
reasons:



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The provision for credit losses totaled
    $3.7 billion in 2003, $3.5 billion in 2002 and
    $2.6 billion in 2001 and changes in the provision can
    materially affect net income. As a percentage of average owned
    receivables, the provision was 4.62% in 2003 compared to 4.87%
    in 2002 and 4.34% in 2001.
|
| |  | Estimates related to the reserve for credit
    losses require us to consider future delinquency and charge-off
    trends which are uncertain and require a high degree of judgment.                                                                                                                                    
|
| |  | The reserve for credit losses is influenced by
    factors outside of our control such as bankruptcy trends and
    laws, 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. Our
estimate of probable net credit losses is inherently uncertain
because it is highly sensitive to changes in economic conditions
which influence growth, portfolio seasoning, bankruptcy trends,
delinquency rates and the flow of loans through the various
stages of delinquency, or buckets, the realizable value of any
collateral and actual loss exposure. Changes in such estimates
could significantly impact our credit loss reserves and our
provision for credit losses. For example, a 10% change in our
projection of probable net credit losses on owned receivables
could have resulted in a change of approximately
$350 million in our credit loss reserve for owned
receivables at December 31, 2003.

Credit loss reserves are based on a range of
estimates and are intended to be adequate but not excessive. We
estimate probable losses for owned consumer receivables using a
roll rate migration analysis that estimates the likelihood that
a loan will progress through the stages of delinquency, or
buckets, and ultimately charge off. This analysis considers
delinquency status, loss experience and severity and takes into
account whether loans are in bankruptcy, have been restructured
or rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment.
Our loss reserves on consumer receivables also reflect our
assessment of portfolio risk factors that may not be fully
reflected in the statistical roll rate calculation. Risk factors
considered in establishing loss reserves on consumer receivables
include recent growth, product mix, bankruptcy trends,
geographic concentrations, economic conditions, portfolio
seasoning and current levels of charge-offs and delinquencies.

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. We recognize the different inherent loss
characteristics in each of our products as well as customer
account management policies and practices and risk management/
collection practices. 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.

We periodically 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. Our credit loss reserves for owned
receivables increased $386.0 million in 2003 to
$3.5 billion at December 31, 2003 primarily due to
receivable growth. Our reserves as a percentage of receivables
were 4.30 percent at December 31, 2003,
4.20 percent at December 31, 2002 and
3.62 percent at

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December 31, 2001. Reserves as a percentage
of receivables at December 31, 2003 were higher than
December 31, 2002 as a result of the sale of
$2.8 billion of higher quality real estate secured loans to
HSBC Bank USA in December 2003. Had this sale not occurred,
reserves as a percentage of receivables at December 31,
2003 would have been lower than 2002 as a result of improving
credit quality in the latter half of 2003 as delinquency rates
stabilized and charge-off levels improved. Compared to
December 31, 2001, our reserves as a percentage of
receivables at December 31, 2002 increased, reflecting the
impact of a weakened economy, increased personal 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 would
have on delinquency and charge-off levels.


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

Receivables Sold and Serviced With Limited
Recourse and Securitization RevenueWe
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 receivable are critical accounting
estimates for the following reasons:



| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Changes in the estimates of future cash flows
    used to determine gains on sale and the value of interest-only
    strip receivables may materially affect net income.                                                                                                                                                
|
| |  | The value of our interest-only strip receivable
    totaled $902.4 million at December 31, 2003 and
    $1.1 billion at December 31, 2002. This value may be
    influenced by factors outside of our control such as customer
    payment patterns and economic conditions which impact charge-off
    and delinquency.
|
| |  | Estimates relating to the gain on sale and the
    value of our interest-only strip receivable require us to
    forecast cash flows which are uncertain and require a high
    degree of judgment.                                                                                                                     

The lives 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. Recording gains on sales for 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. Because our securitization
accounting involves judgment and is influenced by factors
outside of our control, it is reasonably possible such forecasts
and estimates could change. Changes in such estimates or in the
level or mix of receivables securitized could significantly
impact the gains on sale we record and the value of our
interest-only strip receivables.

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 strip receivable
which represents our contractual right to receive interest and
other cash flows from the securitization trust. Our
interest-only strip receivables are reported as a separate
component of receivables, net of our estimate of probable losses
under the recourse provisions, at estimated fair value using
discounted cash flow estimates. 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

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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 2003 and 2002, we experienced
lower interest rates on both the receivables sold and securities
issued as well as generally higher delinquency and charge-off
levels on the underlying receivables sold. We also had lower
initial securitizations of receivables in 2003 compared to 2002
as a result of the use of alternative funding sources including
HSBC subsidiaries and customers. These factors impacted both the
gains recorded and the values of our interest-only strip
receivables. Securitization gains will vary each year based on
the level and mix of receivables securitized in that particular
year. The sensitivity of our interest-only strip receivable to
various adverse changes in assumptions and the amount of gain
recorded and initial receivables securitized in each period is
disclosed in Note 5, Asset Securitizations, to
the accompanying consolidated financial statements.

Securitizations and secured financing levels in
2004 are expected to remain consistent with 2003 levels. We
currently anticipate, however, that we will rely less on
securitizations and secured financings in the future as we
continue to receive funding from HSBC and its clients to
partially fund our operations. Under U.K. GAAP, as reported by
HSBC, securitizations are treated as secured financing
transactions. Therefore, we may structure more of our
securitization transactions as secured financings under
U.S. GAAP in the future in order to align our accounting
treatment with HSBCs U.K. GAAP treatment.

Purchase AccountingIn accordance with the guidelines for accounting for business
combinations, the purchase price paid by HSBC plus related
purchase accounting adjustments have been
pushed-down and recorded in our financial statements
for periods subsequent to March 28, 2003, resulting in a
new basis of accounting for the successor period
beginning March 29, 2003. As of the acquisition date, we
recorded our assets and liabilities at their estimated fair
values. We believe the accounting estimates used to determine
the fair value of our assets and liabilities at the time of the
merger are critical accounting estimates for the
following reasons:



| |   |                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application of push-down accounting in our
    financial statements resulting from our acquisition by HSBC
    resulted in an increase to common shareholders equity of
    $1.4 billion, an increase to acquired intangibles of
    $2.5 billion and an increase to goodwill of
    $1.0 billion at March 28, 2003.
|
| |  | Many fair value estimates required us to forecast
    future cash flows, which often can be uncertain and require a
    high degree of judgment.                                                                                                                                                                     
|
| |  | Amortization of fair value adjustments, which
    increased net income by $98.6 million in 2003, in many
    cases involved determining estimated useful lives and different
    estimates could materially affect net income.                                                                                       

Using different assumptions and estimates may
have resulted in different fair value estimates for our assets
and liabilities, including goodwill. Throughout 2003, we made
adjustments to our preliminary fair value estimates as
additional information, including third party valuation data,
was obtained. Purchase accounting adjustments have not been
allocated to our Consumer segment, which is consistent with
managements view of our reportable segment results. For
purposes of conducting impairment testing, our goodwill will be
allocated to our operating units in 2004.

Whenever possible, quoted market prices were used
to determine the fair value of our assets and liabilities.
However, a significant portion of our financial instruments do
not have a quoted market price. For these items, values were
determined using a discounted cash flow analysis. Assumptions
used to estimate future cash flows on receivables 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 were based
on historical experience adjusted for future expectations.
Assumptions used to determine fair values for assets and
liabilities for which no active market exists are inherently
judgmental and changes in these assumptions could have
significantly affected fair

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value calculations as well as the resulting fair
value amortization. Our identifiable intangibles were valued
independently by a third party.


Contingent
LiabilitiesBoth 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.




FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Developments and Trends

Households acquisition by HSBC on
March 28, 2003 has resulted in a new basis of accounting
reflecting the fair market value of our assets and liabilities
for the successor period beginning March 29,
2003. Information for all predecessor periods prior
to the merger is presented using our historical basis of
accounting, which impacts comparability to our
successor period beginning March 29, 2003.
During 2003, the predecessor period contributed
$460.7 million of net income and the successor
period contributed $1.4 billion of net income. To assist in
the comparability of our financial results and to make it easier
to discuss and understand our results of operations,
Managements Discussion and Analysis combines the
predecessor period (January 1 to March 28,
2003) with the successor period (March 29 to
December 31, 2003) to present combined results
for the year ended December 31, 2003.

Our net income was $1.9 billion in 2003,
$1.6 billion in 2002 and $1.7 billion in 2001.
Operating net income was $2.0 billion in 2002. Operating
net income is a non-GAAP financial measure which excludes the
settlement charge and related expenses of $333.2 million,
after-tax, in 2002.

Operating net income declined from the prior year
due to higher operating expenses to support receivables growth;
increased legal and compliance costs; higher amortization of
intangibles arising from the acquisition by HSBC; lower initial
securitization activity as a result of the use of alternative
funding sources including HSBC subsidiaries and customers; and
higher provision for credit losses as a result of higher
charge-offs. Partially offsetting these decreases were higher
net interest margin and fee income due to receivable growth and
lower funding costs. Net income during 2003 was positively
impacted by purchase accounting adjustments, including
adjustments to the cost of our funding to reflect lower credit
spreads which was partially offset by higher amortization of
intangibles arising from the acquisition by HSBC, and by the
discontinuation of the shortcut method of accounting for our
interest rate swaps under SFAS No. 133, all of which were
the result of the HSBC merger. In 2003, amortization of purchase
accounting adjustments increased net income by
$98.6 million and the loss of the shortcut method of
accounting increased net income by $51.7 million. We have
restructured our interest rate swap portfolio to regain use of
the shortcut method of accounting and to reduce the potential
volatility of future earnings.

The increase in operating net income in 2002
compared to 2001 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. Our
improved operating results in 2002 were offset by the attorney
general settlement charge which reduced net income by
$333.2 million. As of February 1, 2004, approximately
80 percent of eligible customers had accepted funds related
to the attorney general settlement and had executed a release of
all civil claims against us relating to the specified consumer
lending practices.

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Owned receivables were $82.4 billion at
year-end 2003, compared to $75.2 billion at year-end 2002.
Growth was strongest in our real estate secured portfolio,
especially in our mortgage services business. In 2003, our
branch-based consumer lending business reported strong real
estate secured originations in the second half of the year
following weak sales momentum in the first half of the year as a
result of our intentional fourth quarter 2002 slowdown and
higher run-off. Also contributing to the increase was growth
resulting from an expanded range of products. Real estate loan
growth in 2003 was impacted by the sale of $2.8 billion of
our higher quality non-conforming product to HSBC Bank USA on
December 31, 2003 to utilize HSBC liquidity. Real estate
secured receivables also reflect whole loan sales of
$2.7 billion in 2002 pursuant to our liquidity management
plans. Our auto finance, MasterCard and Visa and private label
portfolios also reported growth, while our personal non-credit
card portfolio declined due to tightened underwriting and
reduced marketing.

Our return on average common shareholders
equity (ROE) was 15.6 percent in 2003, compared
to 16.9 percent in 2002 and 20.7 percent in 2001.
Excluding the settlement charge in 2002, ROE was
20.4 percent. The decrease in ROE in 2003 reflects higher
equity levels as a result of push-down accounting resulting from
the merger.

Our return on average owned assets
(ROA) was 1.98 percent in 2003, compared to
1.99 percent in 2002 and 2.56 percent in 2001.
Excluding the settlement charge in 2002, ROA was
2.40 percent. ROA in 2003 declined compared to 2002 ROA
excluding the settlement charge as a result of higher provision
for credit losses, higher operating expenses and lower
securitization revenue.

Our owned net interest margin was
8.37 percent in 2003, compared to 8.24 percent in 2002
and 8.59 percent in 2001. The increase in 2003 was
attributable to lower cost of funds including amortization of
purchase accounting fair value adjustments applied to our
external debt obligations, including derivative financial
instruments, as a result of Households merger with HSBC,
partially offset by lower yields on our receivables,
particularly real estate secured, due to reduced pricing and the
amortization of fair value adjustments to our receivables. 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, partially offset by lower
funding costs.

Our owned consumer charge-off ratio was
4.22 percent in 2003, compared to 4.10 percent in 2002
and 3.72 percent in 2001. The increase reflects the impact
of the weak economy, including higher bankruptcy filings. Our
two-months-and-over contractual delinquency ratio was
5.48 percent at December 31, 2003 compared to
5.38 percent at December 31, 2002. Excluding the
impact of the sale of $2.8 billion of real estate secured
loans to HSBC Bank USA on December 31, 2003,
two-months-and-over contractual delinquency would have been
5.31 percent. During the latter half of 2003, we began to
see improvements in credit quality as delinquency stabilized and
charge-offs improved.

During 2003, we increased our owned loss reserves
to $3.5 billion by recording owned loss provision greater
than charge-offs of $340.9 million. Receivables growth
contributed to the higher loss reserves.

Our owned basis efficiency ratio was
37.1 percent in 2003, 39.4 percent in 2002 and
37.1 percent in 2001. Excluding the settlement charge in
2002, our owned basis efficiency ratio was 34.1 percent.
The increase in the 2003 efficiency ratio over the 2002
efficiency ratio excluding the settlement charge reflects lower
securitization revenue and higher operating expenses, including
planned higher legal and compliance costs, which were partially
offset by higher net interest margin and fee income. We are
committed to taking a leadership role in the consumer finance
industry by establishing a benchmark for quality. As a result,
we have significantly increased our investment in compliance,
monitoring and training to approximately $150 million
during 2003 which is more than double the amount invested in
2002. The decrease in the 2002 efficiency ratio reflects higher
revenues, partially offset by higher operating expenses to
support growth.

Tangible shareholders equity to tangible
managed assets (TETMA) was 7.69 percent at
December 31, 2003 and 8.70 percent at
December 31, 2002. The decrease in 2003 was primarily the
result of purchase accounting adjustments. Excluding purchase
accounting adjustments at December 31, 2003, TETMA was
9.37 percent. TETMA represents a non-GAAP financial measure
that is used by HFC management to evaluate capital adequacy and
may differ from similarly named measures presented by other
companies. See

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Reconciliations to GAAP Financial
Measures for additional discussion and quantitative
reconciliations to the equivalent GAAP basis financial measure.


In December 2003, we received regulatory approval
and subsequently sold $2.8 billion of our higher quality
non-conforming real estate secured receivables to HSBC Bank USA
on December 31, 2003. We recorded a pre-tax gain of
$16.0 million in connection with this sale. We anticipate
selling approximately $1.0 billion of additional similar
receivables to HSBC Bank USA in the first quarter of 2004. In
the future, similar real estate secured loan originations from
correspondents will be purchased directly by HSBC Bank USA.
Pursuant to a service level agreement, we will source,
underwrite and price such purchases for HSBC Bank USA and we
will be paid a fee for each such loan purchased by HSBC Bank
USA. Under a separate servicing agreement, we have agreed to
service all real estate secured loans sold to HSBC Bank USA
including all future business they purchase from correspondents.
We currently estimate that in 2004 new volume of approximately
$3.0 billion will be recorded at HSBC Bank USA rather than
at HFC and our net income will be reduced by approximately
$80 million, or 4 percent of 2003 net income, as a
result of these loan sales and reduced future volume.

Subject to receipt of regulatory and other
approvals, we also intend to transfer substantially all of our
private label credit card portfolio and our General Motors and
Union Privilege MasterCard and Visa portfolios to HSBC Bank USA.
We currently estimate that $10 billion in private label
receivables ($15 billion on a managed basis) and
$4 billion in MasterCard and Visa receivables
($13 billion on a managed basis) will be transferred to
HSBC Bank USA in 2004. Upon completion of the initial sale of
receivables, additional volume will be sold to HSBC Bank USA on
a daily basis. As a result of these contemplated sales, our net
interest margin and fee income will be substantially reduced,
but our other income will substantially increase as we record
gains from these sales. Contingent upon receiving regulatory
approval for these asset transfers in 2004, we would also expect
to adopt charge-off, loss provisioning and account management
guidelines in accordance with the Uniform Retail Credit
Classification and Account Management Policy issued by the FFIEC
for those MasterCard and Visa and private label credit card
receivables which will remain on our balance sheet. We cannot
predict with any degree of certainty the timing as to when or if
regulatory approval will be received and, therefore, when the
related asset transfers will be completed. As a result, it is
not possible to quantify the financial impact to HFC for 2004 at
this time. Additional information on the financial impact of
these proposed asset transfers will be reported as the
regulatory approval process progresses and the amount becomes
quantifiable.

Following completion of the merger with HSBC,
Standard & Poors upgraded our long-term debt rating to
A and our short-term debt rating to A-1;
Moodys Investors Service (Moodys) placed
our long-term debt ratings on review for possible upgrade and
Fitch Ratings confirmed our debt ratings and removed us from
Ratings Watch Evolving. In June 2003, Moodys
upgraded our senior debt rating from A2 to A1.

In 2003, we continued efforts to address the
injunctive relief items set forth in the Attorneys General
settlement agreement. As of December 31, 2003, all Consumer
Protection Plan initiatives have been implemented.

Segment Results  Managed Basis

Our Consumer segment reported net income of
$1.6 billion in 2003, $1.4 billion in 2002 and
$1.5 billion in 2001. Excluding the impact of the
settlement agreement with the state attorneys general, operating
net income (a non-GAAP financial measure), was $1.7 billion
in 2002. Compared to 2002, increases in net interest margin and
fee income were more than offset by higher operating expenses
and provision for credit losses and lower other revenues as a
result of a decline in initial securitization activity due in
part to funding obtained through HSBC in 2003. The increase in
operating net income in 2002 compared to 2001 reflects higher
net interest margin and other revenues.

Net interest margin increased
$831.7 million, or 10 percent, in 2003 and
$1.4 billion, or 20 percent in 2002. Fee income
increased $266.1 million, or 17 percent, in 2003 and
$72.3 million, or 5 percent in 2002. Growth in average
receivables drove the increases in net interest margin and fee
income in both years. Other revenues (excluding fee income)
decreased $348.5 million, or 33 percent, in 2003 and
increased $551.0 mil-

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lion, or 108 percent in 2002. The decrease
in 2003 was primarily attributable to lower securitization
revenue due to a significant decline in initial securitization
volume, particularly in our auto finance business, as a result
of alternative funding including HSBC subsidiaries and
customers. The increase in 2002 was attributable to higher
securitization revenue. Initial securitization levels in 2002
were much higher than both 2003 and 2001 as a result of our
liquidity management plans. Our provision for credit losses rose
$634.4 million, or 12 percent, in 2003 and
$1.6 billion, or 44 percent, in 2002 as a result of
increased levels of receivables, higher provision for credit
losses on securitized receivables, including higher estimated
losses at auto finance, and higher levels of charge-off, due in
part to the weak economy. We increased managed loss reserves by
recording loss provision greater than charge-offs of
$921.4 million in 2003 and $1.1 billion in 2002.
Operating expenses (excluding the 2002 settlement charge and
related expenses) increased $369.0 million, or
12 percent, in 2003 and $218.3 million, or
7 percent in 2002. The increases are the result of
additional operating costs to support the increased receivable
levels and higher legal and compliance costs.


Managed receivables grew to $106.6 billion,
up 9 percent from $97.4 billion at year-end 2002 and
$86.6 billion at year-end 2001. The managed receivable
growth in both years was driven primarily by growth in real
estate secured receivables in our correspondent business. In
2003, our branch-based consumer lending business reported strong
real estate secured originations in the second half of the year
following weak sales momentum in the first half of the year as a
result of our intentional fourth quarter 2002 slowdown and
higher run-off. Real estate growth in 2003 was impacted by the
$2.8 billion loan sale to HSBC Bank USA to utilize HSBC
liquidity. Real estate secured receivables also reflect whole
loan sales of $2.7 billion in 2002 pursuant to our
liquidity management plans. Our private label portfolio also
reported strong growth in 2003 as a result of portfolio
acquisitions and organic growth.

Return on average managed assets
(ROMA) was 1.46 percent in 2003, compared to
1.45 percent in 2002 and 1.89 percent in 2001.
Excluding the settlement charge, ROMA was 1.80 percent in
2002. The declines in the ratios in both years on an operating
basis reflect higher provision for credit losses and operating
expenses. The 2003 ratio also reflects lower securitization
revenue.

See Note 19, Segment Reporting,
to the accompanying consolidated financial statements for
additional segment information.

Receivable Review

Owned receivables at December 31, 2003 and
increases (decreases) over prior years are shown in the
following table:

|                         |  |                                             |          |                     |  |                     |          |   |  |   |     |   |  |   |         |   |  |  |     |  
|------------------------ |  | ------------------------------------------- | -------- | ------------------- |  | ------------------- | -------- | - |  | - | --- | - |  | - | ------- | - |  |  | --- | -
|                         |  |                                             |          |                     |  |                    
|                         |  |                                             |          | Increase (Decrease) |  | Increase (Decrease)
|                         |  |                                             |          | in 2003/2002        |  | in 2002/2001       
|                         |  | December 31,                                |          |                     |  |                    
|                         |  | 2003                                        |          | $                   |  | %                   |          | $ |  | %
|                         |  |                                             |          |                     |  |                     |          |   |  |  
|                         |  |                                            
|                         |  | (All dollar amounts are stated in millions)
|Real estate secured      |  | $                                           | 48,979.8 |                     |  | $                   | 4,927.7  |   |  |   | 11  | % |  | $ | 6,853.7 |   |  |  | 18  | %
|Auto finance             |  |                                             | 4,121.5  |                     |  |                     | 2,093.4  |   |  |   | 103 |   |  |   | (304.1  | ) |  |  | (13 | )
|MasterCard/Visa          |  |                                             | 9,530.3  |                     |  |                     | 1,930.1  |   |  |   | 25  |   |  |   | 638.2   |   |  |  | 9   |  
|Private label            |  |                                             | 9,732.4  |                     |  |                     | 367.2    |   |  |   | 4   |   |  |   | (482.7  | ) |  |  | (5  | )
|Personal non-credit card |  |                                             | 9,643.5  |                     |  |                     | (2,063.4 | ) |  |   | (18 | ) |  |   | 1,148.3 |   |  |  | 11  |  
|Commercial and other     |  |                                             | 396.7    |                     |  |                     | (60.5    | ) |  |   | (13 | ) |  |   | 14.7    |   |  |  | 3   |  
|                         |  |                                             |          |                     |  |                     |          |   |  |   |     |   |  |   |         |   |  |  |     |  
|Total                    |  | $                                           | 82,404.2 |                     |  | $                   | 7,194.5  |   |  |   | 10  | % |  | $ | 7,868.1 |   |  |  | 12  | %
|                         |  |                                             |          |                     |  |                     |          |   |  |   |     |   |  |   |         |   |  |  |     |  

Real estate secured
receivablesincreased
$4.9 billion to $49.0 billion during 2003. During
2003, strong demand for debt consolidation loans and refinancing
due to favorable interest rates contributed to growth,
especially in our mortgage services business. Receivable
originations in our branch-based consumer lending business
improved in the latter half of 2003 compared to earlier in the
year following our intentional fourth quarter 2002 slowdown.
Also contributing to the increase was growth resulting from an
expanded range of products. Real estate growth in 2003 was
impacted by the $2.8 billion loan sale to HSBC Bank USA to
utilize

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HSBC liquidity. Real estate secured receivables
also reflect whole loan sales of $2.7 billion in 2002
pursuant to our liquidity management plans.


Auto finance
receivablesincreased
$2.1 billion to $4.1 billion during 2003 due to lower
securitization levels as planned as well as newly originated
loans acquired from our dealer network and strategic alliances
established during the year.

MasterCard and Visa
receivablesincreased
$1.9 billion to $9.5 billion during 2003 primarily as
a result of portfolio acquisitions totaling $.9 billion.
Our subprime portfolio also reported growth as the result of new
originations. Our GM portfolio reported strong growth as a
result of new account originations and lower securitization
levels. Our Union Plus and merchant partnership portfolios also
reported strong growth.

Private label
receivablesincreased $.4 billion
to $9.7 billion during 2003. The growth was primarily due
to portfolio acquisitions totaling $.8 billion resulting
from new partner programs. Organic growth, including strong
sales growth by several of our larger merchants, also
contributed to growth. This growth was partially offset by the
liquidation of certain inactive merchant portfolios.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Personal non-credit card
    receivablesare comprised of the
    following:

|                                    |  |                 |         |      |  |   |          | 
|----------------------------------- |  | --------------- | ------- | ---- |  | - | -------- | 
|                                    |  |                
|                                    |  | At December 31,
|                                    |  |                
|                                    |  | 2003            |         | 2002
|                                    |  |                 |         |     
|                                    |  |                
|                                    |  | (In millions)  
|Personal non-credit card            |  | $               | 5,627.5 |      |  | $ | 6,468.0  | 
|Union Plus personal non-credit card |  |                 | 713.8   |      |  |   | 1,095.4  | 
|Personal homeowner loans            |  |                 | 3,302.2 |      |  |   | 4,143.5  | 
|                                    |  |                 |         |      |  |   |          | 
|Total                               |  | $               | 9,643.5 |      |  | $ | 11,706.9 | 
|                                    |  |                 |         |      |  |   |          | 

Personal non-credit card receivables decreased
$2.1 billion to $9.6 billion during 2003 as we
intentionally decreased the size of this portfolio through
tightened underwriting in our branches and decreased marketing
in our branches and Union Plus portfolio. Personal non-credit
card 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
non-credit card 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 non-credit card loans
are part of our affinity relationship with the AFL-CIO and are
underwritten similar to other personal non-credit card loans.
The average PHL is approximately $15,000. PHLs typically
have terms of 120 or 180 months and are subordinate lien,
home equity loans with high (100 percent or more) combined
loan-to-value ratios which we underwrite, price, classify and
manage like unsecured loans. Because recovery upon foreclosure
is unlikely after satisfying senior liens and paying the
expenses of foreclosure, we do not consider the collateral as a
source for repayment in our underwriting. Historically, these
loans have performed better from a credit loss perspective than
traditional unsecured loans as consumers are more likely to pay
secured loans than unsecured loans in times of financial
distress.

Distribution and
SalesWe 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 real estate secured receivables
through brokers and purchases real estate secured volume
primarily through 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®) and merchant relationships
sourced through our retail services business. We also supplement
internally-generated receivable growth with portfolio
acquisitions.

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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 both 2003 and 2002.
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 increased
46 percent to $8.9 billion at December 31, 2003
and included 2.8 million accounts. 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.

Results of Operations

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

Net Interest MarginOur net interest margin on an owned basis increased to
$7.2 billion in 2003, up from $6.2 billion in 2002 and
$5.2 billion in 2001. The increase in 2003 was attributable
to higher average receivables and lower cost of funds including
the amortization of purchase accounting fair value adjustments,
partially offset by lower yields on our receivables due to
reduced pricing and the amortization of purchase accounting fair
value adjustments. Excluding amortization of purchase accounting
fair value adjustments, which totaled $620.9 million, net
interest margin was $6.5 billion in 2003. The increase in
2002 was attributable to higher average receivables and lower
funding costs.

As a percent of average interest-earning assets,
net interest margin was 8.37 percent in 2003,
8.24 percent in 2002 and 8.59 percent in 2001. The
increase in 2003 was attributable to lower cost of funds,
including amortization of purchase accounting fair value
adjustments applied to our external debt obligations, including
derivative financial instruments, as a result of
Households merger with HSBC, partially offset by lower
yields on our receivables, particularly in real estate secured,
due to reduced pricing and the amortization of purchase
accounting fair value adjustments to our receivables. The
decrease in 2002 was attributable to the impact of our
liquidity-related investment portfolio which was established in
2002 and has lower yields than our receivable portfolio,
partially offset by lower funding costs.

Our net interest margin on a managed basis
includes finance income earned on our owned receivables as well
as on our securitized receivables. This finance income is offset
by interest expense on the debt recorded on our balance sheet as
well as the contractual rate of return on the instruments issued
to investors when the receivables were securitized. Managed
basis net interest margin increased to $9.9 billion in
2003, up from $8.7 billion in 2002 and $7.2 billion in
2001. Receivable growth contributed to the dollar increases in
both years. As a percent of average managed interest-earning
assets, net interest margin was 9.11 percent in 2003,
9.07 percent in 2002 and 9.05 percent in 2001. Lower
interest expense, including the impact of the previously
discussed amortization of purchase accounting adjustments in
2003 and lower funding costs in 2002, was the primary driver of
the increased margin in both years. In 2003, this increase was
partially offset by lower pricing on our receivables. Our
liquidity-related investment portfolio, which was established in
2002 and has lower yields than our receivables, also had a
negative impact on our net interest margin in both periods.

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 manage our interest rate risk through the use
of derivatives to limit the amount of risk taken. We estimate
that our after-tax earnings would decline by about
$64 million at December 31, 2003 and $48 million
at December 31, 2002, following a gradual 100 basis point
increase in interest rates over a twelve-month period.

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See Reconciliations to GAAP Financial
Measures for additional information regarding our owned
basis and managed basis net interest margin.

Provision for Credit
LossesThe 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. Growth in receivables and portfolio seasoning
also ultimately result in higher provision for credit losses.

The provision for credit losses totaled
$3.7 billion in 2003, compared to $3.5 billion in 2002
and $2.6 billion in 2001, and included owned loss provision
greater than charge-offs of $340.9 million in 2003,
$568.6 million in 2002 and $377.6 million in 2001.
Receivables growth, increases in personal bankruptcy filings and
the weak economy contributed to the increase in provision
dollars 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 utilization of customer
account management policies and practices and risk management/
collection practices relating to 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 4.62 percent in 2003, compared to
4.87 percent in 2002 and 4.34 percent in 2001. The
decrease in 2003 reflects lower additions to loss reserves as a
result of improving charge-offs in the latter half of the year.
The increase in 2002 reflects higher charge-offs, including
bankruptcy charge-offs, and additions to loss reserves, both
resulting from the weak economy.

See Application of Critical Accounting
Policies, Credit Loss Reserves, and
Reconciliations to GAAP Financial Measures for
additional information regarding our owned basis and managed
basis loss reserves.

Other RevenuesTotal
other revenues were $3.7 billion in 2003, $4.0 billion
in 2002 and $3.4 billion in 2001. Total other revenues
included the following:

|                       |  |                        |         |      |  |      |         |  |  |   |         | 
|---------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                       |  |                       
|                       |  | Year Ended December 31
|                       |  |                       
|                       |  | 2003                   |         | 2002 |  | 2001
|                       |  |                        |         |      |  |     
|                       |  |                       
|                       |  | (In millions)         
|Securitization revenue |  | $                      | 1,396.7 |      |  | $    | 2,011.0 |  |  | $ | 1,652.4 | 
|Insurance revenue      |  |                        | 496.3   |      |  |      | 526.4   |  |  |   | 489.2   | 
|Investment income      |  |                        | 182.4   |      |  |      | 167.1   |  |  |   | 153.4   | 
|Fee income             |  |                        | 1,090.6 |      |  |      | 868.8   |  |  |   | 827.7   | 
|Other income           |  |                        | 491.3   |      |  |      | 387.0   |  |  |   | 293.5   | 
|                       |  |                        |         |      |  |      |         |  |  |   |         | 
|Total other revenues   |  | $                      | 3,657.3 |      |  | $    | 3,960.3 |  |  | $ | 3,416.2 | 
|                       |  |                        |         |      |  |      |         |  |  |   |         | 

Securitization
revenueis the result of the
securitization of receivables structured as sales and included
the following:

|                                    |  |                        |         |      |  |      |         |  |  |   |         | 
|----------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                    |  |                       
|                                    |  | Year Ended December 31
|                                    |  |                       
|                                    |  | 2003                   |         | 2002 |  | 2001
|                                    |  |                        |         |      |  |     
|                                    |  |                       
|                                    |  | (In millions)         
|Net initial gains(1)                |  | $                      | 175.9   |      |  | $    | 296.8   |  |  | $ | 154.2   | 
|Net replenishment gains(1)          |  |                        | 517.9   |      |  |      | 505.4   |  |  |   | 403.1   | 
|Servicing revenue and excess spread |  |                        | 702.9   |      |  |      | 1,208.8 |  |  |   | 1,095.1 | 
|                                    |  |                        |         |      |  |      |         |  |  |   |         | 
|Total                               |  | $                      | 1,396.7 |      |  | $    | 2,011.0 |  |  | $ | 1,652.4 | 
|                                    |  |                        |         |      |  |      |         |  |  |   |         | 



---



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Net of our estimate of probable credit losses
    under the recourse provisions.

The decreases in 2003 were due to decreases in
the level of initial securitizations during the year as a result
of the use of alternative funding sources, including funding
from HSBC subsidiaries and clients, and lower excess spread
especially at auto finance due to higher loss estimates and to
amortization of purchase

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accounting fair value adjustments to our
interest-only strip receivables. The increases in 2002 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. Net replenishment gains are
the result of certain securitization trusts such as credit
cards, which are established at fixed levels and require
frequent sales of new receivables into the trust to replace
receivable run-off.


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.
Securitization and secured financing levels in 2004 are expected
to remain consistent with 2003 levels. We currently anticipate,
however, that we will rely less on securitizations and secured
financings in the future as we continue to receive funding from
HSBC and its clients to partially fund our operations. Under
U.K. GAAP, as reported by HSBC, securitizations are treated as
secured financing transactions. Therefore, we may structure more
of our securitization transactions as financings under
U.S. GAAP in the future in order to align our accounting
treatment with HSBCs U.K. GAAP treatment.

Our interest-only strip receivables, net of the
related loss reserve and excluding the mark-to-market adjustment
recorded in accumulated other comprehensive income, decreased
$427.5 million in 2003, increased $123.9 million in
2002 and increased $118.1 million in 2001.

See Note 1, Summary of Significant
Accounting Policies, and Note 5, Asset
Securitizations, to the accompanying consolidated
financial statements, Application of Critical Accounting
Policies and Off-Balance Sheet Arrangements
(Including Securitizations and Commitments), Secured Financings
and Contractual Cash Obligations for further information
on asset securitizations.

Insurance revenuewas $496.3 million in 2003, $526.4 million in 2002 and
$489.2 million in 2001. The decrease in 2003 reflects lower
sales as a result of decreased originations in our branches in
the first half of the year as well as a decrease in the
percentage of customers who purchase insurance. The increase in
2002 reflects increased sales on a larger receivable portfolio.

Investment incomeincludes income on investment securities in the insurance
business as well as realized gains and losses from the sale of
investment securities. Investment income was $182.4 million
in 2003, $167.1 million in 2002 and $153.4 million in
2001. In 2003, higher realized gains on security sales were
partially offset by lower yields including the impact of the
amortization of purchase accounting adjustments. In 2002, the
increase was primarily attributable to higher interest income as
a result of higher average investment balances partially offset
by lower yields.

Fee incomeincludes
fee-based revenues from products such as MasterCard and Visa and
private label credit cards. Fee income was $1.1 billion in
2003, $868.8 million in 2002 and $827.7 million in
2001. 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 19, 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 (RAL)
business, was $491.3 million in 2003, $387.0 million
in 2002 and $293.5 million in 2001. RAL income was
$185.4 million in 2003, $239.9 million in 2002 and
$198.3 million in 2001. RAL income decreased in 2003
primarily as a result of higher funding costs, participation
payments and credit losses. Lower RAL income in 2003 was more
than offset by higher revenues from our mortgage operations and
$81.0 million of income resulting from the discontinuation
of the shortcut method of accounting for a period of time in
2003. In 2002, the increase reflected higher RAL income and
increased revenues from our mortgage operations.

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Costs and ExpensesTotal costs and expenses were $4.2 billion in both 2003 and
2002 and $3.4 billion in 2001. Our owned basis efficiency
ratio was 37.1 percent in 2003, 39.4 percent in 2002
and 37.1 percent in 2001. Excluding the settlement charge
in 2002, our owned basis efficiency ratio was 34.1 percent.
The increase in the 2003 efficiency ratio over the 2002
efficiency ratio excluding the settlement charge reflects higher
operating expenses and lower securitization revenue which was
partially offset by higher net interest margin and fee income.
The improvement in 2002 reflects higher revenues, partially
offset by higher operating expenses to support growth. See
Reconciliations to GAAP Financial Measures for
quantitative reconciliations of our operating efficiency ratio
to our owned basis GAAP efficiency ratio.

Total costs and expenses included the following:

|                                                  |  |                        |         |      |  |      |         |  |  |   |         | 
|------------------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                  |  |                       
|                                                  |  | Year Ended December 31
|                                                  |  |                       
|                                                  |  | 2003                   |         | 2002 |  | 2001
|                                                  |  |                        |         |      |  |     
|                                                  |  |                       
|                                                  |  | (In millions)         
|Salaries and fringe benefits                      |  | $                      | 1,625.5 |      |  | $    | 1,491.0 |  |  | $ | 1,331.0 | 
|Sales incentives                                  |  |                        | 246.5   |      |  |      | 244.2   |  |  |   | 262.9   | 
|Occupancy and equipment expenses                  |  |                        | 316.2   |      |  |      | 297.1   |  |  |   | 270.5   | 
|Other marketing expenses                          |  |                        | 534.4   |      |  |      | 491.0   |  |  |   | 467.2   | 
|Other servicing and administrative expenses       |  |                        | 948.7   |      |  |      | 769.4   |  |  |   | 621.5   | 
|Amortization of acquired intangibles and goodwill |  |                        | 234.2   |      |  |      | 57.8    |  |  |   | 157.4   | 
|Policyholders benefits                           |  |                        | 288.2   |      |  |      | 305.2   |  |  |   | 268.1   | 
|Settlement charge and related expenses            |  |                        |        |      |  |      | 525.0   |  |  |   |        | 
|                                                  |  |                        |         |      |  |      |         |  |  |   |         | 
|Total costs and expenses                          |  | $                      | 4,193.7 |      |  | $    | 4,180.7 |  |  | $ | 3,378.6 | 
|                                                  |  |                        |         |      |  |      |         |  |  |   |         | 

Salaries and fringe
benefitswere $1.6 billion in
2003, $1.5 billion in 2002 and $1.3 billion in 2001.
The increases were primarily due to additional staffing at all
businesses to support growth and compliance functions. Higher
employee benefit plan expenses also contributed to the increase
in 2003.

Sales incentiveswere $246.5 million in 2003, $244.2 million in 2002
and $262.9 million in 2001. In 2003, the increase was
primarily due to increases in our mortgage services business,
substantially offset by lower new loan volume in our branches
and in our auto finance business. In 2002, the decrease was due
to the terms of our 2002 branch incentive plans which,
generally, had higher volume requirements than the prior-year
plans.

Occupancy and equipment
expenseswere $316.2 million in
2003, $297.1 million in 2002 and $270.5 million in
2001. In 2003, the increase was primarily the result of higher
repairs and occupancy maintenance costs. In 2002, the increase
was primarily due to higher rental and other expenses.

Other marketing
expensesinclude payments for
advertising, direct mail programs and other marketing
expenditures. These expenses were $534.4 million in 2003,
$491.0 million in 2002 and $467.2 million in 2001.
Increased marketing initiatives in our MasterCard and Visa
portfolio was the primary driver of the increases in both years.

Other servicing and administrative
expenseswere $948.7 million in
2003, $769.4 million in 2002 and $621.5 million in
2001. Higher collection, legal, compliance and REO expenses as
well as receivable growth contributed to the increases in both
years. In 2003, higher third-party insurance costs also
contributed to the increase. In 2002, the increase was also
attributable to higher consulting expenses.

Amortization of acquired intangibles and
goodwillwas $234.2 million in
2003, $57.8 million in 2002 and $157.4 million in
2001. In 2003, the increase was primarily attributable to
amortization of acquired intangibles established as a result of
the HSBC merger. 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,
which totaled $58.4 million in 2001, recorded in past
business combinations ceased upon adoption of this new
accounting standard.

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Policyholders
benefitswere $288.2 million in
2003, $305.2 million in 2002 and $268.1 million in
2001. The changes were primarily due to and consistent with the
previously discussed changes in insurance revenues. 2003 also
includes amortization of purchase accounting adjustments
relating to our insurance business.

Settlement charge and related
expenseswere $525.0 million in
2002. The charges were 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/or state consumer protection, consumer
financing 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 taxesThe
effective tax rate was 34.5 percent in 2003,
34.2 percent in 2002 and 35.5 percent in 2001.
Excluding the settlement charge, the effective tax rate was
34.6 percent in 2002.




CREDIT QUALITY

Delinquency and
Charge-offsOur 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
customer 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
customer 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 restructuring and other customer account management
techniques which are designed to optimize account relationships,
are helpful in maximizing customer collections.

Charge-Off and Nonaccrual Policies and
Practices

|                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                               
|---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                |  | Charge-off Policies and Practices                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Nonaccrual Policies and Practices                                                                                                                                                                                                                                                                             
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                               
|Real estate secured(1) |  | Carrying values in excess of net realizable value
    are charged-off at or before the time foreclosure is completed
    or when settlement is reached with the borrower. If foreclosure
    is not pursued, and there is no reasonable expectation for
    recovery (insurance claim, title claim, pre-discharge bankrupt
    account), generally the account will be charged-off by the end
    of the month in which the account becomes 9 months
    contractually delinquent. |  | Interest income accruals are suspended when
    principal or interest payments are more than 3 months
    contractually past due and resumed when the receivable becomes
    less than 3 months contractually past due.                                                                                       
|Auto finance(1)        |  | Carrying values in excess of net realizable value
    are charged off at the earlier of the following:
     the collateral has been repossessed and sold,
     the collateral has been in our possession for more
    than 90 days, or
     the loan becomes 150 days contractually
    delinquent.                                                                                                                                                                             |  | Interest income accruals are suspended and the
    portion of previously accrued interest expected to be
    uncollectible is written off when principal payments are more
    than 2 months contractually past due and resumed when the
    receivable becomes less than 2 months contractually past
    due.

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|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                           
|------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                  |  | Charge-off Policies and Practices                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Nonaccrual Policies and Practices                                                                                                                                                                                                                                                                                                                                         
|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                           
|MasterCard and Visa      |  | Generally charged-off by the end of the month in
    which the account becomes 6 months contractually delinquent.                                                                                                                                                                                                                                                                                                                                                                                  |  | Interest generally accrues until charge-off.                                                                                                                                                                                                                                                                                                                              
|Private label            |  | Generally charged-off the month following the
    month in which the account becomes 9 months contractually
    delinquent. Beginning in the fourth quarter of 2002, we
    charge-off receivables originated through new merchant
    relationships by the end of the month in which the account
    becomes 6 months contractually delinquent. As of
    December 31, 2003, approximately 21 percent of our
    owned private label portfolio was subject to this 6-month
    charge-off policy. |  | Interest generally accrues until charge-off.                                                                                                                                                                                                                                                                                                                              
|Personal non-credit card |  | Generally charged-off the month following the
    month in which the account becomes 9 months contractually
    delinquent and no payment received in 6 months, but in no
    event to exceed 12 months contractually delinquent.                                                                                                                                                                                                                                                                  |  | Interest income accruals are suspended when
    principal or interest payments are more than 3 months
    contractually delinquent. For PHLs, interest income accruals
    resume if the receivable becomes less than three months
    contractually past due. For all other personal non-credit card
    receivables, interest income is generally recorded as collected.



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In November 2003, the FASB issued FASB Staff
    Position Number 144-1, Determination of Cost Basis
    for Foreclosed Assets under FASB Statement No. 15, and the
    Measurement of Cumulative Losses Previously Recognized Under
    Paragraph 37 of FASB Statement No. 144
    (FSP 144-1). Under FSP 144-1, sales commissions
    related to the sale of foreclosed assets are recognized as a
    charge-off through the provision for credit losses.
    Historically, we had recognized sales commission expense as a
    component of other servicing and administrative expenses in our
    statements of income. We adopted FSP 144-1 in November
    2003. The adoption had no significant impact on our net income.

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

Subject to receipt of regulatory and other
approvals, we intend to transfer substantially all of our
private label credit card portfolio and our General Motors and
Union Privilege MasterCard and Visa portfolios to HSBC Bank USA.
Contingent upon receiving regulatory approval for these asset
transfers in 2004, we would also expect to adopt charge-off,
loss provisioning and account management guidelines in
accordance with the Uniform Retail Credit Classification and
Account Management Policy issued by the FFIEC for those
MasterCard and Visa and private label credit card receivables
which will remain on our balance sheet. See Developments
and Trends for further discussion.

Our charge-off policies focus on maximizing the
amount of cash collected from a customer while not incurring
excessive collection expenses on a customer who will likely be
ultimately uncollectible. We believe

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our policies are responsive to the specific needs
of the customer segment we serve. Our real estate and auto
finance charge-off policies consider customer behavior in that
initiation of foreclosure or repossession activities often
prompts repayment of delinquent balances. Our collection
procedures and charge-off periods, however, are designed to
avoid ultimate foreclosure or repossession whenever it is
reasonably economically possible. With certain minor variations,
our MasterCard and Visa charge-off policy is generally
consistent with credit card industry practice. Charge-off
periods for our personal non-credit card and private label
products were designed to be responsive to our customer needs
and may be longer than bank competitors who serve a different
market. Our policies have generally been consistently applied in
all material respects. Our loss reserve estimates consider our
charge-off policies to ensure appropriate reserves exist for
products with longer charge-off lives. We believe our current
charge-off policies are appropriate and result in proper loss
recognition.


Customer Account Management Policies and
PracticesOur policies and practices
for the collection of consumer receivables, including our
customer account management 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 policies and
practices vary by product and are designed to manage customer
relationships, maximize collection opportunities and avoid
foreclosure or repossession if reasonably possible. If the
account subsequently experiences payment defaults, it will again
become contractually delinquent. As summarized in the tables
that follow, in the third quarter of 2003, we implemented
certain changes to our restructuring policies. These changes are
intended to eliminate and/or streamline exception provisions to
our existing policies and are generally effective for
receivables originated or acquired after January 1, 2003.
Receivables originated or acquired prior to January 1, 2003
generally are not subject to the revised restructure and
customer account management policies. However, for ease of
administration, in the third quarter of 2003 our mortgage
services business elected to adopt uniform policies for all
products regardless of the date an account was originated or
acquired. Implementation of the uniform policy by mortgage
services has the effect of only counting restructures occurring
on or after January 1, 2003 in assessing restructure
eligibility for purposes of the limitation that no account may
be restructured more than four times in a rolling 60 month
period. Resetting these counters will not impact the ability of
mortgage services to report historical restructure statistics.
Other business units may also elect to adopt uniform policies.
We do not expect the changes to have a significant impact on our
business model or on our results of operations as these changes
will generally be phased in as new receivables are originated or
acquired.

Approximately two-thirds of all restructured
receivables are secured products, which may have less loss
severity exposure because of the underlying collateral. Credit
loss reserves take into account whether loans have been
restructured, rewritten or are subject to forbearance, an
external debt management plan, 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.

Our restructuring policies and practices vary by
product and are described in the table that follows. 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). 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. In addition,
exceptions to these policies and practices may be made in
specific situations in response to legal or regulatory
agreements or orders.

In the policies summarized below, hardship
restructures and workout restructures refer to
situations in which the payment and/or interest rate may be
modified on a temporary or permanent basis. In each case, the
contractual delinquency status is reset to current.
External debt management plans refers to situations
in

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which consumers receive assistance in negotiating
or scheduling debt repayment through public or private agencies
such as Consumers Credit Counseling Services.


|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | RESTRUCTURING POLICIES AND PRACTICES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|HISTORICAL RESTRUCTURING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | FOLLOWING CHANGES IMPLEMENTED IN THE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|POLICIES AND PRACTICES(1)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | THIRD QUARTER 2003(1)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Real estate securedReal Estate  Overall  An account may be
    restructured if we receive two qualifying payments within the
    60 days preceding the restructure; we may restructure
    accounts in hardship, disaster or strike situations with one
    qualifying payment or no payments
      Accounts that have filed for Chapter 7
    bankruptcy protection may be restructured upon receipt of a
    signed reaffirmation agreement
      Accounts subject to a Chapter 13 plan
    filed with a bankruptcy court generally require one qualifying
    payment to be restructured
      Except for bankruptcy reaffirmation and filed
    Chapter 13 plans, agreed automatic payment withdrawal or
    hardship/ disaster/ strike, accounts are generally limited to
    one restructure every 12 months
      Accounts generally are not eligible for
    restructure until on books for at least six monthsReal Estate  Consumer Lending  Accounts whose borrowers agree to pay by
    automatic withdrawal are generally restructured upon receipt of
    one qualifying payment |  | Real estate securedReal Estate  Overall  Accounts may be
    restructured upon receipt of two qualifying payments within the
    60 days preceding the restructure
      Accounts will be limited to four restructures
    in a rolling 60 month period
      Accounts generally are not eligible for
    restructure until nine months after origination
      Accounts whose borrowers have filed for
    Chapter 7 bankruptcy protection may be restructured upon
    receipt of a signed reaffirmation agreement
      Accounts whose borrowers are subject to a
    Chapter 13 plan filed with a bankruptcy court generally may
    be restructured upon receipt of one qualifying payment
      Except for bankruptcy reaffirmation and filed
    Chapter 13 plans, accounts will generally not be
    restructured more than once in a 12 month period
      Accounts whose borrowers agree to pay by
    automatic withdrawal are generally restructured upon receipt of
    one qualifying payment(3)Real Estate  Mortgage Services(4)  Accounts will generally not be
    eligible for restructure until nine months after origination and
    six months after acquisition
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Auto finance  Accounts may be
    extended if we receive one qualifying payment within the
    60 days preceding the extension
      Accounts may be extended no more than three
    months at a time and by no more than three months in any
    12-month period
      Extensions are limited to six months over the
    contractual life
      Accounts that have filed for Chapter 7
    bankruptcy protection may be restructured upon receipt of a
    signed reaffirmation agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | Auto finance  Accounts may
    generally be extended upon receipt of two qualifying payments
    within the 60 days preceding the extension
      Accounts may be extended by no more than three
    months at a time
      Accounts will be limited to four extensions in
    a rolling 60 month period, but in no case will an account
    be extended more than a total of six months over the life
    of the account
      Accounts will be limited to one extension
    every six months
      Accounts will not be eligible for extension
    until on the books for at least six months
      Accounts whose borrowers have filed for
    Chapter 7 bankruptcy protection may be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | RESTRUCTURING POLICIES AND PRACTICES                             
|HISTORICAL RESTRUCTURING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | FOLLOWING CHANGES IMPLEMENTED IN THE                             
|POLICIES AND PRACTICES(1)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | THIRD QUARTER 2003(1)(2)                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | restructured upon receipt of a signed
    reaffirmation agreement
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Mastercard and Visa  Typically, accounts
    qualify for restructuring if we receive two or three qualifying
    payments prior to the restructure, but accounts in approved
    external debt management programs may generally be restructured
    upon receipt of one qualifying payment
      Generally, accounts may be restructured once
    every six months                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                   | Mastercard and Visa  Typically, accounts
    qualify for restructuring if we receive two or three qualifying
    payments prior to the restructure, but accounts in approved
    external debt management programs may generally be restructured
    upon receipt of one qualifying payment
      Generally, accounts may be restructured once
    every six months                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Private label  An account may
    generally be restructured if we receive one or more qualifying
    payments, depending upon the merchant
      Restructuring is limited to once every six
    months (or longer, depending upon the merchant) for revolving
    accounts and once every 12 months for closed-end accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                   | Private label  Accounts originated
    after October 1, 2002 for certain merchants require receipt
    of two or three qualifying payments to be restructured, except
    accounts in an approved, external debt management program may be
    restructured upon receipt of one qualifying payment.
      Accounts must be on the books for nine months
    and we must receive the equivalent of two qualifying payments
    within the 60 days preceding the restructure
      Accounts are not eligible for subsequent
    restructure until 12 months after a prior restructure and
    upon our receipt of three qualifying payments within the
    90 days preceding the restructure
|Personal non-credit card  Accounts may be
    restructured if we receive one qualifying payment within the
    60 days preceding the restructure; may restructure accounts
    in a hardship/ disaster/ strike situation with one qualifying
    payment or no payments
      If an account is never more than 90 days
    delinquent, it may generally be restructured up to three times
    per year
      If an account is ever more than 90 days
    delinquent, it may be restructured with one qualifying payment
    no more than four times over its life; however, generally the
    account may thereafter be restructured if two qualifying
    payments are received
      Accounts subject to programs for hardship or
    strike may require only the receipt of reduced payments in order
    to be restructured; disaster may be restructured with no payments |  |                                                                   | Personal non-credit card  Accounts may be
    restructured upon receipt of two qualifying payments within the
    60 days preceding the restructure
      Accounts will be limited to one restructure
    every six months
      Accounts will be limited to four restructures
    in a rolling 60 month period
      Accounts will not be eligible for restructure
    until six months after origination                                                                                                                                                                                                                                                                               

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We employ account restructuring and other
    customer account management policies and practices as flexible
    customer 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 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. In
    addition, in an effort to determine optimal customer account
    management strategies, management may run more conservative
    tests on some or all accounts in a product line for fixed
    periods of time in order to evaluate the impact of alternative
    policies and practices.                                                                                                                                                                      
|   
|(2) | Generally, policy changes will not be applied to
    the entire portfolio on the date of implementation and may be
    applied to new, or recently originated or acquired accounts.
    However, for ease of administration, in the third quarter of
    2003 our mortgage services business elected to adopt uniform
    policies for all products regardless of the date an account was
    originated or acquired. Implementation of the uniform policy has
    the effect of only counting restructures occurring on or after
    January 1, 2003 in assessing restructure eligibility for
    the purpose of the limitation that no account may be
    restructured more than four times in a rolling 60 month
    period. Resetting these counters will not impact the ability of
    mortgage services to report historical restructure statistics.
    Other business units may also elect to adopt uniform policies.
    Unless otherwise noted, the revisions to the restructure
    policies and practices implemented in the third quarter 2003
    will generally be applied only to accounts originated or
    acquired after January 1, 2003 and the historical
    restructuring policies and practices are effective for all
    accounts originated or acquired prior to January 1, 2003.
    We do not expect the changes to have a significant impact on our
    business model or results of operations as these changes will
    generally be phased in as receivables are originated or acquired.
|   
|(3) | Our mortgage services business implemented this
    policy for all accounts effective March 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Prior to January 1, 2003, accounts that had
    made at least six qualifying payments during the life of the
    loan and that agreed to pay by automatic withdrawal were
    generally restructured with one qualifying payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

In addition to our restructuring policies and
practices, we employ other customer account management
techniques, which we typically use on a more limited basis, that
are similarly designed to manage customer relationships,
maximize collection opportunities and avoid foreclosure or
repossession if reasonably possible. These additional customer
account management techniques include, at our discretion,
actions such as extended payment arrangements, approved external
debt management plans, forbearance, modifications, loan rewrites
and/or deferment pending a change in circumstances. We typically
use these customer account management techniques 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, these additional customer
account management techniques may involve us agreeing to lower
the contractual payment amount and/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 a customer account management technique, we may treat the
account as being contractually current and will not reflect it
as a delinquent account in our delinquency statistics. However,
if the account subsequently experiences payment defaults, it
will again become contractually delinquent. 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.

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The tables below summarize approximate
restructuring statistics in our managed basis portfolio. We
report our restructuring statistics on a managed basis only
because the receivables that we securitize are subject to
underwriting standards comparable to our owned portfolio, are
serviced and collected without regard to ownership and result in
a similar credit loss exposure for us. Our restructure
statistics are compiled using certain assumptions and estimates
and we continue to enhance our ability to capture restructure
data across all business units. When comparing restructuring
statistics from different periods, the fact that our restructure
policies and practices will change over time, that exceptions
are made to those policies and practices, and that our data
capture methodologies will be enhanced over time, should be
taken into account. 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
have disclosed, and 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.

Total Restructured by Restructure
Period(1)

(Managed Basis)


|                   |                                          |                 |       |      |  |  |       |      | 
|------------------ | ---------------------------------------- | --------------- | ----- | ---- |  |  | ----- | ---- | 
|                   |                                          |                
|                   |                                          | At December 31,
|                   |                                          |                
|                   |                                          | 2003            |       | 2002
|                   |                                          |                 |       |     
|Never restructured |                                          |                 | 84.4  | %    |  |  | 84.4  | %   
|Restructured:      |                                          |                 |       |      |  |  |       |     
|                   | Restructured in the last 6 months        |                 |       | 6.7  |  |  |       | 6.5  | 
|                   | Restructured in the last 7-12 months     |                 |       | 3.8  |  |  |       | 4.1  | 
|                   | Previously restructured beyond 12 months |                 |       | 5.1  |  |  |       | 5.0  | 
|                   |                                          |                 |       |      |  |  |       |     
|                   | Total ever restructured                  |                 |       | 15.6 |  |  |       | 15.6 | 
|                   |                                          |                 |       |      |  |  |       |     
|Total              |                                          |                 | 100.0 | %    |  |  | 100.0 | %   
|                   |                                          |                 |       |      |  |  |       |     

Total Restructured by Product(1)

(Managed Basis)


|                         |  |                                         |          |      |  |  |      |   |  |   |          |  |  |  |      |  
|------------------------ |  | --------------------------------------- | -------- | ---- |  |  | ---- | - |  | - | -------- |  |  |  | ---- | -
|                         |  |                                        
|                         |  | At December 31                         
|                         |  |                                        
|                         |  |                                         |          |     
|                         |  | 2003                                    |          | 2002
|                         |  |                                         |          |     
|                         |  |                                         |          |      |  |  |      |  
|                         |  |                                        
|                         |  | (Dollar amounts are stated in millions)
|Real estate secured      |  | $                                       | 9,548.5  |      |  |  | 19.4 | % |  | $ | 8,473.2  |  |  |  | 19.0 | %
|Auto finance             |  |                                         | 1,295.5  |      |  |  | 14.7 |   |  |   | 1,242.9  |  |  |  | 16.7 |  
|MasterCard/Visa          |  |                                         | 583.7    |      |  |  | 3.1  |   |  |   | 540.8    |  |  |  | 3.2  |  
|Private label            |  |                                         | 1,064.6  |      |  |  | 7.1  |   |  |   | 1,255.4  |  |  |  | 9.7  |  
|Personal non-credit card |  |                                         | 4,074.9  |      |  |  | 26.6 |   |  |   | 3,768.1  |  |  |  | 23.0 |  
|                         |  |                                         |          |      |  |  |      |   |  |   |          |  |  |  |      |  
|Total                    |  | $                                       | 16,567.2 |      |  |  | 15.6 | % |  | $ | 15,280.4 |  |  |  | 15.6 | %
|                         |  |                                         |          |      |  |  |      |   |  |   |          |  |  |  |      |  



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 for
further information regarding owned basis and managed basis
delinquency, charge-offs and nonperforming loans.

The amount of managed receivables in forbearance,
modification, credit card services approved consumer credit
counseling accommodations, rewrites or other customer account
management techniques for which we have reset delinquency and
that is not included in the restructured or delinquency
statistics was approximately $.9 billion or .9% of managed
receivables at December 31, 2003 compared with
approximately $.8 billion or .9% of managed receivables at
December 31, 2002.

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##### Table of Contents



Consumer Two-Month-and-Over Contractual
Delinquency Ratios  Owned Basis(1)

|                         |  |         |       |          |  |         |       |         |  |         |       |          |  |         |      |         |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  
|------------------------ |  | ------- | ----- | -------- |  | ------- | ----- | ------- |  | ------- | ----- | -------- |  | ------- | ---- | ------- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | - |  |  | ----- | -
|                         |  |         |       |         
|                         |  | 2003    |       | 2002    
|                         |  |         |       |         
|                         |  | Dec. 31 |       | Sept. 30 |  | June 30 |       | Mar. 31 |  | Dec. 31 |       | Sept. 30 |  | June 30 |      | Mar. 31
|                         |  |         |       |          |  |         |       |         |  |         |       |          |  |         |      |        
|Real estate secured      |  |         | 4.35  | %        |  |         | 4.21  | %       |  |         | 4.27  | %        |  |         | 4.13 | %       |  |  | 3.88 | % |  |  | 3.22 | % |  |  | 2.85 | % |  |  | 3.09  | %
|Auto finance             |  |         | 2.52  |          |  |         | 2.14  |         |  |         | 2.48  |          |  |         | 2.74 |         |  |  | 3.95 |   |  |  | 3.32 |   |  |  | 2.98 |   |  |  | 2.03  |  
|MasterCard/Visa          |  |         | 6.27  |          |  |         | 6.75  |         |  |         | 6.90  |          |  |         | 7.71 |         |  |  | 6.37 |   |  |  | 6.69 |   |  |  | 6.06 |   |  |  | 7.02  |  
|Private label            |  |         | 6.10  |          |  |         | 6.14  |         |  |         | 6.06  |          |  |         | 6.55 |         |  |  | 6.90 |   |  |  | 7.29 |   |  |  | 6.51 |   |  |  | 6.67  |  
|Personal non-credit card |  |         | 11.07 |          |  |         | 10.81 |         |  |         | 10.00 |          |  |         | 9.78 |         |  |  | 9.42 |   |  |  | 9.35 |   |  |  | 9.74 |   |  |  | 10.08 |  
|                         |  |         |       |          |  |         |       |         |  |         |       |          |  |         |      |         |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  
|Total Consumer           |  |         | 5.48  | %        |  |         | 5.46  | %       |  |         | 5.51  | %        |  |         | 5.58 | %       |  |  | 5.38 | % |  |  | 5.00 | % |  |  | 4.69 | % |  |  | 4.96  | %
|                         |  |         |       |          |  |         |       |         |  |         |       |          |  |         |      |         |  |  |      |   |  |  |      |   |  |  |      |   |  |  |       |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our policies and practices for the collection of
    consumer receivables, including our customer account management
    policies and practices, permit us to reset the contractual
    delinquency status of an account to current, based on indicia or
    criteria which, in our judgement, evidence continued payment
    probability. When we use a customer account management
    technique, we may treat the account as being contractually
    current and will not reflect it as a delinquent account in our
    delinquency statistics. However, if the account subsequently
    experiences payment defaults and becomes at least two months
    contractually delinquent, it will be reported in our delinquency
    ratios.

Compared to September 30, 2003, our total
consumer delinquency ratio was essentially flat at
December 31, 2003. Excluding the impact of the sale of
$2.8 billion of our higher quality non-conforming real
estate secured loans to HSBC Bank USA on December 31, 2003,
real estate delinquency ratio would have decreased to
4.12 percent and our total delinquency ratio would have
decreased to 5.31 percent. Both credit card portfolios
showed quarterly declines in the delinquency ratios as a result
of the benefit of seasonal receivable growth. Though not yet
reflected in our delinquency rates at December 31, 2003,
early roll rates in all of our products showed improvement in
the fourth quarter as a result of improvements in the economy
and better underwriting in some products. We believe these
improvements, together with loan growth, may result in lower
delinquency rates in the first half of 2004.

Compared to December 31, 2002, total
consumer delinquency increased modestly, but would have declined
7 basis points excluding the previously discussed
$2.8 billion real estate secured loan sale. Real estate
secured delinquency rates also reflect the $2.8 billion
loan sale as well as higher levels of receivables in
foreclosure. Auto finance delinquency reflects the positive
impact of strategic alliance acquisitions, tightened
underwriting and lower securitization levels. The decrease in
our MasterCard and Visa portfolio reflects receivable growth,
including portfolio acquisitions. These improvements were
partially offset by a growing percentage of subprime receivables
in our portfolio. Though subprime delinquency rates were
relatively stable during 2003, these receivables continue to
have higher delinquency rates than our prime MasterCard and Visa
receivables. Private label delinquency rates reflect improved
underwriting, collections and credit models. The increase in our
personal non-credit card portfolio reflects continued maturation
of the portfolio as well as reduced originations.

See Credit Quality Statistics 
Managed Basis for additional information regarding our
managed basis credit quality. See Customer Account
Management Policies and Practices regarding the treatment
of restructured accounts and accounts subject to forbearance and
other customer account management tools.

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Consumer Net Charge-off Ratios 
Owned Basis

|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |         |       |      |  |         |       |         |  |         |       |         |  |      |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |      |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ----- | ------------------------------- |  | ------- | ----- | ----------------------- |  | ------- | ----- | ---- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | ---- | ----- | - |  |  | ----- | - |  |  | ----- | - |  |  | ----- | - |  |  | ----- | - |  |  | ---- | -
|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |        
|                                                                                                    |  | Full |       | 2003 Quarter Ended (Annualized) |  | Full    |       | 2002 Quarter Annualized |  | Full   
|                                                                                                    |  | Year |       |                                 |  | Year    |       |                         |  | Year   
|                                                                                                    |  | 2003 |       | Dec. 31                         |  | Sep. 30 |       | June 30                 |  | Mar. 31 |       | 2002 |  | Dec. 31 |       | Sep. 30 |  | June 30 |       | Mar. 31 |  | 2001
|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |         |       |      |  |         |       |         |  |         |       |         |  |     
|Real estate secured(1)                                                                              |  |      | 1.02  | %                               |  |         | .96   | %                       |  |         | .93   | %    |  |         | 1.04  | %       |  |         | 1.14  | %       |  |      | .98   | % |  |  | 1.14  | % |  |  | 1.08  | % |  |  | .94   | % |  |  | .73   | % |  |  | .57  | %
|Auto finance(1)                                                                                     |  |      | 4.90  |                                 |  |         | 3.36  |                         |  |         | 4.62  |      |  |         | 5.29  |         |  |         | 7.69  |         |  |      | 5.99  |   |  |  | 8.47  |   |  |  | 5.49  |   |  |  | 4.78  |   |  |  | 5.66  |   |  |  | 4.04 |  
|MasterCard/Visa                                                                                     |  |      | 10.74 |                                 |  |         | 9.77  |                         |  |         | 10.08 |      |  |         | 12.49 |         |  |         | 10.84 |         |  |      | 10.32 |   |  |  | 10.05 |   |  |  | 9.73  |   |  |  | 11.09 |   |  |  | 10.47 |   |  |  | 9.82 |  
|Private label                                                                                       |  |      | 6.35  |                                 |  |         | 5.65  |                         |  |         | 5.91  |      |  |         | 7.06  |         |  |         | 6.82  |         |  |      | 6.65  |   |  |  | 6.85  |   |  |  | 7.20  |   |  |  | 6.14  |   |  |  | 6.44  |   |  |  | 6.11 |  
|Personal non-credit card                                                                            |  |      | 11.21 |                                 |  |         | 11.85 |                         |  |         | 11.97 |      |  |         | 11.04 |         |  |         | 10.06 |         |  |      | 9.60  |   |  |  | 9.06  |   |  |  | 10.03 |   |  |  | 9.97  |   |  |  | 9.35  |   |  |  | 8.37 |  
|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |         |       |      |  |         |       |         |  |         |       |         |  |      |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |      |  
|Total consumer(1)                                                                                   |  |      | 4.22  | %                               |  |         | 3.89  | %                       |  |         | 4.12  | %    |  |         | 4.51  | %       |  |         | 4.39  | %       |  |      | 4.10  | % |  |  | 4.15  | % |  |  | 4.19  | % |  |  | 4.07  | % |  |  | 3.98  | % |  |  | 3.72 | %
|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |         |       |      |  |         |       |         |  |         |       |         |  |      |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |      |  
|Real estate charge-offs and REO expense as
    a percent of average real estate secured receivables |  |      | 1.46  | %                               |  |         | 1.41  | %                       |  |         | 1.39  | %    |  |         | 1.49  | %       |  |         | 1.56  | %       |  |      | 1.40  | % |  |  | 1.54  | % |  |  | 1.46  | % |  |  | 1.38  | % |  |  | 1.20  | % |  |  | .95  | %
|                                                                                                    |  |      |       |                                 |  |         |       |                         |  |         |       |      |  |         |       |         |  |         |       |         |  |      |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |       |   |  |  |      |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in New Accounting
    Pronouncements, we adopted FSP 144-1 in November
    2003. The adoption increased real estate charge-offs by
    $9.1 million and auto finance charge-offs by
    $1.2 million during the quarter ended December 31,
    2003. The adoption increased real estate charge-offs by
    7 basis points for the quarter ended December 31, 2003
    and 2 basis points for the full year 2003, auto finance
    charge-offs by 12 basis points for the quarter ended
    December 31, 2003 and 4 basis points for the full year
    2003, and total consumer charge-offs by 4 basis points for
    the quarter ended December 31, 2003 and 1 basis point
    for the full year 2003. The impact on prior periods was not
    material.

For the full year, higher levels of new
bankruptcy filings and the weak economy, including higher
unemployment, continued to negatively affect charge-off rates in
all products while average receivable growth positively impacted
all products except personal non-credit card. Average receivable
growth includes portfolio acquisitions in our MasterCard and
Visa and private label portfolios and newly originated loans
acquired from strategic alliances in our auto finance portfolio.
Auto finance charge-off rates also reflect improved underwriting
and lower securitization levels. Loss severities on repossessed
vehicles in our auto finance business remain high, but were
stable during 2003. The increase in MasterCard and Visa
receivables reflects growth in our subprime portfolio. Our
private label charge-off rates also reflect improved
underwriting, collections and credit models. Charge-off rates in
our personal non-credit card portfolio reflect continued
maturation of the portfolio as well as reduced originations.

The increase in real estate charge-offs and REO
expense as a percent of average real estate secured receivables
over the 2002 ratio was the result of the seasoning of our
portfolios, higher loss severities and higher bankruptcy filings.

The increases in charge-off ratios in 2002
compared to 2001 reflect the weak economy and higher bankruptcy
filings. Though we took a number of steps designed to reduce our
credit losses, including tightening underwriting, reducing
unused credit lines, strengthening risk model capabilities and
adding collectors, the weak economy, including higher bankruptcy
rates, 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 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.

See Credit Quality Statistics 
Managed Basis for additional information regarding our
managed basis credit quality.

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Credit Loss ReservesWe 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 are intended to be adequate but not excessive. We
estimate probable losses for owned consumer receivables using a
roll rate migration analysis that estimates the likelihood that
a loan will progress through the various stages of delinquency,
or buckets, and ultimately charge off. This analysis considers
delinquency status, loss experience and severity and takes into
account whether loans are in bankruptcy, have been restructured
or rewritten, or are subject to forbearance, an external debt
management plan, hardship, 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 the event of default. Delinquency status may be
affected by customer 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.
If customer account management policies, or changes thereto,
shift loans from a higher delinquency bucket to a
lower delinquency bucket, this will be reflected in
our roll rate statistics. To the extent that restructured
accounts have a greater propensity to roll to higher delinquency
buckets, this will be captured in the roll rates. Since the loss
reserve is computed based on the composite of all of these
calculations, this increase in roll rate will be applied to
receivables in all respective delinquency buckets, which will
increase the overall reserve level. In addition, loss reserves
on consumer receivables are maintained to reflect our assessment
of portfolio risk factors that may not be fully reflected in the
statistical roll rate calculation. Risk factors considered in
establishing loss reserves on consumer receivables include
recent growth, product mix, bankruptcy trends, geographic
concentrations, economic conditions, portfolio seasoning and
current levels of charge-offs and delinquencies.

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. We recognize the different inherent loss
characteristics in each of our products as well as customer
account management policies and practices and risk management/
collection practices. 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. As these estimates
are influenced by factors outside of 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.

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

|                                             |  |                                             |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                             |  |                                            
|                                             |  | At December 31                             
|                                             |  |                                            
|                                             |  | 2003                                        |         | 2002 |  | 2001
|                                             |  |                                             |         |      |  |     
|                                             |  |                                            
|                                             |  | (All dollar amounts are stated in millions)
|Owned credit loss reserves                   |  | $                                           | 3,542.9 |      |  | $    | 3,156.9 |   |  | $ | 2,440.6 |  
|Reserves as a percent of receivables         |  |                                             | 4.30    | %    |  |      | 4.20    | % |  |   | 3.62    | %
|Reserves as a percent of net charge-offs     |  |                                             | 105.3   |      |  |      | 109.0   |   |  |   | 109.5   |  
|Reserves as a percent of nonperforming loans |  |                                             | 95.7    |      |  |      | 97.6    |   |  |   | 93.3    |  
|                                             |  |                                             |         |      |  |      |         |   |  |   |         |  

We increased credit loss reserves by recording
owned loss provision greater than charge-offs of
$340.9 million in 2003 and $568.6 million in 2002.
Reserve levels at December 31, 2003 reflect receivable
growth as well as consideration of key ratios such as reserves
as a percentage of net charge-offs and reserves as a percentage
of nonperforming loans. Reserves as a percentage of receivables
at December 31, 2003 were higher than at December 31,
2002 as a result of the sale of $2.8 billion of higher
quality real estate secured loans to HSBC Bank USA in December
2003. Had this sale not occurred, reserves as a percentage of
receivables at December 2003 would have been lower than 2002 as
a result of improving credit quality in the latter half of 2003
as delinquency rates stabilized and charge-off levels improved.
The ratios in 2002 and 2001 reflect the impact of the weak
economy, higher delinquency levels, and uncertainty as to the
ultimate impact the weakened economy would have on delinquency
and charge-off levels.

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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:

|                                             |  |                                             |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                             |  |                                            
|                                             |  | At December 31                             
|                                             |  |                                            
|                                             |  | 2003                                        |         | 2002 |  | 2001
|                                             |  |                                             |         |      |  |     
|                                             |  |                                            
|                                             |  | (All dollar amounts are stated in millions)
|Managed credit loss reserves                 |  | $                                           | 5,789.2 |      |  | $    | 4,795.2 |   |  | $ | 3,502.7 |  
|Reserves as a percent of receivables         |  |                                             | 5.39    | %    |  |      | 4.86    | % |  |   | 4.02    | %
|Reserves as a percent of net charge-offs     |  |                                             | 116.6   |      |  |      | 114.3   |   |  |   | 108.6   |  
|Reserves as a percent of nonperforming loans |  |                                             | 120.0   |      |  |      | 114.7   |   |  |   | 105.4   |  
|                                             |  |                                             |         |      |  |      |         |   |  |   |         |  

See Reconciliations to GAAP Financial
Measures for additional information regarding our owned
basis and managed basis loss reserves.

Owned Nonperforming Assets

|                                                                         |                                 |                                             |         |         |  |      |         |         |  |   |         |         | 
|------------------------------------------------------------------------ | ------------------------------- | ------------------------------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                         |                                 |                                            
|                                                                         |                                 | At December 31                             
|                                                                         |                                 |                                            
|                                                                         |                                 | 2003                                        |         | 2002    |  | 2001
|                                                                         |                                 |                                             |         |         |  |     
|                                                                         |                                 |                                            
|                                                                         |                                 | (All dollar amounts are stated in millions)
|Nonaccrual receivables                                                   |                                 | $                                           | 2,828.0 |         |  | $    | 2,401.8 |         |  | $ | 1,801.5 |        
|Accruing consumer receivables 90 or more days
    delinquent             |                                 |                                             | 872.4   |         |  |      | 833.2   |         |  |   | 814.1   |        
|                                                                         |                                 |                                             |         |         |  |      |         |         |  |   |         |        
|                                                                         | Total nonperforming receivables |                                             |         | 3,700.4 |  |      |         | 3,235.0 |  |   |         | 2,615.6 | 
|Real estate owned                                                        |                                 |                                             | 626.6   |         |  |      | 423.9   |         |  |   | 392.6   |        
|                                                                         |                                 |                                             |         |         |  |      |         |         |  |   |         |        
|Total nonperforming assets                                               |                                 | $                                           | 4,327.0 |         |  | $    | 3,658.9 |         |  | $ | 3,008.2 |        
|                                                                         |                                 |                                             |         |         |  |      |         |         |  |   |         |        
|Owned credit loss reserves as a percent of
    nonperforming receivables |                                 |                                             | 95.7    | %       |  |      | 97.6    | %       |  |   | 93.3    | %      
|                                                                         |                                 |                                             |         |         |  |      |         |         |  |   |         |        

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.

Geographic
ConcentrationsThe state of California
accounts for 14 percent of our owned portfolio. No other
state accounts for more than 10 percent of either our 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

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

Households merger with HSBC has improved
our access to the capital markets and lowered our funding costs.
In addition to providing several important sources of direct
funding, our affiliation with HSBC is also expanding access to a
worldwide pool of potential investors. While these new funding
synergies will reduce our reliance on traditional sources to
fund our growth, we are focused on balancing our use of
affiliate and third-party funding sources to minimize funding
expense while maximizing liquidity. Because we are now a
subsidiary of HSBC, our credit spreads relative to treasuries
have tightened since the merger. In 2003, these tightened credit
spreads have resulted in cash funding expense savings of
approximately $125 million

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compared to the funding costs we would have
incurred using average spreads from the first half of 2002. It
is anticipated that these tightened credit spreads and other
funding synergies will eventually enable HSBC to realize annual
cash funding expense savings, including external fee savings, in
excess of $1 billion per year as our existing term debt
matures over the course of the next few years. The portion of
these savings to be realized by HFC will depend in large part
upon the amount and timing of the proposed private label and
MasterCard and Visa credit card receivable transfers to HSBC
Bank USA and other initiatives between HFC and HSBC
subsidiaries. Amortization of purchase accounting fair value
adjustments applied to our external debt obligations, including
derivative financial instruments, as a result of
Households merger with HSBC reduced interest expense by
$797.6 million in 2003.


As of December 31, 2003, we had received
$9.9 billion in HSBC related funding as detailed in the
table below. We also implemented a $2.5 billion revolving
credit facility with HSBC.

|                                                                        |                                        |               |     |     | 
|----------------------------------------------------------------------- | -------------------------------------- | ------------- | --- | --- | 
|                                                                        |                                        | (in billions)
|Debt issued to HSBC subsidiaries:                                       |                                        |               |     |    
|                                                                        | Short-term borrowings                  |               | $   | 2.6 | 
|                                                                        | Term debt                              |               |     | 1.3 | 
|                                                                        |                                        |               |     |    
|                                                                        | Total debt issued to HSBC subsidiaries |               |     | 3.9 | 
|                                                                        |                                        |               |     |    
|Debt issued to HSBC clients:                                            |                                        |               |     |    
|                                                                        | Euro commercial paper                  |               |     | 2.8 | 
|                                                                        | Term debt                              |               |     | .4  | 
|                                                                        |                                        |               |     |    
|                                                                        | Total debt issued to HSBC clients      |               |     | 3.2 | 
|Cash received on sale of real estate secured
    loans to HSBC Bank USA |                                        |               | 2.8 |    
|                                                                        |                                        |               |     |    
|Total HSBC related funding                                              |                                        | $             | 9.9 |    
|                                                                        |                                        |               |     |    

We maintained an investment security liquidity
portfolio of $7.9 billion at December 31, 2003,
including $2.4 billion which is dedicated to our credit
card bank. Our investment securities balance at
December 31, 2003 was unusually high as a result of the
cash received from the $2.8 billion real estate secured
loan sale to HSBC Bank USA on December 31, 2003 as well as
excess liquidity. Our insurance subsidiaries also held an
additional $2.6 billion in investment securities at
December 31, 2003.

In managing capital, we develop targets for
tangible shareholders equity to tangible managed assets
(TETMA). This target is based on discussions with
HSBC and rating agencies, risks inherent in the portfolio, the
projected operating environment and related risks, and any
acquisition objectives. Our targets may change from time to time
to accommodate changes in the operating environment or other
considerations such as those listed above. We are committed to
maintaining at least a mid-single A rating and as
part of that effort will continue to review appropriate capital
levels with our rating agencies.

Selected capital ratios were as follows:

|                                                   |  |                |      |      |  |  |      | 
|-------------------------------------------------- |  | -------------- | ---- | ---- |  |  | ---- | 
|                                                   |  |               
|                                                   |  | At December 31
|                                                   |  |               
|                                                   |  | 2003           |      | 2002
|                                                   |  |                |      |     
|TETMA(1)                                           |  |                | 7.69 |      |  |  | 8.70 | 
|TETMA excluding purchase accounting adjustments(1) |  |                | 9.37 |      |  |  | 8.70 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This capital ratio represents a non-GAAP
    financial measure that is used by HFC management to evaluate
    capital adequacy and may differ from similarly named measures
    presented by other companies. See Reconciliations to GAAP
    Financial Measures for additional discussion and
    quantitative reconciliations to the equivalent GAAP basis
    financial measure.

Following completion of the merger with HSBC,
Standard & Poors upgraded our long-term debt rating to
A and our short-term debt rating to A-1;
Moodys Investors Service (Moodys) placed
our long-

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##### Table of Contents



term debt ratings on review for possible upgrade
and Fitch Ratings confirmed our debt ratings and removed us from
Ratings Watch Evolving. In June 2003, Moodys
upgraded our senior debt rating from A2 to A1.


Dividends and Capital
ContributionsNo dividends were paid
to our parent in 2003. We paid cash dividends to our parent of
$300 million in 2002 and $650 million in 2001. Our
subsidiary, Household Bank (SB), N.A., 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. No cash capital contributions were received from our
parent in 2003 or 2002.

FundingWe fund our
operations by collecting receivable balances; issuing commercial
paper, medium-term debt and long-term debt; 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. The vast majority of our domestic
medium-term notes and long-term debt is now marketed through
subsidiaries of HSBC. Domestic medium-term notes may also be
marketed through our in-house sales force and investment banks.
Long-term debt may also be marketed through investment banks.

At December 31, 2003, due to affiliates
totaled $2.1 billion and included advances from
subsidiaries of HSBC of $3.9 billion and advances to
Household subsidiaries of $1.8 billion. The interest rates
on the funding are comparable to those available from
unaffiliated parties.

Our outstanding commercial paper totaled
$7.9 billion at December 31, 2003, a $3.8 billion
increase from the December 31, 2002 balance of
$4.1 billion. The increase is attributable to the upgrade
of our debt ratings following the HSBC merger which expanded our
universe of potential buyers and to a new Euro commercial paper
program which has expanded our European investor base. Under the
new Euro commercial paper program, commercial paper denominated
in Euros, British pounds and U.S. dollars are sold to
foreign investors. At December 31, 2003, outstanding Euro
commercial paper totaled $2.8 billion, all of which had
been sold to clients of HSBC. We actively manage the level of
commercial paper outstanding to ensure availability to core
investors and proper use of any excess capacity within
internally-established targets.

During 2003, we issued $3.8 billion in
domestic medium-term notes, $6.4 billion in foreign
currency-denominated bonds (including $1.3 billion issued
to subsidiaries of HSBC and $370 million issued to HSBC
private banking clients) and $5.1 billion in global debt.
HFC also issued $2.1 billion of
InterNotes(SM)(retail-oriented medium-term notes). In
order to eliminate future foreign exchange risk, currency swaps
were used at the time of issuance to fix in U.S. dollars
terms substantially all foreign-denominated notes.

We issued securities backed by dedicated
receivables of $3.3 billion in 2003 and $7.5 billion
in 2002. 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, 2003, closed-end real estate secured
receivables totaling $8.0 billion secured $6.7 billion
of outstanding debt. At December 31, 2002, closed-end real
estate secured receivables totaling $8.5 billion secured
$7.5 billion of outstanding debt related to these
transactions.

In 2002, we also issued $542 million of
8.875 percent Adjustable Conversion-Rate Equity Security
Units.

We had committed back-up lines of credit totaling
$10.1 billion at December 31, 2003. Included in this
total is a $2.5 billion revolving credit facility with
HSBC. None of these back-up lines were drawn upon in 2003. 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 maintenance of
minimum shareholders equity of $5.8 billion.

At December 31, 2003, we had facilities with
commercial and investment banks under which we may securitize up
to $16.1 billion of receivables, including up to
$14.4 billion of auto finance, MasterCard, Visa, private
label and personal non-credit card receivables and
$1.75 billion of real estate secured receivables. As a
result of additional liquidity capacity now available from HSBC
and its subsidiaries, we reduced our total conduit capacity by
$3.4 billion in 2003. Conduit capacity for real estate
secured receivables was decreased

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$4.5 billion and capacity for other products
was increased $1.1 billion. The facilities are renewable at
the banks option. At December 31, 2003,
$11.5 billion of auto finance, MasterCard and Visa, private
label and personal non-credit card receivables and
$.75 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.


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

2004 Funding
StrategyAs previously discussed,
Households merger with HSBC has improved our access to the
capital markets as well as expanded our access to a worldwide
pool of potential investors. Our estimated funding needs and
sources for 2004, which reflect these new markets, are
summarized in the table that follows. Because we cannot predict
with any certainty the timing as to when or if regulatory
approval will be received for our proposed transfer of
receivables to HSBC Bank USA, these transfers are not
contemplated in the following 2004 funding plan. If these
proposed transfers do occur, our external funding needs will
decrease.

|                 |                                                               |               |   |       | 
|---------------- | ------------------------------------------------------------- | ------------- | - | ----- | 
|                 |                                                               | (in billions)
|                 |                                                               |              
|Funding needs:   |                                                               |               |   |      
|                 | Net asset growth                                              |               | $ | 14-16 | 
|                 | Commercial paper, term debt and securitization
    maturities |               |   | 24-26 | 
|                 | Other                                                         |               |   | 2-5   | 
|                 |                                                               |               |   |      
|                 | Total funding needs, including growth                         |               | $ | 40-47 | 
|                 |                                                               |               |   |      
|Funding sources: |                                                               |               |   |      
|                 | External funding, including HSBC clients                      |               | $ | 34-38 | 
|                 | HSBC and HSBC subsidiaries                                    |               |   | 6-9   | 
|                 |                                                               |               |   |      
|                 | Total funding sources                                         |               | $ | 40-47 | 
|                 |                                                               |               |   |      

Except during our RAL season when commercial
paper balances will be temporarily high, commercial paper
outstanding in 2004 is expected to be consistent with
post-merger balances. Approximately two-thirds of outstanding
commercial paper is expected to be domestic commercial paper
sold both directly and through dealer programs. Euro commercial
paper, introduced in 2003, is expected to account for
approximately one-third of outstanding commercial paper and will
be marketed predominately to HSBC private banking clients.

Term debt issuances are expected to utilize
several ongoing programs to achieve the required funding.
Approximately one-half of term debt funding is expected to be
achieved through issuance of up to 10 large
U.S. dollar global and Euro transactions. Domestic and
foreign retail note programs are expected to account for up to
20 percent of term debt issuances. The remaining term debt
issuances are expected to consist of domestic and foreign
currency medium-term note (MTN) offerings.

Securitization and secured financing levels in
2004 are expected to remain consistent with 2003 levels. Most
asset classes will again be securitized in 2004 and a single
seller asset backed security conduit program will be introduced
to provide an additional source of funding.

Capital ExpendituresWe made capital expenditures of $98 million in 2003 and
$112 million in 2002.

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OFF-BALANCE-SHEET ARRANGEMENTS (INCLUDING
SECURITIZATIONS AND

COMMITMENTS), SECURED FINANCINGS AND
CONTRACTUAL CASH OBLIGATIONS


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

At December 31, 2003, securitizations
structured as sales represented 23 percent and secured
financings represented 6 percent of the funding associated
with our managed portfolio. 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.

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. Under U.K. GAAP as reported by HSBC,
securitizations are treated as secured financings.

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 shares of finance
charges and fees received from the securitized loans are
collected each month and are 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.

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 interest 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.

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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, 2003 and 2002:

|                                        |  |                |         |      |  |   |         | 
|--------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                        |  |               
|                                        |  | At December 31
|                                        |  |               
|                                        |  | 2003           |         | 2002
|                                        |  |                |         |     
|                                        |  |               
|                                        |  | (In millions) 
|Overcollateralization                   |  | $              | 1,684.2 |      |  | $ | 2,143.8 | 
|Interest-only strip receivables         |  |                | 902.4   |      |  |   | 1,083.3 | 
|Cash spread accounts                    |  |                | 222.7   |      |  |   | 296.4   | 
|Other subordinated interests            |  |                | 4,044.4 |      |  |   | 2,568.4 | 
|                                        |  |                |         |      |  |   |         | 
|Total retained securitization interests |  | $              | 6,853.7 |      |  | $ | 6,091.9 | 
|                                        |  |                |         |      |  |   |         | 

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.

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.

Securitizations and secured financings of
consumer receivables have been, and will continue to be, a
source of our funding and liquidity. Securitization and secured
financing levels in 2004 are expected to remain consistent with
2003 levels. We currently anticipate, however, that we will rely
less on securitizations and secured financings in the future as
we receive funding from HSBC and its clients to partially fund
our operations. Under U.K. GAAP, as reported by HSBC,
securitizations are treated as secured financings. Therefore, we
may structure more of our securitization transactions as
financings under U.S. GAAP in the future in order to more
closely align our accounting treatment with HSBCs
U.K. GAAP treatment. Our securitization and secured
financing activity in 2002 exceeded that of both 2003 and 2001.
The lower levels in 2003 compared to 2002 reflected the use of
additional sources of liquidity provided by HSBC and its
subsidiaries. The higher levels in 2002 compared to 2001 reflect
our liquidity management plans and were often a more
cost-effective source of funding than traditional medium and
long-term unsecured debt funding sources.

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Securitizations and secured financings were as
follows:

|                                                |  |                        |          |      |  |      |          |  |  |   |          | 
|----------------------------------------------- |  | ---------------------- | -------- | ---- |  | ---- | -------- |  |  | - | -------- | 
|                                                |  |                       
|                                                |  | Year Ended December 31
|                                                |  |                       
|                                                |  | 2003                   |          | 2002 |  | 2001
|                                                |  |                        |          |      |  |     
|                                                |  |                       
|                                                |  | (In millions)         
|Initial Securitizations:                        |  |                        |          |      |  |      |          |  |  |   |          | 
|Auto finance                                    |  | $                      | 1,523.0  |      |  | $    | 3,288.6  |  |  | $ | 2,573.9  | 
|MasterCard/Visa                                 |  |                        | 670.0    |      |  |      | 944.0    |  |  |   | 261.1    | 
|Private label                                   |  |                        | 1,250.0  |      |  |      | 1,747.2  |  |  |   | 500.0    | 
|Personal non-credit card                        |  |                        | 3,320.0  |      |  |      | 3,560.7  |  |  |   | 1,975.0  | 
|                                                |  |                        |          |      |  |      |          |  |  |   |          | 
|Total                                           |  | $                      | 6,763.0  |      |  | $    | 9,540.5  |  |  | $ | 6,362.6  | 
|                                                |  |                        |          |      |  |      |          |  |  |   |          | 
|Replenishment Securitizations:                  |  |                        |          |      |  |      |          |  |  |   |          | 
|MasterCard/Visa                                 |  | $                      | 23,285.4 |      |  | $    | 23,346.5 |  |  | $ | 22,706.0 | 
|Private label                                   |  |                        | 6,767.3  |      |  |      | 2,151.2  |  |  |   | 1,417.6  | 
|Personal non-credit card                        |  |                        | 674.8    |      |  |      | 325.4    |  |  |   | 261.0    | 
|                                                |  |                        |          |      |  |      |          |  |  |   |          | 
|Total                                           |  | $                      | 30,727.5 |      |  | $    | 25,823.1 |  |  | $ | 24,384.6 | 
|                                                |  |                        |          |      |  |      |          |  |  |   |          | 
|Secured
    financings Real estate
    secured |  | $                      | 3,260.0  |      |  | $    | 7,548.6  |  |  | $ | 1,471.0  | 
|                                                |  |                        |          |      |  |      |          |  |  |   |          | 

Outstanding securitized receivables consisted of
the following:

|                         |  |                |          |      |  |   |          | 
|------------------------ |  | -------------- | -------- | ---- |  | - | -------- | 
|                         |  |               
|                         |  | At December 31
|                         |  |               
|                         |  | 2003           |          | 2002
|                         |  |                |          |     
|                         |  |               
|                         |  | (In millions) 
|Real estate secured      |  | $              | 193.6    |      |  | $ | 456.3    | 
|Auto finance             |  |                | 4,674.8  |      |  |   | 5,418.6  | 
|MasterCard/Visa          |  |                | 9,253.1  |      |  |   | 9,272.5  | 
|Private label            |  |                | 5,261.3  |      |  |   | 3,577.1  | 
|Personal non-credit card |  |                | 5,695.4  |      |  |   | 4,697.7  | 
|                         |  |                |          |      |  |   |          | 
|Total                    |  | $              | 25,078.2 |      |  | $ | 23,422.2 | 
|                         |  |                |          |      |  |   |          | 

The following table summarizes the expected
amortization of our securitized receivables at December 31,
2003:

|                         |  |               |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |       |  |  |   |       |  |  |   |          | 
|------------------------ |  | ------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- |  |  | - | ----- |  |  | - | ----- |  |  | - | -------- | 
|                         |  | 2004          |         | 2005 |  | 2006 |         | 2007 |  | 2008 |         | Thereafter |  | Total
|                         |  |               |         |      |  |      |         |      |  |      |         |            |  |      
|                         |  |              
|                         |  | (In millions)
|Real estate secured      |  | $             | 116.2   |      |  | $    | 77.4    |      |  |      |        |            |  |       |        |  |  |   |      |  |  |   |      |  |  | $ | 193.6    | 
|Auto finance             |  |               | 1,962.5 |      |  |      | 1,349.4 |      |  | $    | 1,052.1 |            |  | $     | 310.8   |  |  |   |      |  |  |   |      |  |  |   | 4,674.8  | 
|MasterCard/Visa          |  |               | 3,346.0 |      |  |      | 3,832.1 |      |  |      | 1,575.0 |            |  |       | 167.0   |  |  | $ | 333.0 |  |  |   |      |  |  |   | 9,253.1  | 
|Private label            |  |               | 1,497.1 |      |  |      | 1,506.1 |      |  |      | 1,821.1 |            |  |       | 437.0   |  |  |   |      |  |  |   |      |  |  |   | 5,261.3  | 
|Personal non-credit card |  |               | 2,216.2 |      |  |      | 1,516.7 |      |  |      | 874.9   |            |  |       | 490.4   |  |  |   | 346.8 |  |  |   | 250.4 |  |  |   | 5,695.4  | 
|                         |  |               |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |       |  |  |   |       |  |  |   |          | 
|Total                    |  | $             | 9,138.0 |      |  | $    | 8,281.7 |      |  | $    | 5,323.1 |            |  | $     | 1,405.2 |  |  | $ | 679.8 |  |  | $ | 250.4 |  |  | $ | 25,078.2 | 
|                         |  |               |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |       |  |  |   |       |  |  |   |          | 

At December 31, 2003, the expected
weighted-average remaining life of these transactions was
1.61 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

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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, 2003, we had facilities with
commercial and investment banks under which we may securitize up
to $16.1 billion of receivables. We may securitize up to
$14.4 billion of auto finance, MasterCard and Visa, private
label and personal non-credit card receivables and
$1.75 billion of real estate secured receivables. Draws on
the real estate conduit facilities are structured as secured
financings for accounting purposes. The facilities are renewable
at the banks option. At December 31, 2003,
$11.5 billion of auto finance, MasterCard and Visa, private
label, and personal non-credit card receivables and
$.75 billion of real estate secured receivables were
securitized under these programs. The amount available under the
facilities will vary based on the timing and volume of public
securitization and secured financing transactions. Through
existing term bank financing and new debt issuances, we believe
we should continue to have adequate sources of funds, which
could be impacted from time to time by volatility in the
financial markets, if one or more of these facilities were
unable to be renewed.

CommitmentsWe 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, 2003
|                                                   |  |                     
|                                                   |  | (In billions)       
|MasterCard and Visa and private label credit cards |  | $                    | 134.4 | 
|Other consumer lines of credit                     |  |                      | 1.0   | 
|                                                   |  |                      |       | 
|Open lines of credit                               |  | $                    | 135.4 | 
|                                                   |  |                      |       | 

At December 31, 2003, our mortgage services
business had commitments with numerous correspondents to
purchase up to $1.8 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.

Contractual Cash
ObligationsThe following table
summarizes our long-term contractual cash obligations at
December 31, 2003 by period due:

|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |          | 
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------- | -------- | -------- |  | ---- | -------- | -------- |  | ---- | ------- | ---------- |  | ----- | ------- | ------- |  | - | ------- | ------- |  | - | -------- | -------- |  | - | -------- | -------- | 
|                                                     |                                                                             | 2004          |          | 2005     |  | 2006 |          | 2007     |  | 2008 |         | Thereafter |  | Total
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |      
|                                                     |                                                                             |              
|                                                     |                                                                             | (In millions)
|Principal balance of debt:                           |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|                                                     | Due to HSBC affiliates                                                      |               | $        | 2,658.0  |  |      |          |         |  |      | $       | 728.0      |  |       |         |        |  |   |         |        |  |   | $        | 525.0    |  |   | $        | 3,911.0  | 
|                                                     | Senior debt and senior subordinated debt
    (including secured financings) |               |          | 10,691.6 |  |      | $        | 10,837.4 |  |      |         | 7,534.1    |  |       | $       | 5,773.4 |  |   | $       | 9,028.6 |  |   |          | 24,392.8 |  |   |          | 68,257.9 | 
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|                                                     | Total debt                                                                  |               |          | 13,349.6 |  |      |          | 10,837.4 |  |      |         | 8,262.1    |  |       |         | 5,773.4 |  |   |         | 9,028.6 |  |   |          | 24,917.8 |  |   |          | 72,168.9 | 
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|Operating leases:                                    |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|                                                     | Minimum rental payments                                                     |               |          | 149.7    |  |      |          | 116.3    |  |      |         | 106.1      |  |       |         | 76.3    |  |   |         | 62.9    |  |   |          | 165.2    |  |   |          | 676.5    | 
|                                                     | Minimum sublease income                                                     |               |          | 22.7     |  |      |          | 22.1     |  |      |         | 21.8       |  |       |         | 21.8    |  |   |         | 21.8    |  |   |          | 32.6     |  |   |          | 142.8    | 
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|                                                     | Total operating leases                                                      |               |          | 127.0    |  |      |          | 94.2     |  |      |         | 84.3       |  |       |         | 54.5    |  |   |         | 41.1    |  |   |          | 132.6    |  |   |          | 533.7    | 
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|Obligations under merchant and affinity
    programs |                                                                             |               | 128.0    |          |  |      | 131.4    |          |  |      | 134.9   |            |  |       | 138.5   |         |  |   | 135.6   |         |  |   | 489.2    |          |  |   | 1,157.6  |         
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         
|Total contractual cash obligations                   |                                                                             | $             | 13,604.6 |          |  | $    | 11,063.0 |          |  | $    | 8,481.3 |            |  | $     | 5,966.4 |         |  | $ | 9,205.3 |         |  | $ | 25,539.6 |          |  | $ | 73,860.2 |         
|                                                     |                                                                             |               |          |          |  |      |          |          |  |      |         |            |  |       |         |         |  |   |         |         |  |   |          |          |  |   |          |         

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

Our purchase obligations for goods and services
at December 31, 2003 were not significant.

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RISK MANAGEMENT

We have a comprehensive program to address
potential financial risks, such as liquidity, interest rate,
currency and counterparty credit risk. Historically, the Finance
Committee of Households Board of Directors had set
acceptable limits for each of these risks annually and reviewed
the limits semi-annually. As a result of the active involvement
of and guidelines provided by HSBC, the Finance Committee was
dissolved in the first quarter of 2004. In addition, the
Household Asset Liability Committee (ALCO), meets
regularly to review risks and approve appropriate risk
management strategies within limits established by
Households Board of Directors and HSBC.

Liquidity RiskGenerally, 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.

Our ability to ensure continuous access to the
capital markets and maintain a diversified funding base is
important in meeting our funding needs. To manage this liquidity
risk, we offer a broad line of debt products designed to meet
the needs of both institutional and retail investors. We
maintain investor diversity by placing paper directly with
customers, through selected dealer programs and by targeted
issuance of large liquid transactions. Through the issuance of
securitizations and secured financings, we are able to access an
alternative investor base and further diversify our funding
strategies. We also maintain a comprehensive, direct marketing
program to ensure our investors receive consistent and timely
information regarding our financial performance.

The measurement and management of liquidity risk
is a primary focus. Three standard analyses are utilized to
accomplish this goal. First, a rolling 60 day funding plan
is updated daily to quantify near-term needs and develop the
appropriate measures to fund those needs. As part of this
process, debt maturity profiles (daily, monthly, annually) are
generated to assist in planning and limiting any potential
rollover risk (which is the risk that we will be unable to pay
our debt or borrow additional funds as it becomes due). Second,
comprehensive plans identifying monthly funding requirements for
the next two years are updated. These plans focus on funding
projected asset growth and drive both the timing and size of
debt issuances. And third, a Maximum Cumulative Outflow (MCO)
analysis is updated regularly to measure liquidity risk.
Cumulative comprehensive cash inflows are subtracted from
outflows to generate a net exposure that is tracked both monthly
over the next 12 month period and annually for
5 years. Net outflow limits are reviewed by
Households Asset Liability Committee and HSBC.

We recognize the importance of being prepared for
constrained funding environments. While the potential scenarios
driving this analysis have changed due to our affiliation with
HSBC, contingency funding plans are still maintained as part of
the liquidity management process. Alternative funding strategies
are updated regularly for a rolling 12 months and assume
limited access to unsecured funding and continued access to the
securitization markets. These alternative strategies are
designed to enable us to achieve monthly funding goals through
controlled growth, sales of receivables and access to committed
sources of contingent liquidity including bank lines and undrawn
securitization conduits. Although our overall liquidity
situation has improved significantly over the past twelve
months, the strategies and analyses utilized in the past to
successfully manage liquidity remain in place today. The
combination of this process with the funding provided by HSBC
subsidiaries and clients should ensure our access to diverse
markets, investor bases and adequate funding for the foreseeable
future.

See Liquidity and Capital Resources
for further discussion of our liquidity position.

Interest Rate and Currency
RiskWe 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.

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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, 2003, our interest rate risk levels were
substantially below those allowed by our existing policy.

HSBC also has certain limits and benchmarks that
serve as guidelines in determining the appropriate levels of
interest rate risk. One such limit is expressed in terms of the
Present Value of a Basis Point (PVBP), which
reflects the change in value of the balance sheet for a one
basis point movement in all interest rates. Households
PVBP limit as of December 31, 2003 was $4.0 million,
which includes limits associated with financial instruments.
Thus, for a one basis point change in interest rates, the policy
dictates that the value of the balance sheet shall not increase
or decrease by more than $4.0 million. As of
December 31, 2003, we had a PVBP position of
$1.0 million reflecting the impact of a one basis point
increase in interest rates.

We estimate that our after-tax earnings would
decline by about $64 million at December 31, 2003 and
$48 million at December 31, 2002 following a gradual
100 basis point increase in interest rates over a twelve month
period and would increase by about $77 million at
December 31, 2003 and $49 million at December 31,
2002 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 by the amount indicated.

We generally fund our assets with liabilities
that have similar interest rate features, but different
maturities. 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. Interest rate futures, interest rate forwards
and purchased options are also used on a limited basis to reduce
interest rate risk. Prior to the merger with HSBC, the majority
of our fair value and cash flow hedges were effective hedges
which qualified for shortcut accounting under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,
(SFAS No. 133). Under the Financial
Accounting Standards Boards interpretations of SFAS
No. 133, the shortcut method of accounting was no longer
allowed for interest rate swaps which were outstanding at the
time of the merger. The discontinuation of shortcut accounting
increased net income by $51.7 million in 2003. We have
restructured our swap portfolio to regain use of the shortcut
method of accounting and reduce the potential volatility of
future earnings.

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 foreign
exchange rate forward contracts and currency swaps to minimize
currency risk associated with changes in the value of
foreign-denominated 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.

Counterparty Credit
RiskThe 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

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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
and contract structure. During the third quarter of 2003, we
began utilizing an affiliate, HSBC Bank USA, as the primary
provider of new derivative products. We have never suffered a
loss due to counterparty failure.


Going forward, it is expected that most of our
existing third party derivative contracts will be assigned to
HSBC Bank USA making them our primary counterparty in derivative
transactions. Most swap agreements, both with third parties and
affiliates, require that payments be made to, or received from,
the counterparty when the fair value of the agreement reaches a
certain level. Generally, third-party counterparties provide
collateral in the form of cash which are recorded on our balance
sheet as other assets or derivative related liabilities and
totaled $.4 billion at December 31, 2003. Affiliate
swap counterparties generally provide collateral in the form of
securities which are not recorded on our balance sheet and
totaled $.5 billion at December 31, 2003. At
December 31, 2003, we had derivative contracts with a
notional value of approximately $64.6 billion, including
$39.4 billion outstanding with HSBC Bank USA.

See Note 11 to the accompanying consolidated
financial statements, Derivative Financial Instruments and
Concentrations of Credit Risk, for additional information
related to interest rate risk management and Note 12,
Fair Value of Financial Instruments, for information
regarding the fair value of certain financial instruments.




NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
Number 46, Consolidation of Variable Interest
Entities (Interpretation No. 46).
Interpretation No. 46 clarified 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 FASB Statement
Number 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities are
excluded from the scope of Interpretation No. 46.
Interpretation No. 46 applied immediately to all variable
interest entities created after January 31, 2003 and was
originally effective for fiscal periods beginning after
July 1, 2003 for existing variable interest entities. In
October 2003, the FASB postponed the effective date of
Interpretation No. 46 to December 31, 2003.

In December 2003, a revised version of
Interpretation 46 (Revised Interpretation
No. 46) was issued by the FASB. The revisions clarify
some requirements, ease some implementation problems, add new
scope exceptions, and add applicability judgments. Revised
Interpretation No. 46 is required to be adopted by most
public companies no later than March 31, 2004. The adoption
of Revised Interpretation No. 46 did not have a material
impact on our financial position or results of operations.

In November 2003, the FASB issued FASB Staff
Position Number 144-1, Determination of Cost Basis
for Foreclosed Assets under FASB Statement No. 15, and the
Measurement of Cumulative Losses Previously Recognized Under
Paragraph 37 of FASB Statement No. 144
(FSP 144-1). Under FSP 144-1, sales
commissions related to the sale of foreclosed assets are
recognized as a charge-off through the provision for credit
losses. Historically, we had recognized sales commission expense
as a component of other servicing and administrative expenses in
our statements of income. We adopted FSP 144-1 in November
of 2003. The adoption increased real estate charge-offs by
7 basis points ($9.1 million) for the quarter ended
December 31, 2003 and 2 basis points for the full year
2003, auto finance charge-offs by 12 basis points
($1.2 million) for the quarter ended December 31, 2003
and 4 basis points for the full year 2003, and total consumer
charge-offs by 4 basis points ($10.3 million) for the
quarter ended December 31, 2003 and 1 basis point for
the full year 2003. As the adoption resulted in a
reclassification between income statement lines only, it had no
significant impact on our net income. The impact on prior
periods was not material.

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In December 2003, the American Institute of
Certified Public Accountants (AICPA) released Statement of
Position 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer
(SOP 03-3). SOP 03-3 addresses accounting
for differences between contractual cash flows and cash flows
expected to be collected from an investors initial
investment in loans or debt securities acquired in a transfer if
those differences are attributable to credit quality.
SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 15, 2004. Adoption is not expected
to have a material impact on our financial position or results
of operations.

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GLOSSARY OF TERMS

Acquired
Intangibles Assets (not
including financial assets) that lack physical substance. Our
acquired intangibles include purchased credit card relationships
and related programs, merchant relationships in our retail
services business, other loan related relationships, trade
names, and technology, customer lists and other contracts.

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® 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®). 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
customer account management policies and practices such as the
restructure of accounts, forbearance agreements, extended
payment plans, modification arrangements, external debt
management plans, 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 A non-GAAP 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.

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

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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
high loan-to-value 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.

Portfolio
Seasoning Relates to the
aging of origination vintages. Loss patterns emerge slowly over
time as new accounts are booked.

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.

Product Vintage
Analysis Refers to loss
curves on specific product origination pools by date of
origination.

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,
typically real estate secured receivables, are sold to
investors. Generally, 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, typically credit card, auto or personal non-credit card
receivables, are sold to investors. Generally, 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 balance sheet.

Securitization
Revenue Includes income
associated with 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 senior
debt which contains mandatorily redeemable obligations to
purchase HSBC common stock in 2006, excluding purchase
accounting adjustments (the Adjustable Conversion-Rate Equity
Security Units), less acquired intangibles and goodwill.

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

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

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HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CREDIT QUALITY STATISTICS  OWNED
BASIS

|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                    |  |                                            
|                                                                                                    |  | At December 31, unless otherwise indicated.
|                                                                                                    |  |                                            
|                                                                                                    |  | 2003                                        |         | 2002 |  | 2001
|                                                                                                    |  |                                             |         |      |  |     
|                                                                                                    |  |                                            
|                                                                                                    |  | (All dollar amounts are stated in millions)
|Owned Two-Month-and-Over Contractual
    Delinquency Ratios                                         |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  |                                             | 4.35    | %    |  |      | 3.88    | % |  |   | 2.89    | %
|Auto finance                                                                                        |  |                                             | 2.52    |      |  |      | 3.95    |   |  |   | 2.90    |  
|MasterCard/Visa                                                                                     |  |                                             | 6.27    |      |  |      | 6.37    |   |  |   | 6.26    |  
|Private label                                                                                       |  |                                             | 6.10    |      |  |      | 6.90    |   |  |   | 6.30    |  
|Personal non-credit card                                                                            |  |                                             | 11.07   |      |  |      | 9.42    |   |  |   | 9.66    |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 5.48    | %    |  |      | 5.38    | % |  |   | 4.81    | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Ratio of Owned Net Charge-offs to Average
    Owned Receivables for the Year                        |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  |                                             | 1.02    | %    |  |      | .98     | % |  |   | .57     | %
|Auto finance                                                                                        |  |                                             | 4.90    |      |  |      | 5.99    |   |  |   | 4.04    |  
|MasterCard/Visa                                                                                     |  |                                             | 10.74   |      |  |      | 10.32   |   |  |   | 9.82    |  
|Private label                                                                                       |  |                                             | 6.35    |      |  |      | 6.65    |   |  |   | 6.11    |  
|Personal non-credit card                                                                            |  |                                             | 11.21   |      |  |      | 9.60    |   |  |   | 8.37    |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 4.22    |      |  |      | 4.10    |   |  |   | 3.72    |  
|Commercial                                                                                          |  |                                             | .46     |      |  |      | (.35    | ) |  |   | 2.11    |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  |                                             | 4.20    | %    |  |      | 4.07    | % |  |   | 3.71    | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate charge-offs and REO expense as a
    percent of average real estate secured receivables |  |                                             | 1.46    | %    |  |      | 1.40    | % |  |   | .95     | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Nonaccrual Owned Receivables                                                                        |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  | $                                           | 1,777.4 |      |  | $    | 1,366.6 |   |  | $ | 905.7   |  
|Auto finance                                                                                        |  |                                             | 104.0   |      |  |      | 80.1    |   |  |   | 67.6    |  
|Private label                                                                                       |  |                                             | 42.7    |      |  |      | 38.0    |   |  |   | 38.6    |  
|Personal non-credit card                                                                            |  |                                             | 897.7   |      |  |      | 902.6   |   |  |   | 780.4   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 2,821.8 |      |  |      | 2,387.3 |   |  |   | 1,792.3 |  
|Commercial and other                                                                                |  |                                             | 6.2     |      |  |      | 14.5    |   |  |   | 9.2     |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  | $                                           | 2,828.0 |      |  | $    | 2,401.8 |   |  | $ | 1,801.5 |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Accruing Consumer Owned Receivables 90 or More
    Days Delinquent                                  |  |                                             |         |      |  |      |         |   |  |   |         |  
|MasterCard/Visa                                                                                     |  | $                                           | 429.4   |      |  | $    | 342.0   |   |  | $ | 352.1   |  
|Private label                                                                                       |  |                                             | 443.0   |      |  |      | 491.2   |   |  |   | 462.0   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  | $                                           | 872.4   |      |  | $    | 833.2   |   |  | $ | 814.1   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real Estate Owned                                                                                   |  | $                                           | 626.6   |      |  | $    | 423.9   |   |  | $ | 392.6   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  

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HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CREDIT QUALITY STATISTICS  MANAGED
BASIS(1)

|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                    |  |                                            
|                                                                                                    |  | At December 31, unless otherwise indicated.
|                                                                                                    |  |                                            
|                                                                                                    |  | 2003                                        |         | 2002 |  | 2001
|                                                                                                    |  |                                             |         |      |  |     
|                                                                                                    |  |                                            
|                                                                                                    |  | (All dollar amounts are stated in millions)
|Managed Two-Month-and-Over Contractual
    Delinquency Ratios                                       |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  |                                             | 4.38    | %    |  |      | 3.91    | % |  |   | 2.94    | %
|Auto finance                                                                                        |  |                                             | 3.85    |      |  |      | 3.65    |   |  |   | 3.15    |  
|MasterCard/Visa                                                                                     |  |                                             | 4.32    |      |  |      | 4.33    |   |  |   | 4.30    |  
|Private label                                                                                       |  |                                             | 5.29    |      |  |      | 6.36    |   |  |   | 5.65    |  
|Personal non-credit card                                                                            |  |                                             | 11.53   |      |  |      | 9.92    |   |  |   | 10.07   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 5.48    | %    |  |      | 5.29    | % |  |   | 4.75    | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Ratio of Managed Net Charge-offs to Average
    Managed Receivables for the Year                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  |                                             | 1.02    | %    |  |      | .99     | % |  |   | .58     | %
|Auto finance                                                                                        |  |                                             | 7.00    |      |  |      | 6.63    |   |  |   | 5.36    |  
|MasterCard/Visa                                                                                     |  |                                             | 7.87    |      |  |      | 7.50    |   |  |   | 7.12    |  
|Private label                                                                                       |  |                                             | 6.02    |      |  |      | 5.96    |   |  |   | 5.55    |  
|Personal non-credit card                                                                            |  |                                             | 11.11   |      |  |      | 9.57    |   |  |   | 8.25    |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 4.84    |      |  |      | 4.58    |   |  |   | 4.12    |  
|Commercial                                                                                          |  |                                             | .46     |      |  |      | (.35    | ) |  |   | 2.11    |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  |                                             | 4.82    | %    |  |      | 4.56    | % |  |   | 4.11    | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate charge-offs and REO expense as a
    percent of average real estate secured receivables |  |                                             | 1.46    | %    |  |      | 1.40    | % |  |   | .94     | %
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Nonaccrual Managed Receivables                                                                      |  |                                             |         |      |  |      |         |   |  |   |         |  
|Real estate secured                                                                                 |  | $                                           | 1,790.6 |      |  | $    | 1,390.7 |   |  | $ | 939.7   |  
|Auto finance                                                                                        |  |                                             | 338.4   |      |  |      | 271.9   |   |  |   | 200.2   |  
|Private label                                                                                       |  |                                             | 42.7    |      |  |      | 38.0    |   |  |   | 38.6    |  
|Personal non-credit card                                                                            |  |                                             | 1,464.1 |      |  |      | 1,320.7 |   |  |   | 1,104.3 |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total consumer                                                                                      |  |                                             | 3,635.8 |      |  |      | 3,021.3 |   |  |   | 2,282.8 |  
|Commercial and other                                                                                |  |                                             | 6.2     |      |  |      | 14.5    |   |  |   | 9.2     |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  | $                                           | 3,642.0 |      |  | $    | 3,035.8 |   |  | $ | 2,292.0 |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Accruing Consumer Managed Receivables 90 or
    More Days Delinquent                                |  |                                             |         |      |  |      |         |   |  |   |         |  
|MasterCard/Visa                                                                                     |  | $                                           | 581.9   |      |  | $    | 512.7   |   |  | $ | 527.2   |  
|Private label                                                                                       |  |                                             | 601.0   |      |  |      | 633.4   |   |  |   | 502.9   |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  
|Total                                                                                               |  | $                                           | 1,182.9 |      |  | $    | 1,146.1 |   |  | $ | 1,030.1 |  
|                                                                                                    |  |                                             |         |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These non-GAAP financial measures are provided
    for comparison of our operating trends and should be read in
    conjunction with our owned basis GAAP financial information.
    Refer to Reconciliations to GAAP Financial Measures
    for a discussion of non-GAAP financial information and for
    quantitative reconciliations to the equivalent GAAP basis
    financial measure.

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HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). In addition to
the GAAP financial results reported in our consolidated
financial statements, MD&A includes reference to the
following information which is presented on a non-GAAP basis:

Operating Results, Percentages and
RatiosCertain percentages and ratios
have been presented on an operating basis and have been
calculated using operating net income, a non-GAAP
financial measure. Operating net income is net
income excluding certain nonrecurring items. These nonrecurring
items are also excluded in calculating our operating basis
efficiency ratios. We believe that excluding nonrecurring items
helps readers of our financial statements to understand better
the results and trends of our underlying business.

Managed Basis
ReportingWe monitor our operations
and evaluate trends on a managed basis (a non-GAAP financial
measure), which assumes that securitized receivables have not
been sold and are still on our balance sheet. We manage and
evaluate 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.

When reporting on a managed basis, net interest
margin, provision for credit losses and fee income related to
receivables securitized are reclassified from securitization
revenue in our owned statements of income into the appropriate
caption. Additionally, charge-off and delinquency associated
with these receivables are included in our managed basis credit
quality statistics.

Debt analysts, rating agencies and others also
evaluate our operations on a managed basis for the reasons
discussed above and have historically requested managed basis
information from us. We believe that managed basis information
enables investors and other interested parties to better
understand the performance and quality of our entire managed
loan portfolio and is important to understanding the quality of
originations and the related credit risk inherent in our owned
portfolio.

Equity RatiosTangible shareholders equity to tangible managed assets
(TETMA) is a non-GAAP financial measure that is used
by HFC management to evaluate capital adequacy. This ratio may
differ from similarly named measures presented by other
companies. Because they include obligations to purchase HSBC
ordinary shares in 2006, our Adjustable Conversion-Rate Equity
Security Units, which exclude purchase accounting adjustments,
are considered equity in the TETMA calculation. The most
directly comparable GAAP financial measure is common equity to
owned assets.

We also monitor TETMA excluding the impact of
purchase accounting adjustments. We do so because we believe
that the purchase accounting adjustments represent non-cash
transactions which do not affect our business operations, cash
flows or ability to meet our debt obligations.

Quantitative Reconciliations of Non-GAAP
Financial Measures to GAAP Financial
MeasuresFor a reconciliation of
managed basis net interest margin, fee income and provision for
credit losses to the comparable owned basis amounts, see
Note 19, Segment Reporting, to the accompanying
consolidated financial statements. For a reconciliation of our
owned loan portfolio by product to our managed loan portfolio,
see Note 4, Receivables, to the accompanying
consolidated financial statements. Reconciliations of our owned
basis and managed basis credit quality, selected financial
ratios, including operating ratios, and our equity ratios follow.

56



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##### Table of Contents



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57



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

CREDIT QUALITY STATISTICS 
2003


|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |       |  
|------------------------------- | ------------------------ | ------------------------------------------- | - | ------------------------- |  | ---------------- | - | ----------- |  | ----------- |  | ----------- | - |  | - | ------- |  |  | - | --------- |  |  |  | ----- | -
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-Over                         |   | Year-to-Date Charge-offs,
|                                |                          | Contractual Delinquency                     |   | Net of Recoveries        
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-                             |   |                           |  | Two-Months-and-  |   |            
|                                |                          | Over Contractual                            |   | Receivables               |  | Over Contractual |   | Net         |  | Average     |  | Net        
|                                |                          | Delinquency                                 |   | Outstanding               |  | Delinquency      |   | Charge-offs |  | Receivables |  | Charge-offs
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |            
|                                |                          |                                            
|                                |                          | (All dollar amounts are stated in millions)
|Owned:                          |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | First mortgage(1)        |                                             | $ | 2.8                       |  |                  | $ | 32.0        |  |             |  | 8.75        | % |  | $ | .3      |  |  | $ | 35.5      |  |  |  | .85   | %
|                                | Real estate secured      |                                             |   | 2,131.9                   |  |                  |   | 48,979.8    |  |             |  | 4.35        |   |  |   | 486.1   |  |  |   | 47,891.1  |  |  |  | 1.02  |  
|                                | Auto finance             |                                             |   | 104.0                     |  |                  |   | 4,121.5     |  |             |  | 2.52        |   |  |   | 143.3   |  |  |   | 2,923.1   |  |  |  | 4.90  |  
|                                | MasterCard/Visa          |                                             |   | 597.9                     |  |                  |   | 9,530.3     |  |             |  | 6.27        |   |  |   | 848.4   |  |  |   | 7,899.2   |  |  |  | 10.74 |  
|                                | Private label            |                                             |   | 593.7                     |  |                  |   | 9,732.4     |  |             |  | 6.10        |   |  |   | 611.9   |  |  |   | 9,636.5   |  |  |  | 6.35  |  
|                                | Personal non-credit card |                                             |   | 1,067.5                   |  |                  |   | 9,643.5     |  |             |  | 11.07       |   |  |   | 1,272.9 |  |  |   | 11,355.1  |  |  |  | 11.21 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Total consumer           |                                             |   | 4,497.8                   |  |                  |   | 82,039.5    |  |             |  | 5.48        |   |  |   | 3,362.9 |  |  |   | 79,740.5  |  |  |  | 4.22  |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 364.7       |  |             |  |            |   |  |   | 1.8     |  |  |   | 389.9     |  |  |  | .46   |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Total                    |                                             | $ | 4,497.8                   |  |                  | $ | 82,404.2    |  |             |  | 5.46        | % |  | $ | 3,364.7 |  |  | $ | 80,130.4  |  |  |  | 4.20  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|Serviced with Limited Recourse: |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Real estate secured      |                                             | $ | 21.4                      |  |                  | $ | 193.6       |  |             |  | 11.05       | % |  | $ | 4.6     |  |  | $ | 271.9     |  |  |  | 1.69  | %
|                                | Auto finance             |                                             |   | 234.5                     |  |                  |   | 4,674.8     |  |             |  | 5.02        |   |  |   | 411.2   |  |  |   | 4,998.8   |  |  |  | 8.23  |  
|                                | MasterCard/Visa          |                                             |   | 213.5                     |  |                  |   | 9,253.1     |  |             |  | 2.31        |   |  |   | 486.5   |  |  |   | 9,071.0   |  |  |  | 5.36  |  
|                                | Private label            |                                             |   | 199.3                     |  |                  |   | 5,261.3     |  |             |  | 3.79        |   |  |   | 214.0   |  |  |   | 4,073.4   |  |  |  | 5.25  |  
|                                | Personal non-credit card |                                             |   | 700.9                     |  |                  |   | 5,695.4     |  |             |  | 12.31       |   |  |   | 483.2   |  |  |   | 4,448.8   |  |  |  | 10.86 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Total                    |                                             | $ | 1,369.6                   |  |                  | $ | 25,078.2    |  |             |  | 5.46        | % |  | $ | 1,599.5 |  |  | $ | 22,863.9  |  |  |  | 7.00  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|Managed:                        |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | First mortgage(1)        |                                             | $ | 2.8                       |  |                  | $ | 32.0        |  |             |  | 8.75        | % |  | $ | .3      |  |  | $ | 35.5      |  |  |  | .85   | %
|                                | Real estate secured      |                                             |   | 2,153.3                   |  |                  |   | 49,173.4    |  |             |  | 4.38        |   |  |   | 490.7   |  |  |   | 48,163.0  |  |  |  | 1.02  |  
|                                | Auto finance             |                                             |   | 338.5                     |  |                  |   | 8,796.3     |  |             |  | 3.85        |   |  |   | 554.5   |  |  |   | 7,921.9   |  |  |  | 7.00  |  
|                                | MasterCard/Visa          |                                             |   | 811.4                     |  |                  |   | 18,783.4    |  |             |  | 4.32        |   |  |   | 1,334.9 |  |  |   | 16,970.2  |  |  |  | 7.87  |  
|                                | Private label            |                                             |   | 793.0                     |  |                  |   | 14,993.7    |  |             |  | 5.29        |   |  |   | 825.9   |  |  |   | 13,709.9  |  |  |  | 6.02  |  
|                                | Personal non-credit card |                                             |   | 1,768.4                   |  |                  |   | 15,338.9    |  |             |  | 11.53       |   |  |   | 1,756.1 |  |  |   | 15,803.9  |  |  |  | 11.11 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Total consumer           |                                             |   | 5,867.4                   |  |                  |   | 107,117.7   |  |             |  | 5.48        |   |  |   | 4,962.4 |  |  |   | 102,604.4 |  |  |  | 4.84  |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 364.7       |  |             |  |            |   |  |   | 1.8     |  |  |   | 389.9     |  |  |  | .46   |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      
|                                | Total                    |                                             | $ | 5,867.4                   |  |                  | $ | 107,482.4   |  |             |  | 5.46        | % |  | $ | 4,964.2 |  |  | $ | 102,994.3 |  |  |  | 4.82  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |           |  |  |  |      



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Includes our liquidating legacy first and reverse
    mortgage portfolios

58



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##### Table of Contents



|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | ---------------- |  | ------- | ----- | - |  | - | -------- | -
|                                                                                                    |  |                                             |          | Serviced with    |  |        
|                                                                                                    |  | Owned                                       |          | Limited Recourse |  | Managed
|                                                                                                    |  |                                             |          |                  |  |        
|                                                                                                    |  |                                            
|                                                                                                    |  | (All dollar amounts are stated in millions)
|Nonaccrual Receivables                                                                              |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate secured                                                                                 |  | $                                           | 1,777.4  |                  |  | $       | 13.2  |   |  | $ | 1,790.6  |  
|Auto finance                                                                                        |  |                                             | 104.0    |                  |  |         | 234.4 |   |  |   | 338.4    |  
|Private label                                                                                       |  |                                             | 42.7     |                  |  |         |      |   |  |   | 42.7     |  
|Personal non-credit card                                                                            |  |                                             | 897.7    |                  |  |         | 566.4 |   |  |   | 1,464.1  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total consumer                                                                                      |  |                                             | 2,821.8  |                  |  |         | 814.0 |   |  |   | 3,635.8  |  
|Commercial and other                                                                                |  |                                             | 6.2      |                  |  |         |      |   |  |   | 6.2      |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total                                                                                               |  | $                                           | 2,828.0  |                  |  | $       | 814.0 |   |  | $ | 3,642.0  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Accruing Consumer Receivables 90 or More Days
    Delinquent                                        |  |                                             |          |                  |  |         |       |   |  |   |          |  
|MasterCard/Visa                                                                                     |  | $                                           | 429.4    |                  |  | $       | 152.5 |   |  | $ | 581.9    |  
|Private label                                                                                       |  |                                             | 443.0    |                  |  |         | 158.0 |   |  |   | 601.0    |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total                                                                                               |  | $                                           | 872.4    |                  |  | $       | 310.5 |   |  | $ | 1,182.9  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real Estate Charge-offs and REO Expense as a
    Percent of Average Real Estate Secured Receivables |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate charge-offs and REO expense                                                             |  | $                                           | 698.5    |                  |  | $       | 4.6   |   |  | $ | 703.1    |  
|Average real estate secured receivables                                                             |  |                                             | 47,891.1 |                  |  |         | 271.9 |   |  |   | 48,163.0 |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate charge-offs and REO expense as a
    percent of average real estate secured receivables |  |                                             | 1.46     | %                |  |         | 1.69  | % |  |   | 1.46     | %
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  

59



---



##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

CREDIT QUALITY STATISTICS 
2002


|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |       |  
|------------------------------- | ------------------------ | ------------------------------------------- | - | ------------------------- |  | ---------------- | - | ----------- |  | ----------- |  | ----------- | - |  | - | ------- | - |  | - | -------- |  |  |  | ----- | -
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-Over                         |   | Year-to-Date Charge-offs,
|                                |                          | Contractual Delinquency                     |   | Net of Recoveries        
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-                             |   |                           |  | Two-Months-and-  |   |            
|                                |                          | Over Contractual                            |   | Receivables               |  | Over Contractual |   | Net         |  | Average     |  | Net        
|                                |                          | Delinquency                                 |   | Outstanding               |  | Delinquency      |   | Charge-offs |  | Receivables |  | Charge-offs
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |            
|                                |                          |                                            
|                                |                          | (All dollar amounts are stated in millions)
|Owned:                          |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | First mortgage(1)        |                                             | $ | 4.0                       |  |                  | $ | 39.9        |  |             |  | 10.03       | % |  | $ | .2      |   |  | $ | 32.5     |  |  |  | .62   | %
|                                | Real estate secured      |                                             |   | 1,707.7                   |  |                  |   | 44,052.1    |  |             |  | 3.88        |   |  |   | 407.2   |   |  |   | 41,487.6 |  |  |  | .98   |  
|                                | Auto finance             |                                             |   | 80.1                      |  |                  |   | 2,028.1     |  |             |  | 3.95        |   |  |   | 151.1   |   |  |   | 2,522.1  |  |  |  | 5.99  |  
|                                | MasterCard/Visa          |                                             |   | 483.8                     |  |                  |   | 7,600.2     |  |             |  | 6.37        |   |  |   | 677.6   |   |  |   | 6,566.8  |  |  |  | 10.32 |  
|                                | Private label            |                                             |   | 645.9                     |  |                  |   | 9,365.2     |  |             |  | 6.90        |   |  |   | 600.6   |   |  |   | 9,030.3  |  |  |  | 6.65  |  
|                                | Personal non-credit card |                                             |   | 1,103.3                   |  |                  |   | 11,706.9    |  |             |  | 9.42        |   |  |   | 1,059.9 |   |  |   | 11,038.4 |  |  |  | 9.60  |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Total consumer           |                                             |   | 4,024.8                   |  |                  |   | 74,792.4    |  |             |  | 5.38        |   |  |   | 2,896.6 |   |  |   | 70,677.7 |  |  |  | 4.10  |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 417.3       |  |             |  |            |   |  |   | (1.5    | ) |  |   | 427.3    |  |  |  | (.35  | )
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Total                    |                                             | $ | 4,024.8                   |  |                  | $ | 75,209.7    |  |             |  | 5.35        | % |  | $ | 2,895.1 |   |  | $ | 71,105.0 |  |  |  | 4.07  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|Serviced with Limited Recourse: |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Real estate secured      |                                             | $ | 31.1                      |  |                  | $ | 456.3       |  |             |  | 6.82        | % |  | $ | 7.2     |   |  | $ | 572.1    |  |  |  | 1.26  | %
|                                | Auto finance             |                                             |   | 191.8                     |  |                  |   | 5,418.6     |  |             |  | 3.54        |   |  |   | 308.9   |   |  |   | 4,412.6  |  |  |  | 7.00  |  
|                                | MasterCard/Visa          |                                             |   | 246.6                     |  |                  |   | 9,272.5     |  |             |  | 2.66        |   |  |   | 500.7   |   |  |   | 9,143.1  |  |  |  | 5.48  |  
|                                | Private label            |                                             |   | 177.4                     |  |                  |   | 3,577.1     |  |             |  | 4.96        |   |  |   | 106.6   |   |  |   | 2,840.4  |  |  |  | 3.75  |  
|                                | Personal non-credit card |                                             |   | 524.8                     |  |                  |   | 4,697.7     |  |             |  | 11.17       |   |  |   | 376.8   |   |  |   | 3,981.6  |  |  |  | 9.46  |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Total                    |                                             | $ | 1,171.7                   |  |                  | $ | 23,422.2    |  |             |  | 5.00        | % |  | $ | 1,300.2 |   |  | $ | 20,949.8 |  |  |  | 6.21  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|Managed:                        |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | First mortgage(1)        |                                             | $ | 4.0                       |  |                  | $ | 39.9        |  |             |  | 10.03       | % |  | $ | .2      |   |  | $ | 32.5     |  |  |  | .62   | %
|                                | Real estate secured      |                                             |   | 1,738.8                   |  |                  |   | 44,508.4    |  |             |  | 3.91        |   |  |   | 414.4   |   |  |   | 42,059.7 |  |  |  | .99   |  
|                                | Auto finance             |                                             |   | 271.9                     |  |                  |   | 7,446.7     |  |             |  | 3.65        |   |  |   | 460.0   |   |  |   | 6,934.7  |  |  |  | 6.63  |  
|                                | MasterCard/Visa          |                                             |   | 730.4                     |  |                  |   | 16,872.7    |  |             |  | 4.33        |   |  |   | 1,178.3 |   |  |   | 15,709.9 |  |  |  | 7.50  |  
|                                | Private label            |                                             |   | 823.3                     |  |                  |   | 12,942.3    |  |             |  | 6.36        |   |  |   | 707.2   |   |  |   | 11,870.7 |  |  |  | 5.96  |  
|                                | Personal non-credit card |                                             |   | 1,628.1                   |  |                  |   | 16,404.6    |  |             |  | 9.92        |   |  |   | 1,436.7 |   |  |   | 15,020.0 |  |  |  | 9.57  |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Total consumer           |                                             |   | 5,196.5                   |  |                  |   | 98,214.6    |  |             |  | 5.29        |   |  |   | 4,196.8 |   |  |   | 91,627.5 |  |  |  | 4.58  |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 417.3       |  |             |  |            |   |  |   | (1.5    | ) |  |   | 427.3    |  |  |  | (.35  | )
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      
|                                | Total                    |                                             | $ | 5,196.5                   |  |                  | $ | 98,631.9    |  |             |  | 5.27        | % |  | $ | 4,195.3 |   |  | $ | 92,054.8 |  |  |  | 4.56  | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |   |  |   |          |  |  |  |      



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Includes our liquidating legacy first and reverse
    mortgage portfolios

60



---



##### Table of Contents



|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | ---------------- |  | ------- | ----- | - |  | - | -------- | -
|                                                                                                    |  |                                             |          | Serviced with    |  |        
|                                                                                                    |  | Owned                                       |          | Limited Recourse |  | Managed
|                                                                                                    |  |                                             |          |                  |  |        
|                                                                                                    |  |                                            
|                                                                                                    |  | (All dollar amounts are stated in millions)
|Nonaccrual Receivables                                                                              |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate secured                                                                                 |  | $                                           | 1,366.6  |                  |  | $       | 24.1  |   |  | $ | 1,390.7  |  
|Auto finance                                                                                        |  |                                             | 80.1     |                  |  |         | 191.8 |   |  |   | 271.9    |  
|Private label                                                                                       |  |                                             | 38.0     |                  |  |         |      |   |  |   | 38.0     |  
|Personal non-credit card                                                                            |  |                                             | 902.6    |                  |  |         | 418.1 |   |  |   | 1,320.7  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total consumer                                                                                      |  |                                             | 2,387.3  |                  |  |         | 634.0 |   |  |   | 3,021.3  |  
|Commercial and other                                                                                |  |                                             | 14.5     |                  |  |         |      |   |  |   | 14.5     |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total                                                                                               |  | $                                           | 2,401.8  |                  |  | $       | 634.0 |   |  | $ | 3,035.8  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Accruing Consumer Receivables 90 or More Days
    Delinquent                                        |  |                                             |          |                  |  |         |       |   |  |   |          |  
|MasterCard/Visa                                                                                     |  | $                                           | 342.0    |                  |  | $       | 170.7 |   |  | $ | 512.7    |  
|Private label                                                                                       |  |                                             | 491.2    |                  |  |         | 142.2 |   |  |   | 633.4    |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Total                                                                                               |  | $                                           | 833.2    |                  |  | $       | 312.9 |   |  | $ | 1,146.1  |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real Estate Charge-offs and REO Expense as a
    Percent of Average Real Estate Secured Receivables |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate charge-offs and REO expense                                                             |  | $                                           | 581.9    |                  |  | $       | 7.2   |   |  | $ | 589.1    |  
|Average real estate secured receivables                                                             |  |                                             | 41,487.6 |                  |  |         | 572.1 |   |  |   | 42,059.7 |  
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  
|Real estate charge-offs and REO expense as a
    percent of average real estate secured receivables |  |                                             | 1.40     | %                |  |         | 1.26  | % |  |   | 1.40     | %
|                                                                                                    |  |                                             |          |                  |  |         |       |   |  |   |          |  

61



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

CREDIT QUALITY STATISTICS 
2001


|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |      |  
|------------------------------- | ------------------------ | ------------------------------------------- | - | ------------------------- |  | ---------------- | - | ----------- |  | ----------- |  | ----------- | - |  | - | ------- |  |  | - | -------- |  |  |  | ---- | -
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-Over                         |   | Year-to-Date Charge-offs,
|                                |                          | Contractual Delinquency                     |   | Net of Recoveries        
|                                |                          |                                             |   |                          
|                                |                          | Two-Months-and-                             |   |                           |  | Two-Months-and-  |   |            
|                                |                          | Over Contractual                            |   | Receivables               |  | Over Contractual |   | Net         |  | Average     |  | Net        
|                                |                          | Delinquency                                 |   | Outstanding               |  | Delinquency      |   | Charge-offs |  | Receivables |  | Charge-offs
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |            
|                                |                          |                                            
|                                |                          | (All dollar amounts are stated in millions)
|Owned:                          |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Real estate secured      |                                             | $ | 1,075.1                   |  |                  | $ | 37,198.4    |  |             |  | 2.89        | % |  | $ | 188.6   |  |  |   | 32,904.8 |  |  |  | .57  |  
|                                | Auto finance             |                                             |   | 67.6                      |  |                  |   | 2,332.2     |  |             |  | 2.90        |   |  |   | 88.4    |  |  |   | 2,187.2  |  |  |  | 4.04 |  
|                                | MasterCard/Visa          |                                             |   | 435.5                     |  |                  |   | 6,962.0     |  |             |  | 6.26        |   |  |   | 594.7   |  |  |   | 6,054.4  |  |  |  | 9.82 |  
|                                | Private label            |                                             |   | 620.1                     |  |                  |   | 9,847.9     |  |             |  | 6.30        |   |  |   | 530.3   |  |  |   | 8,676.9  |  |  |  | 6.11 |  
|                                | Personal non-credit card |                                             |   | 1,020.1                   |  |                  |   | 10,558.6    |  |             |  | 9.66        |   |  |   | 816.7   |  |  |   | 9,759.9  |  |  |  | 8.37 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Total consumer           |                                             |   | 3,218.4                   |  |                  |   | 66,899.1    |  |             |  | 4.81        |   |  |   | 2,218.7 |  |  |   | 59,583.2 |  |  |  | 3.72 |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 442.5       |  |             |  |            |   |  |   | 10.1    |  |  |   | 478.6    |  |  |  | 2.11 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Total                    |                                             | $ | 3,218.4                   |  |                  | $ | 67,341.6    |  |             |  | 4.78        | % |  | $ | 2,228.8 |  |  | $ | 60,061.8 |  |  |  | 3.71 | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|Serviced with Limited Recourse: |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Real estate secured      |                                             | $ | 43.1                      |  |                  | $ | 861.8       |  |             |  | 5.00        | % |  | $ | 8.4     |  |  | $ | 1,199.2  |  |  |  | .70  | %
|                                | Auto finance             |                                             |   | 132.6                     |  |                  |   | 4,026.6     |  |             |  | 3.29        |   |  |   | 189.9   |  |  |   | 3,004.4  |  |  |  | 6.32 |  
|                                | MasterCard/Visa          |                                             |   | 252.4                     |  |                  |   | 9,047.5     |  |             |  | 2.79        |   |  |   | 473.4   |  |  |   | 8,953.5  |  |  |  | 5.29 |  
|                                | Private label            |                                             |   | 57.9                      |  |                  |   | 2,150.0     |  |             |  | 2.69        |   |  |   | 47.6    |  |  |   | 1,744.1  |  |  |  | 2.73 |  
|                                | Personal non-credit card |                                             |   | 412.6                     |  |                  |   | 3,673.4     |  |             |  | 11.23       |   |  |   | 277.5   |  |  |   | 3,496.1  |  |  |  | 7.94 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Total                    |                                             | $ | 898.6                     |  |                  | $ | 19,759.3    |  |             |  | 4.55        | % |  | $ | 996.8   |  |  | $ | 18,397.3 |  |  |  | 5.42 | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|Managed:                        |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Real estate secured      |                                             | $ | 1,118.2                   |  |                  | $ | 38,060.2    |  |             |  | 2.94        | % |  | $ | 197.0   |  |  | $ | 34,104.0 |  |  |  | .58  |  
|                                | Auto finance             |                                             |   | 200.2                     |  |                  |   | 6,358.8     |  |             |  | 3.15        |   |  |   | 278.3   |  |  |   | 5,191.6  |  |  |  | 5.36 |  
|                                | MasterCard/Visa          |                                             |   | 687.9                     |  |                  |   | 16,009.5    |  |             |  | 4.30        |   |  |   | 1,068.2 |  |  |   | 15,007.9 |  |  |  | 7.12 |  
|                                | Private label            |                                             |   | 678.0                     |  |                  |   | 11,997.9    |  |             |  | 5.65        |   |  |   | 577.9   |  |  |   | 10,421.0 |  |  |  | 5.55 |  
|                                | Personal non-credit card |                                             |   | 1,432.7                   |  |                  |   | 14,232.0    |  |             |  | 10.07       |   |  |   | 1,094.2 |  |  |   | 13,256.0 |  |  |  | 8.25 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Total consumer           |                                             |   | 4,117.0                   |  |                  |   | 86,658.4    |  |             |  | 4.75        |   |  |   | 3,215.6 |  |  |   | 77,980.5 |  |  |  | 4.12 |  
|                                | Commercial               |                                             |   |                          |  |                  |   | 442.5       |  |             |  |            |   |  |   | 10.1    |  |  |   | 478.6    |  |  |  | 2.11 |  
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     
|                                | Total                    |                                             | $ | 4,117.0                   |  |                  | $ | 87,100.9    |  |             |  | 4.73        | % |  | $ | 3,225.7 |  |  | $ | 78,459.1 |  |  |  | 4.11 | %
|                                |                          |                                             |   |                           |  |                  |   |             |  |             |  |             |   |  |   |         |  |  |   |          |  |  |  |     

62



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##### Table of Contents



|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | -------- | ---------------- |  | ------- | ------- | - |  | - | -------- | -
|                                                                                                    |  |                                             |          | Serviced with    |  |        
|                                                                                                    |  | Owned                                       |          | Limited Recourse |  | Managed
|                                                                                                    |  |                                             |          |                  |  |        
|                                                                                                    |  |                                            
|                                                                                                    |  | (All dollar amounts are stated in millions)
|Nonaccrual Receivables                                                                              |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Real estate secured                                                                                 |  | $                                           | 905.7    |                  |  | $       | 34.0    |   |  | $ | 939.7    |  
|Auto finance                                                                                        |  |                                             | 67.6     |                  |  |         | 132.6   |   |  |   | 200.2    |  
|Private label                                                                                       |  |                                             | 38.6     |                  |  |         |        |   |  |   | 38.6     |  
|Personal non-credit card                                                                            |  |                                             | 780.4    |                  |  |         | 323.9   |   |  |   | 1,104.3  |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Total consumer                                                                                      |  |                                             | 1,792.3  |                  |  |         | 490.5   |   |  |   | 2,282.8  |  
|Commercial and other                                                                                |  |                                             | 9.2      |                  |  |         |        |   |  |   | 9.2      |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Total                                                                                               |  | $                                           | 1,801.5  |                  |  | $       | 490.5   |   |  | $ | 2,292.0  |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Accruing Consumer Receivables 90 or More Days
    Delinquent                                        |  |                                             |          |                  |  |         |         |   |  |   |          |  
|MasterCard/Visa                                                                                     |  | $                                           | 352.1    |                  |  | $       | 175.1   |   |  | $ | 527.2    |  
|Private label                                                                                       |  |                                             | 462.0    |                  |  |         | 40.9    |   |  |   | 502.9    |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Total                                                                                               |  | $                                           | 814.1    |                  |  | $       | 216.0   |   |  | $ | 1,030.1  |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Real Estate Charge-offs and REO Expense as a
    Percent of Average Real Estate Secured Receivables |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Real estate charge-offs and REO expense                                                             |  | $                                           | 311.7    |                  |  | $       | 8.4     |   |  | $ | 320.1    |  
|Average real estate secured receivables                                                             |  |                                             | 32,904.8 |                  |  |         | 1,199.2 |   |  |   | 34,104.0 |  
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  
|Real estate charge-offs and REO expense as a
    percent of average real estate secured receivables |  |                                             | .95      | %                |  |         | .70     | % |  |   | .94      | %
|                                                                                                    |  |                                             |          |                  |  |         |         |   |  |   |          |  

63



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

SELECTED FINANCIAL DATA AND
STATISTICS


|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |          | 
|------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | --------------------------------- | -------- | --------- |  | ---- | ------- | --------- | - | - | ------- | -------- | 
|                                                                         |                                                                                         | 2003                              |          | 2002      |  | 2001
|                                                                         |                                                                                         |                                   |          |           |  |     
|                                                                         |                                                                                         |                                  
|                                                                         |                                                                                         | (All dollar amounts are stated in
|                                                                         |                                                                                         | millions)                        
|Return on Average Common Shareholders
    Equity:                       |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Net income                                                               |                                                                                         | $                                 | 1,910.1  |           |  | $    | 1,636.5 |           |   | $ | 1,727.9 |         
|Settlement charge and related expenses                                   |                                                                                         |                                   |         |           |  |      | 333.2   |           |   |   |        |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Operating net income available to common
    shareholders                |                                                                                         | $                                 | 1,910.1  |           |  | $    | 1,969.7 |           |   | $ | 1,727.9 |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Average common shareholders equity                                      |                                                                                         | $                                 | 12,226.6 |           |  | $    | 9,663.6 |           |   | $ | 8,337.4 |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Return on average common shareholders equity                            |                                                                                         |                                   | 15.6     | %         |  |      | 16.9    | %         |   |   | 20.7    | %       
|Return on average common shareholders
    equity, operating basis       |                                                                                         |                                   | 15.6     |           |  |      | 20.4    |           |   |   | 20.7    |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Return on Average Assets:                                                |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Net income                                                               |                                                                                         | $                                 | 1,910.1  |           |  | $    | 1,636.5 |           |   | $ | 1,727.9 |         
|Operating net income                                                     |                                                                                         |                                   | 1,910.1  |           |  |      | 1,969.7 |           |   |   | 1,727.9 |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Average assets:                                                          |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Owned basis                                                                             |                                   | $        | 96,601.7  |  |      | $       | 82,165.7  |   |   | $       | 67,539.1 | 
|                                                                         | Serviced with limited recourse                                                          |                                   |          | 22,863.9  |  |      |         | 20,949.8  |   |   |         | 18,397.3 | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Managed basis                                                                           |                                   | $        | 119,465.6 |  |      | $       | 103,115.5 |   |   | $       | 85,936.4 | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Return on average owned assets                                           |                                                                                         |                                   | 1.98     | %         |  |      | 1.99    | %         |   |   | 2.56    | %       
|Return on average owned assets, operating basis                          |                                                                                         |                                   | 1.98     |           |  |      | 2.40    |           |   |   | 2.56    |         
|Return on average managed assets                                         |                                                                                         |                                   | 1.60     |           |  |      | 1.59    |           |   |   | 2.01    |         
|Return on average managed assets, operating basis                        |                                                                                         |                                   | 1.60     |           |  |      | 1.91    |           |   |   | 2.01    |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Efficiency Ratio:                                                        |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Total costs and expenses less policyholders
    benefits                |                                                                                         | $                                 | 3,905.5  |           |  | $    | 3,875.5 |           |   | $ | 3,110.5 |         
|                                                                         | Settlement charge and related expenses                                                  |                                   |          |          |  |      |         | (525.0    | ) |   |         |         | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Total costs and expenses less policyholders
    benefits, excluding nonrecurring items |                                   | $        | 3,905.5   |  |      | $       | 3,350.5   |   |   | $       | 3,110.5  | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Net interest margin and other revenues less
    policyholders benefits: |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Owned basis                                                                             |                                   | $        | 10,528.9  |  |      | $       | 9,825.7   |   |   | $       | 8,394.6  | 
|                                                                         | Serviced with limited recourse                                                          |                                   |          | 2,177.4   |  |      |         | 1,838.8   |   |   |         | 1,063.1  | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Managed basis                                                                           |                                   | $        | 12,706.3  |  |      | $       | 11,664.5  |   |   | $       | 9,457.7  | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Owned basis efficiency ratio                                             |                                                                                         |                                   | 37.1     | %         |  |      | 39.4    | %         |   |   | 37.1    | %       
|Owned basis efficiency ratio, operating basis                            |                                                                                         |                                   | 37.1     |           |  |      | 34.1    |           |   |   | 37.1    |         
|Managed basis efficiency ratio                                           |                                                                                         |                                   | 30.7     |           |  |      | 33.2    |           |   |   | 32.9    |         
|Managed basis efficiency ratio, operating basis                          |                                                                                         |                                   | 30.7     |           |  |      | 28.7    |           |   |   | 32.9    |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Net Interest Margin:                                                     |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Net Interest Margin:                                                     |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Owned basis                                                                             |                                   | $        | 7,159.8   |  |      | $       | 6,170.6   |   |   | $       | 5,246.5  | 
|                                                                         | Serviced with limited recourse                                                          |                                   |          | 2,710.5   |  |      |         | 2,522.4   |   |   |         | 1,944.1  | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Managed basis                                                                           |                                   | $        | 9,870.3   |  |      | $       | 8,693.0   |   |   | $       | 7,190.6  | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Average interest-earning assets:                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Owned basis                                                                             |                                   | $        | 85,496.0  |  |      | $       | 74,881.6  |   |   | $       | 61,078.6 | 
|                                                                         | Serviced with limited recourse                                                          |                                   |          | 22,863.9  |  |      |         | 20,949.8  |   |   |         | 18,397.3 | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|                                                                         | Managed basis                                                                           |                                   | $        | 108,359.9 |  |      | $       | 95,831.4  |   |   | $       | 79,475.9 | 
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         
|Owned basis net interest margin                                          |                                                                                         |                                   | 8.37     | %         |  |      | 8.24    | %         |   |   | 8.59    | %       
|Managed basis net interest margin                                        |                                                                                         |                                   | 9.11     |           |  |      | 9.07    |           |   |   | 9.05    |         
|                                                                         |                                                                                         |                                   |          |           |  |      |         |           |   |   |         |         

64



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

RECONCILIATIONS TO GAAP FINANCIAL
MEASURES

EQUITY RATIOS


|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |          |  
|------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------- | --------- | -------- | - | ---- | --------- | -------- | - | - | -------- | -------- | -
|                                                                                                        |                                                                         | 2003                                      |           | 2002     |   | 2001
|                                                                                                        |                                                                         |                                           |           |          |   |     
|                                                                                                        |                                                                         |                                          
|                                                                                                        |                                                                         | All dollar amounts are stated in millions
|Tangible shareholders equity:                                                                          |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Common shareholders equity                                                                             |                                                                         | $                                         | 13,727.5  |          |   | $    | 10,041.5  |          |   | $ | 8,633.9  |         
|Exclude:                                                                                                |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|                                                                                                        | Unrealized (gains) losses on cash flow hedging
    instruments          |                                           |           | (88.8    | ) |      |           | 685.0    |   |   |          | 645.6    |  
|                                                                                                        | Unrealized gains on investments and interest-only
    strip receivables |                                           |           | (164.5   | ) |      |           | (292.9   | ) |   |          | (179.2   | )
|                                                                                                        | Acquired intangibles                                                    |                                           |           | (2,627.3 | ) |      |           | (386.4   | ) |   |          | (444.3   | )
|                                                                                                        | Goodwill                                                                |                                           |           | (2,107.7 | ) |      |           | (1,117.7 | ) |   |          | (1,103.0 | )
|Adjustable Conversion-Rate Equity Security Units                                                        |                                                                         |                                           | 519.1     |          |   |      | 511.0     |          |   |   |         |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Tangible shareholders equity                                                                           |                                                                         |                                           | 9,258.3   |          |   |      | 9,440.5   |          |   |   | 7,553.0  |         
|Purchase accounting adjustments                                                                         |                                                                         |                                           | 1,988.8   |          |   |      |          |          |   |   |         |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Tangible shareholders equity, excluding
    purchase accounting adjustments                            |                                                                         | $                                         | 11,247.1  |          |   | $    | 9,440.5   |          |   | $ | 7,553.0  |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Tangible managed assets:                                                                                |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Owned assets                                                                                            |                                                                         | $                                         | 102,959.9 |          |   | $    | 88,372.9  |          |   | $ | 74,529.5 |         
|Receivables serviced with limited recourse                                                              |                                                                         |                                           | 25,078.2  |          |   |      | 23,422.2  |          |   |   | 19,759.3 |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Managed assets                                                                                          |                                                                         |                                           | 128,038.1 |          |   |      | 111,795.1 |          |   |   | 94,288.8 |         
|Exclude:                                                                                                |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|                                                                                                        | Acquired intangibles                                                    |                                           |           | (2,627.3 | ) |      |           | (386.4   | ) |   |          | (444.3   | )
|                                                                                                        | Goodwill                                                                |                                           |           | (2,107.7 | ) |      |           | (1,117.7 | ) |   |          | (1,103.0 | )
|                                                                                                        | Derivative financial assets                                             |                                           |           | (2,939.7 | ) |      |           | (1,805.0 | ) |   |          | (6.7     | )
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Tangible managed assets                                                                                 |                                                                         |                                           | 120,363.4 |          |   |      | 108,486.0 |          |   |   | 92,734.8 |         
|Purchase accounting adjustments                                                                         |                                                                         |                                           | (370.8    | )        |   |      |          |          |   |   |         |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Tangible managed assets, excluding purchase
    accounting adjustments                                  |                                                                         | $                                         | 119,992.6 |          |   | $    | 108,486.0 |          |   | $ | 92,734.8 |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Equity ratios:                                                                                          |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         
|Common equity to owned assets                                                                           |                                                                         |                                           | 13.33     | %        |   |      | 11.36     | %        |   |   | 11.58    | %       
|Tangible common equity to tangible managed assets                                                       |                                                                         |                                           | 7.69      |          |   |      | 8.70      |          |   |   | 8.14     |         
|Tangible shareholders equity to tangible
    managed assets, excluding purchase accounting adjustments |                                                                         |                                           | 9.37      |          |   |      | 8.70      |          |   |   | 8.14     |         
|                                                                                                        |                                                                         |                                           |           |          |   |      |           |          |   |   |          |         

65



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##### Table of Contents



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 39 to 42, Off-Balance Sheet Arrangements
(Including Securitizations and Commitments), Secured Financings
and Contractual Cash Obligations, pages 43 to 46, and
Risk Management, pages 47 to 49.

Item 8.     Financial
Statements and Supplementary Data.

Our 2003 Financial Statements meet the
requirements of Regulation S-X. The 2003 Financial
Statements and supplementary financial information specified by
Item 302 of Regulation S-K are set forth below.

66



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|--------------------------------------------------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | - | ------- |  |  | - | ------- | 
|                                                          |  | March 29      |         | January 1     |  |               |         |              
|                                                          |  | through       |         | through       |  | Year ended    |         | Year ended   
|                                                          |  | December 31,  |         | March 28,     |  | December 31,  |         | December 31, 
|                                                          |  | 2003          |         | 2003          |  | 2002          |         | 2001         
|                                                          |  |               |         |               |  |               |         |              
|                                                          |  | (Successor)   |         | (Predecessor) |  | (Predecessor) |         | (Predecessor)
|                                                          |  |              
|                                                          |  | (In millions)
|Finance and other interest income                         |  | $             | 7,111.5 |               |  | $             | 2,266.9 |               |  | $ | 9,215.0 |  |  | $ | 8,519.0 | 
|Interest expense                                          |  |               | 1,434.0 |               |  |               | 784.6   |               |  |   | 3,044.4 |  |  |   | 3,272.5 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Net interest margin                                       |  |               | 5,677.5 |               |  |               | 1,482.3 |               |  |   | 6,170.6 |  |  |   | 5,246.5 | 
|Provision for credit losses on owned receivables          |  |               | 2,784.9 |               |  |               | 920.7   |               |  |   | 3,463.7 |  |  |   | 2,606.4 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Net interest margin after provision for credit
    losses |  |               | 2,892.6 |               |  |               | 561.6   |               |  |   | 2,706.9 |  |  |   | 2,640.1 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Securitization revenue                                    |  |               | 983.5   |               |  |               | 413.2   |               |  |   | 2,011.0 |  |  |   | 1,652.4 | 
|Insurance revenue                                         |  |               | 377.5   |               |  |               | 118.8   |               |  |   | 526.4   |  |  |   | 489.2   | 
|Investment income                                         |  |               | 106.6   |               |  |               | 75.8    |               |  |   | 167.1   |  |  |   | 153.4   | 
|Fee income                                                |  |               | 820.0   |               |  |               | 270.6   |               |  |   | 868.8   |  |  |   | 827.7   | 
|Other income                                              |  |               | 259.7   |               |  |               | 231.6   |               |  |   | 387.0   |  |  |   | 293.5   | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Total other revenues                                      |  |               | 2,547.3 |               |  |               | 1,110.0 |               |  |   | 3,960.3 |  |  |   | 3,416.2 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Salaries and fringe benefits                              |  |               | 1,247.4 |               |  |               | 378.1   |               |  |   | 1,491.0 |  |  |   | 1,331.0 | 
|Sales incentives                                          |  |               | 211.7   |               |  |               | 34.8    |               |  |   | 244.2   |  |  |   | 262.9   | 
|Occupancy and equipment expenses                          |  |               | 238.3   |               |  |               | 77.9    |               |  |   | 297.1   |  |  |   | 270.5   | 
|Other marketing expenses                                  |  |               | 406.9   |               |  |               | 127.5   |               |  |   | 491.0   |  |  |   | 467.2   | 
|Other servicing and administrative expenses               |  |               | 680.1   |               |  |               | 268.6   |               |  |   | 769.4   |  |  |   | 621.5   | 
|Amortization of acquired intangibles and goodwill         |  |               | 221.9   |               |  |               | 12.3    |               |  |   | 57.8    |  |  |   | 157.4   | 
|Policyholders benefits                                   |  |               | 217.1   |               |  |               | 71.1    |               |  |   | 305.2   |  |  |   | 268.1   | 
|Settlement charge and related expenses                    |  |               |        |               |  |               |        |               |  |   | 525.0   |  |  |   |        | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Total costs and expenses                                  |  |               | 3,223.4 |               |  |               | 970.3   |               |  |   | 4,180.7 |  |  |   | 3,378.6 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Income before income taxes                                |  |               | 2,216.5 |               |  |               | 701.3   |               |  |   | 2,486.5 |  |  |   | 2,677.7 | 
|Income taxes                                              |  |               | 767.1   |               |  |               | 240.6   |               |  |   | 850.0   |  |  |   | 949.8   | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 
|Net income                                                |  | $             | 1,449.4 |               |  | $             | 460.7   |               |  | $ | 1,636.5 |  |  | $ | 1,727.9 | 
|                                                          |  |               |         |               |  |               |         |               |  |   |         |  |  |   |         | 

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

67



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                        |                            |           |               |  |   |          |          |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------- |  | - | -------- | -------- | -
|                                           |                                                                                                                        |                           
|                                           |                                                                                                                        | At December 31            
|                                           |                                                                                                                        |                           
|                                           |                                                                                                                        | 2003                       |           | 2002         
|                                           |                                                                                                                        |                            |           |              
|                                           |                                                                                                                        | (Successor)                |           | (Predecessor)
|                                           |                                                                                                                        |                           
|                                           |                                                                                                                        | (In millions, except share
|                                           |                                                                                                                        | data)                     
|ASSETS                                    
|Cash                                       |                                                                                                                        | $                          | 395.0     |               |  | $ | 667.9    |         
|Investment securities                      |                                                                                                                        |                            | 10,545.0  |               |  |   | 6,707.6  |         
|Receivables, net                           |                                                                                                                        |                            | 81,239.1  |               |  |   | 74,828.4 |         
|Acquired intangibles, net                  |                                                                                                                        |                            | 2,627.3   |               |  |   | 386.4    |         
|Goodwill                                   |                                                                                                                        |                            | 2,107.7   |               |  |   | 1,117.7  |         
|Properties and equipment, net              |                                                                                                                        |                            | 391.6     |               |  |   | 403.1    |         
|Real estate owned                          |                                                                                                                        |                            | 626.6     |               |  |   | 423.9    |         
|Derivative financial assets                |                                                                                                                        |                            | 2,939.7   |               |  |   | 1,805.0  |         
|Other assets                               |                                                                                                                        |                            | 2,087.9   |               |  |   | 2,032.9  |         
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|Total assets                               |                                                                                                                        | $                          | 102,959.9 |               |  | $ | 88,372.9 |         
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|LIABILITIES AND SHAREHOLDERS
    EQUITY  
|Debt:                                      |                                                                                                                        |                            |           |               |  |   |          |         
|                                           | Due to affiliates                                                                                                      |                            | $         | 2,101.7       |  |   | $        | 86.9     |  
|                                           | Commercial paper, bank and other borrowings                                                                            |                            |           | 7,983.8       |  |   |          | 4,143.3  |  
|                                           | Senior and senior subordinated debt (with
    original maturities over one year)                                       |                            |           | 74,597.6      |  |   |          | 70,275.6 |  
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|Total debt                                 |                                                                                                                        |                            | 84,683.1  |               |  |   | 74,505.8 |         
|Insurance policy and claim reserves        |                                                                                                                        |                            | 1,127.0   |               |  |   | 890.9    |         
|Derivative related liabilities             |                                                                                                                        |                            | 549.7     |               |  |   | 1,087.5  |         
|Other liabilities                          |                                                                                                                        |                            | 2,872.6   |               |  |   | 1,847.2  |         
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|Total liabilities                          |                                                                                                                        |                            | 89,232.4  |               |  |   | 78,331.4 |         
|Common shareholders equity:               |                                                                                                                        |                            |           |               |  |   |          |         
|                                           | Common stock, $1.00 par value, 1,000 shares
    authorized, issued and outstanding, and additional paid-in
    capital |                            |           | 12,016.1      |  |   |          | 3,790.8  |  
|                                           | Retained earnings                                                                                                      |                            |           | 1,449.4       |  |   |          | 6,642.4  |  
|                                           | Accumulated other comprehensive income (loss)                                                                          |                            |           | 262.0         |  |   |          | (391.7   | )
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|Total common shareholders equity          |                                                                                                                        |                            | 13,727.5  |               |  |   | 10,041.5 |         
|                                           |                                                                                                                        |                            |           |               |  |   |          |         
|Total liabilities and shareholders equity |                                                                                                                        | $                          | 102,959.9 |               |  | $ | 88,372.9 |         
|                                           |                                                                                                                        |                            |           |               |  |   |          |         

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

68



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |           |  
|--------------------------------------------------------------------------- | ------------------------------------------------ | ------------- | --------- | ------------- | - | ------------- | -------- | ------------- | - | - | --------- | --------- | - | - | --------- | --------- | -
|                                                                            |                                                  | March 29      |           | January 1     |   |               |          |              
|                                                                            |                                                  | through       |           | through       |   | Year ended    |          | Year ended   
|                                                                            |                                                  | December 31,  |           | March 28,     |   | December 31,  |          | December 31, 
|                                                                            |                                                  | 2003          |           | 2003          |   | 2002          |          | 2001         
|                                                                            |                                                  |               |           |               |   |               |          |              
|                                                                            |                                                  | (Successor)   |           | (Predecessor) |   | (Predecessor) |          | (Predecessor)
|                                                                            |                                                  |              
|                                                                            |                                                  | (In millions)
|Cash Provided by Operations                                                 |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Net income                                                                  |                                                  | $             | 1,449.4   |               |   | $             | 460.7    |               |   | $ | 1,636.5   |           |   | $ | 1,727.9   |          
|Adjustments to reconcile net income to net cash
    provided by operations: |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|                                                                            | Provision for credit losses on owned receivables |               |           | 2,784.9       |   |               |          | 920.7         |   |   |           | 3,463.7   |   |   |           | 2,606.4   |  
|                                                                            | Insurance policy and claim reserves              |               |           | (146.5        | ) |               |          | 65.3          |   |   |           | (12.8     | ) |   |           | 221.5     |  
|                                                                            | Depreciation and amortization                    |               |           | 301.7         |   |               |          | 46.1          |   |   |           | 193.3     |   |   |           | 288.1     |  
|                                                                            | Deferred income tax provision (benefit)          |               |           | (90.2         | ) |               |          | 137.3         |   |   |           | (163.8    | ) |   |           | 19.7      |  
|                                                                            | Interest-only strip receivables, net change      |               |           | 395.1         |   |               |          | 32.4          |   |   |           | (123.9    | ) |   |           | (118.1    | )
|                                                                            | Other assets                                     |               |           | 420.7         |   |               |          | (532.3        | ) |   |           | (209.0    | ) |   |           | (.3       | )
|                                                                            | Other liabilities                                |               |           | 502.0         |   |               |          | 41.1          |   |   |           | 592.5     |   |   |           | 166.8     |  
|                                                                            | Other, net                                       |               |           | (312.0        | ) |               |          | 400.5         |   |   |           | 2,067.9   |   |   |           | 397.3     |  
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Cash provided by operations                                                 |                                                  |               | 5,305.1   |               |   |               | 1,571.8  |               |   |   | 7,444.4   |           |   |   | 5,309.3   |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Investments in Operations                                                   |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Investment securities:                                                      |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|                                                                            | Purchased                                        |               |           | (4,459.5      | ) |               |          | (981.4        | ) |   |           | (4,865.9  | ) |   |           | (1,520.5  | )
|                                                                            | Matured                                          |               |           | 3,112.7       |   |               |          | 534.5         |   |   |           | 1,588.5   |   |   |           | 316.5     |  
|                                                                            | Sold                                             |               |           | 686.9         |   |               |          | 768.4         |   |   |           | 642.2     |   |   |           | 684.1     |  
|Short-term investment securities, net change                                |                                                  |               | (3,266.9  | )             |   |               | (203.2   | )             |   |   | (1,024.9  | )         |   |   | 893.8     |          
|Receivables:                                                                |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|                                                                            | Originations, net                                |               |           | (40,658.2     | ) |               |          | (7,758.2      | ) |   |           | (45,335.7 | ) |   |           | (39,202.7 | )
|                                                                            | Purchases and related premiums                   |               |           | (2,001.1      | ) |               |          | (129.0        | ) |   |           | (4,162.5  | ) |   |           | (4,744.4  | )
|                                                                            | Initial and fill-up securitizations              |               |           | 30,256.1      |   |               |          | 7,234.4       |   |   |           | 35,363.6  |   |   |           | 29,694.6  |  
|                                                                            | Whole loan sales                                 |               |           |              |   |               |          |              |   |   |           | 2,748.6   |   |   |           |          |  
|                                                                            | Sales to affiliates                              |               |           | 2,843.9       |   |               |          |              |   |   |           |          |   |   |           |          |  
|Properties and equipment purchased                                          |                                                  |               | (81.6     | )             |   |               | (16.0    | )             |   |   | (112.2    | )         |   |   | (135.7    | )        
|Properties and equipment sold                                               |                                                  |               |          |               |   |               | .1       |               |   |   | 12.8      |           |   |   | 2.1       |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Cash decrease from investments in operations                                |                                                  |               | (13,567.7 | )             |   |               | (550.4   | )             |   |   | (15,145.5 | )         |   |   | (14,012.2 | )        
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Financing and Capital Transactions                                          |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Short-term debt, net change                                                 |                                                  |               | 5,147.3   |               |   |               | (1,306.8 | )             |   |   | (4,931.3  | )         |   |   | 248.2     |          
|Due to affiliates, net change                                               |                                                  |               | 2,642.1   |               |   |               | (627.3   | )             |   |   | (2,598.3  | )         |   |   | (1,160.7  | )        
|Senior and senior subordinated debt issued                                  |                                                  |               | 15,167.8  |               |   |               | 4,232.8  |               |   |   | 29,095.7  |           |   |   | 19,179.6  |          
|Senior and senior subordinated debt retired                                 |                                                  |               | (14,642.2 | )             |   |               | (3,566.1 | )             |   |   | (13,349.0 | )         |   |   | (8,382.6  | )        
|Policyholders benefits paid                                                |                                                  |               | (59.9     | )             |   |               | (26.8    | )             |   |   | (101.2    | )         |   |   | (97.9     | )        
|Cash received from policyholders                                            |                                                  |               | 7.3       |               |   |               | .1       |               |   |   |          |           |   |   |          |          
|Capital contributions from parent company                                   |                                                  |               |          |               |   |               |         |               |   |   |          |           |   |   | 50.0      |          
|Dividends paid to parent company                                            |                                                  |               |          |               |   |               |         |               |   |   | (300.0    | )         |   |   | (650.0    | )        
|Dividends  pooled affiliates                                               |                                                  |               |          |               |   |               |         |               |   |   |          |           |   |   | (225.0    | )        
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Cash increase (decrease) from financing and
    capital transactions        |                                                  |               | 8,262.4   |               |   |               | (1,294.1 | )             |   |   | 7,815.9   |           |   |   | 8,961.6   |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Increase (decrease) in cash                                                 |                                                  |               | (.2       | )             |   |               | (272.7   | )             |   |   | 114.8     |           |   |   | 258.7     |          
|Cash at beginning of period                                                 |                                                  |               | 395.2     |               |   |               | 667.9    |               |   |   | 553.1     |           |   |   | 294.4     |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Cash at end of period                                                       |                                                  | $             | 395.0     |               |   | $             | 395.2    |               |   | $ | 667.9     |           |   | $ | 553.1     |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Supplemental Cash Flow Information:                                         |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Interest paid                                                               |                                                  | $             | 2,110.6   |               |   | $             | 754.9    |               |   | $ | 2,973.0   |           |   | $ | 3,620.1   |          
|Income taxes paid                                                           |                                                  |               | 799.8     |               |   |               | 147.7    |               |   |   | 937.8     |           |   |   | 917.8     |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Supplemental Non-Cash Financing and Capital
    Transactions:               |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          
|Push-down of purchase price by parent company
    (Note 2)                  |                                                  |               |          |               |   | $             | 12,016.1 |               |   |   |          |           |   |   |          |          
|                                                                            |                                                  |               |           |               |   |               |          |               |   |   |           |           |   |   |           |          

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

69



---



##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN

COMMON SHAREHOLDERS EQUITY


|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |        |  
|------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------- | -------- | -------- |  | ------------- | -------- | ------------- |  | - | ------ | ------ | - | - | -------- | ------ | -
|                                                                          |                                                                          | Common        |          |          |  |               |          |              
|                                                                          |                                                                          | Stock and     |          |          |  | Accumulated   |          | Total        
|                                                                          |                                                                          | Additional    |          |          |  | Other         |          | Common       
|                                                                          |                                                                          | Paid-in       |          | Retained |  | Comprehensive |          | Shareholders
|                                                                          |                                                                          | Capital       |          | Earnings |  | Income (Loss) |          | Equity       
|                                                                          |                                                                          |               |          |          |  |               |          |              
|                                                                          |                                                                          |              
|                                                                          |                                                                          | (In millions)
|Balance at December 31, 2000
    (Predecessor)                            |                                                                          | $             | 3,740.8  |          |  | $             | 4,453.0  |               |  | $ | 32.1   |        |   | $ | 8,225.9  |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Net income                                                                |                                                                          |               |          |          |  |               | 1,727.9  |               |  |   |        |        |   |   | 1,727.9  |       
|Other comprehensive income, net of tax:                                   |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|                                                                          | Cumulative effect of change in accounting
    principle (SFAS No. 133)   |               |          |          |  |               |          |               |  |   |        | (230.0 | ) |   |          | (230.0 | )
|                                                                          | Unrealized losses on cash flow hedging instruments                       |               |          |          |  |               |          |               |  |   |        | (415.6 | ) |   |          | (415.6 | )
|                                                                          | Unrealized gains on investments and interest-only
    strip receivables  |               |          |          |  |               |          |               |  |   |        | 154.6  |   |   |          | 154.6  |  
|                                                                          | Foreign currency translation adjustments                                 |               |          |          |  |               |          |               |  |   |        | (3.9   | ) |   |          | (3.9   | )
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Total comprehensive income                                                |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   | 1,233.0  |       
|Dividends paid to parent company                                          |                                                                          |               |          |          |  |               | (650.0   | )             |  |   |        |        |   |   | (650.0   | )     
|Dividends  pooled affiliates (1)                                         |                                                                          |               |          |          |  |               | (225.0   | )             |  |   |        |        |   |   | (225.0   | )     
|Contribution of capital from parent company                               |                                                                          |               | 50.0     |          |  |               |          |               |  |   |        |        |   |   | 50.0     |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Balance at December 31, 2001
    (Predecessor)                            |                                                                          |               | 3,790.8  |          |  |               | 5,305.9  |               |  |   | (462.8 | )      |   |   | 8,633.9  |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Net income                                                                |                                                                          |               |          |          |  |               | 1,636.5  |               |  |   |        |        |   |   | 1,636.5  |       
|Other comprehensive income, net of tax:                                   |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|                                                                          | Unrealized losses on cash flow hedging instruments                       |               |          |          |  |               |          |               |  |   |        | (39.4  | ) |   |          | (39.4  | )
|                                                                          | Unrealized gains on investments and interest-only
    strip receivables  |               |          |          |  |               |          |               |  |   |        | 113.7  |   |   |          | 113.7  |  
|                                                                          | Foreign currency translation adjustments                                 |               |          |          |  |               |          |               |  |   |        | (3.2   | ) |   |          | (3.2   | )
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Total comprehensive income                                                |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   | 1,707.6  |       
|Dividends paid to parent company                                          |                                                                          |               |          |          |  |               | (300.0   | )             |  |   |        |        |   |   | (300.0   | )     
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Balance at December 31, 2002
    (Predecessor)                            |                                                                          |               | 3,790.8  |          |  |               | 6,642.4  |               |  |   | (391.7 | )      |   |   | 10,041.5 |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Net income                                                                |                                                                          |               |          |          |  |               | 460.7    |               |  |   |        |        |   |   | 460.7    |       
|Other comprehensive income, net of tax:                                   |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|                                                                          | Unrealized gains on cash flow hedging instruments                        |               |          |          |  |               |          |               |  |   |        | 110.6  |   |   |          | 110.6  |  
|                                                                          | Unrealized losses on investments and
    interest-only strip receivables |               |          |          |  |               |          |               |  |   |        | (30.7  | ) |   |          | (30.7  | )
|                                                                          | Foreign currency translation adjustments                                 |               |          |          |  |               |          |               |  |   |        | 2.5    |   |   |          | 2.5    |  
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Total comprehensive income                                                |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   | 543.1    |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Balance at March 28, 2003
    (Predecessor)                               |                                                                          |               | 3,790.8  |          |  |               | 7,103.1  |               |  |   | (309.3 | )      |   |   | 10,584.6 |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Effect of push-down accounting of HSBCs
    purchase price on net assets |                                                                          |               | 8,225.3  |          |  |               | (7,103.1 | )             |  |   | 309.3  |        |   |   | 1,431.5  |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Balance at March 28, 2003
    (Successor)                                 |                                                                          |               | 12,016.1 |          |  |               |         |               |  |   |       |        |   |   | 12,016.1 |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Net income                                                                |                                                                          |               |          |          |  |               | 1,449.4  |               |  |   |        |        |   |   | 1,449.4  |       
|Other comprehensive income, net of tax:                                   |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|                                                                          | Unrealized gains on cash flow hedging instruments                        |               |          |          |  |               |          |               |  |   |        | 88.8   |   |   |          | 88.8   |  
|                                                                          | Unrealized gains on investments and interest-only
    strip receivables  |               |          |          |  |               |          |               |  |   |        | 164.5  |   |   |          | 164.5  |  
|                                                                          | Foreign currency translation adjustments                                 |               |          |          |  |               |          |               |  |   |        | 8.7    |   |   |          | 8.7    |  
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Total comprehensive income                                                |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   | 1,711.4  |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       
|Balance at December 31, 2003
    (Successor)                              |                                                                          | $             | 12,016.1 |          |  | $             | 1,449.4  |               |  | $ | 262.0  |        |   | $ | 13,727.5 |       
|                                                                          |                                                                          |               |          |          |  |               |          |               |  |   |        |        |   |   |          |       



---



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(1) | Related to previous equity transaction of
    Household Bank (SB), N.A.

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

70



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES
IN

COMMON SHAREHOLDERS EQUITY
(Continued)


Accumulated Other Comprehensive Income
(Loss)

The balances associated with the components of
accumulated other comprehensive income (loss) on a
predecessor basis were eliminated as a result of
push-down accounting effective March 29, 2003 when the
successor period began. Accumulated other
comprehensive income (loss) includes the following:

|                                                                         |                        |               |       |               |  |               |        |               |  |               |        |       |  |   |        |       |  |   |      |      | 
|------------------------------------------------------------------------ | ---------------------- | ------------- | ----- | ------------- |  | ------------- | ------ | ------------- |  | ------------- | ------ | ----- |  | - | ------ | ----- |  | - | ---- | ---- | 
|                                                                         |                        | December 31,  |       | March 28,     |  | December 31,  |        | December 31,  |  | December 31, 
|                                                                         |                        | 2003          |       | 2003          |  | 2002          |        | 2001          |  | 2000         
|                                                                         |                        |               |       |               |  |               |        |               |  |              
|                                                                         |                        | (Successor)   |       | (Predecessor) |  | (Predecessor) |        | (Predecessor) |  | (Predecessor)
|                                                                         |                        |              
|                                                                         |                        | (In millions)
|Unrealized gains (losses) on cash flow hedging
    instruments           |                        |               | 88.8  |               |  | $             | (574.4 | )             |  | $             | (685.0 | )     |  | $ | (645.6 | )     |  |   |     |     
|Unrealized gains on investments and interest-only
    strip receivables: |                        |               |       |               |  |               |        |               |  |               |        |       |  |   |        |       |  |   |      |     
|                                                                         | Gross unrealized gains |               |       | 261.1         |  |               |        | 415.4         |  |               |        | 462.6 |  |   |        | 288.5 |  |   | $    | 41.8 | 
|                                                                         | Income tax expense     |               |       | 96.6          |  |               |        | 153.2         |  |               |        | 169.7 |  |   |        | 109.3 |  |   |      | 17.2 | 
|                                                                         |                        |               |       |               |  |               |        |               |  |               |        |       |  |   |        |       |  |   |      |     
|                                                                         | Net unrealized gains   |               |       | 164.5         |  |               |        | 262.2         |  |               |        | 292.9 |  |   |        | 179.2 |  |   |      | 24.6 | 
|Foreign currency translation adjustments                                 |                        |               | 8.7   |               |  |               | 2.9    |               |  |               | .4     |       |  |   | 3.6    |       |  |   | 7.5  |     
|                                                                         |                        |               |       |               |  |               |        |               |  |               |        |       |  |   |        |       |  |   |      |     
|Total accumulated other comprehensive income
    (loss)                  |                        | $             | 262.0 |               |  | $             | (309.3 | )             |  | $             | (391.7 | )     |  | $ | (462.8 | )     |  | $ | 32.1 |     
|                                                                         |                        |               |       |               |  |               |        |               |  |               |        |       |  |   |        |       |  |   |      |     

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.

|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |        |  
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------- | ------ | --------- | - | ---------- | ----- | ------ | - | - | ------ | ------ | -
|                                                                                  |                                                                             |               |        | Tax       |   |           
|                                                                                  |                                                                             |               |        | (Expense) |   |           
|                                                                                  |                                                                             | Before-Tax    |        | Benefit   |   | Net-of-Tax
|                                                                                  |                                                                             |               |        |           |   |           
|                                                                                  |                                                                             |              
|                                                                                  |                                                                             | (In millions)
|Year ended December 31, 2001
    (Predecessor)                                    |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|Unrealized gains (losses) on cash flow hedging
    instruments:                   |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|                                                                                  | Cumulative effect of change in accounting
    principle (SFAS No. 133)      |               | $      | (358.5    | ) |            | $     | 128.5  |   |   | $      | (230.0 | )
|                                                                                  | Net losses arising during the period                                        |               |        | (1,032.5  | ) |            |       | 370.1  |   |   |        | (662.4 | )
|                                                                                  | Less: Reclassification adjustment for losses
    realized in net income     |               |        | 384.7     |   |            |       | (137.9 | ) |   |        | 246.8  |  
|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|                                                                                  | Net losses on cash flow hedging instruments                                 |               |        | (1,006.3  | ) |            |       | 360.7  |   |   |        | (645.6 | )
|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|Unrealized gains (losses) on investments and
    interest-only strip receivables: |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|                                                                                  | Net unrealized holding gains arising during the
    period                  |               |        | 257.9     |   |            |       | (96.0  | ) |   |        | 161.9  |  
|                                                                                  | Less: Reclassification adjustment for gains
    realized in net income      |               |        | (11.2     | ) |            |       | 3.9    |   |   |        | (7.3   | )
|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|                                                                                  | Net unrealized gains on investments and
    interest-only strip receivables |               |        | 246.7     |   |            |       | (92.1  | ) |   |        | 154.6  |  
|Foreign currency translation adjustments                                          |                                                                             |               | (3.9   | )         |   |            |      |        |   |   | (3.9   | )     
|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |       
|Other comprehensive expense                                                       |                                                                             | $             | (763.5 | )         |   | $          | 268.6 |        |   | $ | (494.9 | )     
|                                                                                  |                                                                             |               |        |           |   |            |       |        |   |   |        |       

71



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##### Table of Contents



HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES
IN

COMMON SHAREHOLDERS EQUITY
(Continued)


|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |        |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------- | ----- | --------- | - | ---------- | ------ | ------ | - | - | ----- | ------ | -
|                                                                                  |                                                                              |               |       | Tax       |   |           
|                                                                                  |                                                                              |               |       | (Expense) |   |           
|                                                                                  |                                                                              | Before-Tax    |       | Benefit   |   | Net-of-Tax
|                                                                                  |                                                                              |               |       |           |   |           
|                                                                                  |                                                                              |              
|                                                                                  |                                                                              | (In millions)
|Year ended December 31, 2002
    (Predecessor)                                    |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on cash flow hedging
    instruments:                   |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net losses arising during the period                                         |               | $     | (696.4    | ) |            | $      | 254.9  |   |   | $     | (441.5 | )
|                                                                                  | Less: Reclassification adjustment for losses
    realized in net income      |               |       | 633.7     |   |            |        | (231.6 | ) |   |       | 402.1  |  
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net losses on cash flow hedging instruments                                  |               |       | (62.7     | ) |            |        | 23.3   |   |   |       | (39.4  | )
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on investments and
    interest-only strip receivables: |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized holding gains arising during the
    period                   |               |       | 181.1     |   |            |        | (62.9  | ) |   |       | 118.2  |  
|                                                                                  | Less: Reclassification adjustment for gains
    realized in net income       |               |       | (7.0      | ) |            |        | 2.5    |   |   |       | (4.5   | )
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized gains on investments and
    interest-only strip receivables  |               |       | 174.1     |   |            |        | (60.4  | ) |   |       | 113.7  |  
|Foreign currency translation adjustments                                          |                                                                              |               | (3.2  | )         |   |            |       |        |   |   | (3.2  | )     
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Other comprehensive income                                                        |                                                                              | $             | 108.2 |           |   | $          | (37.1  | )      |   | $ | 71.1  |       
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|January 1 through March 28, 2003
    (Predecessor)                                |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on cash flow hedging
    instruments:                   |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net gains arising during the period                                          |               | $     | 45.0      |   |            | $      | (16.4  | ) |   | $     | 28.6   |  
|                                                                                  | Less: Reclassification adjustment for losses
    realized in net income      |               |       | 129.0     |   |            |        | (47.0  | ) |   |       | 82.0   |  
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net gains on cash flow hedging instruments                                   |               |       | 174.0     |   |            |        | (63.4  | ) |   |       | 110.6  |  
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on investments and
    interest-only strip receivables: |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized holding losses arising during the
    period                  |               |       | (9.2      | ) |            |        | 3.2    |   |   |       | (6.0   | )
|                                                                                  | Less: Reclassification adjustment for gains
    realized in net income       |               |       | (38.0     | ) |            |        | 13.3   |   |   |       | (24.7  | )
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized losses on investments and
    interest-only strip receivables |               |       | (47.2     | ) |            |        | 16.5   |   |   |       | (30.7  | )
|Foreign currency translation adjustments                                          |                                                                              |               | 2.5   |           |   |            |       |        |   |   | 2.5   |       
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Other comprehensive income                                                        |                                                                              | $             | 129.3 |           |   | $          | (46.9  | )      |   | $ | 82.4  |       
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|March 29 through December 31, 2003
    (Successor)                                |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on cash flow hedging
    instruments:                   |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net gains arising during the period                                          |               | $     | 145.7     |   |            | $      | (51.1  | ) |   | $     | 94.6   |  
|                                                                                  | Less: Reclassification adjustment for gains
    realized in net income       |               |       | (9.1      | ) |            |        | 3.3    |   |   |       | (5.8   | )
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net gains on cash flow hedging instruments                                   |               |       | 136.6     |   |            |        | (47.8  | ) |   |       | 88.8   |  
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Unrealized gains (losses) on investments and
    interest-only strip receivables: |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized holding gains arising during the
    period                   |               |       | 279.0     |   |            |        | (102.9 | ) |   |       | 176.1  |  
|                                                                                  | Less: Reclassification adjustment for gains
    realized in net income       |               |       | (17.9     | ) |            |        | 6.3    |   |   |       | (11.6  | )
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|                                                                                  | Net unrealized gains on investments and
    interest-only strip receivables  |               |       | 261.1     |   |            |        | (96.6  | ) |   |       | 164.5  |  
|Foreign currency translation adjustments                                          |                                                                              |               | 8.7   |           |   |            |       |        |   |   | 8.7   |       
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       
|Other comprehensive income                                                        |                                                                              | $             | 406.4 |           |   | $          | (144.4 | )      |   | $ | 262.0 |       
|                                                                                  |                                                                              |               |       |           |   |            |        |        |   |   |       |       

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

72



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##### Table of Contents



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 or the
parent company). Household was acquired by a wholly
owned subsidiary of HSBC Holdings plc (HSBC) on
March 28, 2003 in a purchase business combination recorded
under the push-down method of accounting, which
resulted in a new basis of accounting for the
successor period beginning March 29, 2003.
Information relating to all predecessor periods
prior to the acquisition is presented using our historical basis
of accounting.

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
card loans, private label credit card loans, 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.



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies

Basis of
PresentationThe consolidated
financial statements include the accounts of Household Finance
Corporation and all subsidiaries including all variable interest
entities in which we are the primary beneficiary as defined by
Financial Accounting Standards Board Interpretation No. 46
(Revised). Unaffiliated trusts to which we have transferred
securitized receivables which are qualifying special purpose
entities (QSPE) as defined by Statement of Financial
Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125, are not consolidated. All
significant intercompany accounts and transactions have been
eliminated.

Household was acquired by a wholly owned
subsidiary of HSBC on March 28, 2003 in a purchase business
combination recorded under the push-down method of
accounting, which resulted in a new basis of accounting for the
successor period beginning March 29, 2003.
Information relating to all predecessor periods
prior to the acquisition is presented using our historical basis
of accounting.

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
SecuritiesWe 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, 2003 and 2002.
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 portfolio are recorded in investment income.
Accrued investment income is classified with investment
securities.






|  |                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|* | MasterCard is a registered trademark of
    MasterCard International, Incorporated and VISA is a registered
    trademark of VISA USA, Inc.

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ReceivablesReceivables are carried at amortized cost. As a result of
Households merger with HSBC, the amortized cost of our
receivables was adjusted to fair market value at the time of the
merger. Finance income is recognized using the effective yield
method. Premiums and discounts, including purchase accounting
adjustments, on 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 origination costs. These amounts on a
predecessor basis were eliminated as a result of
push-down accounting effective March 29, 2003 when the
successor period began. Net deferred origination
fees, excluding MasterCard and Visa, totaled $192.3 million
at December 31, 2003 and $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 $50.4 million at December 31,
2003 and $118.5 million at December 31, 2002.

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

Provision and Credit Loss
ReservesProvision for credit losses
on owned receivables is made in an amount sufficient to maintain
credit loss reserves at a level considered adequate, but not
excessive, to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing
owned portfolio. We estimate probable losses for owned consumer
receivables using a roll rate migration analysis that estimates
the likelihood that a loan will progress through the various
stages of delinquency, or buckets, and ultimately charge off.
This analysis considers delinquency status, loss experience and
severity and takes into account whether loans are in bankruptcy,
have been restructured, rewritten or are subject to forbearance,
an external debt management plan, hardship, 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 the event of default.
Delinquency status may be affected by customer 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. If customer
account management policies, or changes thereto, shift loans
from a higher delinquency bucket to a
lower delinquency bucket, this will be reflected in
our roll rate statistics. To the extent that restructured
accounts have a greater propensity to roll to higher delinquency
buckets, this will be captured in the roll rates. Since the loss
reserve is computed based on the composite of all of these
calculations, this increase in roll rate will be applied to
receivables in all respective delinquency buckets, which will
increase the overall reserve level. 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 roll rate calculation. Risk factors considered
in establishing loss reserves on consumer receivables include
recent growth, product mix, bankruptcy trends, geographic
concentrations, economic conditions, portfolio seasoning and
current levels of charge-offs and delinquencies. For commercial
loans, probable losses are calculated using estimates of amounts
and timing of future cash flows expected to be received on loans.

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. We recognize the different inherent loss
characteristics in each of our products as well as customer
account management policies and practices and risk management/
collection practices. 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.

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

|                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                               
|---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                |  | Charge-off Policies and Practices                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | Nonaccrual Policies and Practices(1)                                                                                                                                                                                                                                                                          
|                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                               
|Real estate secured(1) |  | Carrying values in excess of net realizable value
    are charged-off at or before the time foreclosure is completed
    or when settlement is reached with the borrower. If foreclosure
    is not pursued, and there is no reasonable expectation for
    recovery (insurance claim, title claim, pre-discharge bankrupt
    account), generally the account will be charged-off by the end
    of the month in which the account becomes 9 months
    contractually delinquent.                 |  | Interest income accruals are suspended when
    principal or interest payments are more than 3 months
    contractually past due and resumed when the receivable becomes
    less than 3 months contractually past due.                                                                                       
|Auto finance(1)        |  | Carrying values in excess of net realizable value
    are charged off at the earlier of the following:
     the collateral has been repossessed and sold,
     the collateral has been in our possession for more
    than 90 days, or
     the loan becomes 150 days contractually
    delinquent.                                                                                                                                                                                             |  | Interest income accruals are suspended and the
    portion of previously accrued interest expected to be
    uncollectible is written off when principal payments are more
    than 2 months contractually past due and resumed when the
    receivable becomes less than 2 months contractually past
    due.
|MasterCard and Visa    |  | Generally charged-off by the end of the month in
    which the account becomes 6 months contractually delinquent.                                                                                                                                                                                                                                                                                                                                                                                  |  | Interest generally accrues until charge-off.                                                                                                                                                                                                                                                                  
|Private label          |  | Generally charged-off the month following the
    month in which the account becomes 9 months contractually
    delinquent. Beginning in the fourth quarter of 2002, we
    charge-off receivables originated through new merchant
    relationships by the end of the month in which the account
    becomes 6 months contractually delinquent. As of
    December 31, 2003, approximately 21 percent of our
    owned private label portfolio was subject to this 6-month
    charge-off policy. |  | Interest generally accrues until charge-off.                                                                                                                                                                                                                                                                  

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|                         |  |                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                           
|------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                  |  | Charge-off Policies and Practices                                                                                                                                                                                                 |  | Nonaccrual Policies and Practices(1)                                                                                                                                                                                                                                                                                                                                      
|                         |  |                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                           
|Personal non-credit card |  | Generally charged-off the month following the
    month in which the account becomes 9 months contractually
    delinquent and no payment received in 6 months, but in no
    event to exceed 12 months contractually delinquent. |  | Interest income accruals are suspended when
    principal or interest payments are more than 3 months
    contractually delinquent. For PHLs, interest income accruals
    resume if the receivable becomes less than three months
    contractually past due. For all other personal non-credit card
    receivables, interest income is generally recorded as collected.



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In November 2003, the FASB issued FASB Staff
    Position Number 144-1, Determination of Cost Basis for
    Foreclosed Assets under FASB Statement No. 15, and the
    Measurement of Cumulative Losses Previously Recognized Under
    Paragraph 37 of FASB Statement No. 144
    (FSP 144-1). Under FSP 144-1, sales
    commissions related to the sale of foreclosed assets are
    recognized as a charge-off through the provision for credit
    losses. Historically, we had recognized sales commission expense
    as a component of other servicing and administrative expenses in
    our statements of income. We adopted FSP 144-1 in November
    2003. The adoption had no significant impact on our net income.

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

Subject to receipt of regulatory and other
approvals, we intend to transfer substantially all of our
private label credit card portfolio and our General Motors and
Union Privilege MasterCard and Visa portfolios to HSBC Bank USA.
Contingent upon receiving regulatory approval for these asset
transfers in 2004, we would also expect to adopt charge-off,
loss provisioning and account management guidelines in
accordance with the Uniform Retail Credit Classification and
Account Management Policy issued by the Federal Financial
Institutions Examination Council (FFIEC) for those
MasterCard and Visa and private label credit card receivables
which will remain on our balance sheet.

Receivables Sold and Serviced with Limited
Recourse and Securitization RevenueCertain 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.

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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.

Properties and Equipment,
NetProperties and equipment are
recorded at cost, net of accumulated depreciation and
amortization. As a result of Households merger with HSBC,
the amortized cost of our properties and equipment was adjusted
to fair market value and accumulated depreciation and
amortization on a predecessor basis was eliminated
at the time of the merger. 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
CollateralReal 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.

InsuranceInsurance
revenues on monthly premium 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,
NetAcquired intangibles consist of
purchased credit card relationships and related programs, retail
services merchant relationships, other loan related
relationships, trade names, technology, customer lists and other
contracts. The trade names are not subject to amortization as we
believe they have infinite lives. The remaining acquired
intangibles are being amortized over their estimated useful
lives either on a straight-line basis or in proportion to the
underlying revenues generated. These useful lives range from
5 years for retail services merchant relationships to
approximately 10 years for certain loan related
relationships. Acquired intangibles are reviewed for impairment
using discounted cash flows whenever events indicate that the
carrying amounts may not be recoverable. We consider significant
and long-term changes in industry and economic conditions to be
our primary indicator of potential impairment. Impairment
charges, when required, are calculated using discounted cash
flows.

GoodwillGoodwill
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
impairment may be reviewed earlier if circumstances indicate
that the carrying amount may not be recoverable. We consider
significant and long-term changes in industry and economic
conditions to be our primary indicator of potential impairment.
Our goodwill was not impaired prior to Households merger
with HSBC on March 28, 2003. Consistent with business
combination guidance, our goodwill will not be tested again for
impairment until 2004 as no circumstances indicating impairment
have arisen subsequent to the merger.

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Derivative Financial
InstrumentsEffective 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 recognized in other income in the current period.

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 why we think
the hedge will be effective and how hedge effectiveness and
ineffectiveness will be measured. This process includes linking
derivatives to specific assets and liabilities on the balance
sheet. We also formally assess, both at the hedges
inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items.
This assessment is conducted using statistical regression
analysis. For interest rate swaps which meet the shortcut method
criteria under SFAS No. 133, no assessment is required.
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
TranslationWe 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.
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
SalesPrior to 2003, we had purchased
receivables from an affiliate. These receivables were purchased
at fair market value. Premiums were recorded when the fair
market value exceeded the carrying value of receivables
purchased.

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Income TaxesHFC and
its non-insurance subsidiaries are included in Household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 asset and liability
method. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Investment tax credits generated by
leveraged leases are accounted for using the deferral method.



|   |             
|-- | ------------
|2. | Acquisitions

Acquisition of
HouseholdOn March 28, 2003, HSBC
acquired Household by way of merger with H2 Acquisition
Corporation (H2), a wholly owned subsidiary of HSBC,
acquiring 100% of the voting equity interest of Household in a
purchase business combination. Subsequent to the merger, H2 was
renamed Household International, Inc. HSBC believes
that the merger offers significant opportunities to extend its
business model into countries and territories currently served
by HSBC and broadens the product range available to the enlarged
customer base.

In accordance with the guidelines for accounting
for business combinations, the purchase price paid by HSBC plus
related purchase accounting adjustments have been
pushed-down and recorded in our financial statements
for the period subsequent to March 28, 2003. This has
resulted in a new basis of accounting reflecting the fair market
value of our assets and liabilities for the
successor period beginning March 29, 2003.
Information for all predecessor periods prior to the
merger are presented using our historical basis of accounting,
which impacts comparability to our successor periods.

The purchase price paid by HSBC for
Households common stock plus related purchase accounting
adjustments was valued at approximately $14.7 billion. Of
this amount, approximately $12.0 billion has been assigned
to HFC and is presented as Additional paid-in
capital in the accompanying consolidated balance sheet.

The purchase price has been allocated to our
assets and liabilities based on their estimated fair values at
the merger date. These preliminary fair values were estimated,
in part, on third party valuation data. Throughout 2003, we made
adjustments to preliminary fair value estimates as additional
information, including third party valuation data, was obtained.

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The following table summarizes the estimated
preliminary fair values of our assets and liabilities as of the
merger date:

|                                    |                           |               |          |          | 
|----------------------------------- | ------------------------- | ------------- | -------- | -------- | 
|                                    |                           | (In millions)
|Assets acquired:                    |                           |               |          |         
|Cash                                |                           | $             | 395.2    |         
|Investment securities               |                           |               | 6,561.9  |         
|Receivables, net                    |                           |               | 74,868.9 |         
|Advances to affiliates              |                           |               | 540.4    |         
|Acquired intangibles                |                           |               | 2,856.1  |         
|Goodwill                            |                           |               | 2,107.7  |         
|Properties and equipment            |                           |               | 415.6    |         
|Real estate owned                   |                           |               | 441.4    |         
|Derivative financial assets         |                           |               | 2,091.1  |         
|Other assets                        |                           |               | 2,377.9  |         
|                                    |                           |               |          |         
|                                    | Total assets acquired     |               | $        | 92,656.2 | 
|                                    |                           |               |          |         
|Liabilities assumed:                |                           |               |          |         
|Debt                                |                           | $             | 75,837.5 |         
|Insurance policy and claim reserves |                           |               | 1,193.4  |         
|Derivative related liabilities      |                           |               | 1,420.4  |         
|Other liabilities                   |                           |               | 2,188.8  |         
|                                    |                           |               |          |         
|                                    | Total liabilities assumed |               | $        | 80,640.1 | 
|                                    |                           |               |          |         
|Total purchase price                |                           | $             | 12,016.1 |         
|                                    |                           |               |          |         

None of the goodwill is expected to be deductible
for tax purposes.

Approximately $2.9 billion of acquired
intangibles were recorded as part of the allocation of the
purchase price. Total acquired intangibles resulting from the
merger were comprised of the following:

|                                                             |  |               |         | 
|------------------------------------------------------------ |  | ------------- | ------- | 
|                                                             |  | (In millions)
|Purchased credit card relationships and related
    programs |  | $             | 1,272.0 | 
|Retail services merchant relationships                       |  |               | 277.0   | 
|Other loan related relationships                             |  |               | 326.1   | 
|Trade names                                                  |  |               | 700.0   | 
|Technology, customer lists and other contracts               |  |               | 281.0   | 
|                                                             |  |               |         | 
|Total acquired intangibles                                   |  | $             | 2,856.1 | 
|                                                             |  |               |         | 

The trade names are not subject to amortization
as we believe they have infinite lives. The remaining acquired
intangibles are being amortized to their residual values over
their estimated useful lives either on a straight-line basis or
in proportion to the underlying revenues generated. These useful
lives range from 5 years for retail services merchant
relationships to approximately 10 years for certain loan
related relationships. Our purchased credit card relationships
have estimated residual values of $268.2 million.

Household Bank (SB),
N.A.On July 1, 2002, Household
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. 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.

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|   |                      
|-- | ---------------------
|3. | Investment Securities

|                                                       |  |                |          |      |  |   |         | 
|------------------------------------------------------ |  | -------------- | -------- | ---- |  | - | ------- | 
|                                                       |  |               
|                                                       |  | At December 31
|                                                       |  |               
|                                                       |  | 2003           |          | 2002
|                                                       |  |                |          |     
|                                                       |  |               
|                                                       |  | (In millions) 
|Available-For-Sale Investments                         |  |                |          |      |  |   |         | 
|Corporate debt securities                              |  | $              | 5,649.1  |      |  | $ | 2,107.6 | 
|U.S. government and federal agency debt
    securities |  |                | 2,428.3  |      |  |   | 1,820.8 | 
|Money market funds                                     |  |                | 427.9    |      |  |   | 1,610.5 | 
|Non-government mortgage backed securities              |  |                | 371.4    |      |  |   | 664.0   | 
|Marketable equity securities                           |  |                | 17.5     |      |  |   | 19.8    | 
|Time deposits                                          |  |                | 885.5    |      |  |   | 9.9     | 
|Other                                                  |  |                | 726.1    |      |  |   | 424.7   | 
|                                                       |  |                |          |      |  |   |         | 
|Subtotal                                               |  |                | 10,505.8 |      |  |   | 6,657.3 | 
|Accrued investment income                              |  |                | 39.2     |      |  |   | 50.3    | 
|                                                       |  |                |          |      |  |   |         | 
|Total investment securities                            |  | $              | 10,545.0 |      |  | $ | 6,707.6 | 
|                                                       |  |                |          |      |  |   |         | 

Information with respect to sales of
available-for-sale investment securities was as follows:

|                      |  |               |       |           |  |             |       |      |  |   |       |  |  |   |       | 
|--------------------- |  | ------------- | ----- | --------- |  | ----------- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                      |  |               |       |           |  |            
|                      |  | March 29      |       | January 1 |  | Year ended 
|                      |  | through       |       | through   |  | December 31
|                      |  | December 31,  |       | March 28, |  |            
|                      |  | 2003          |       | 2003      |  | 2002        |       | 2001
|                      |  |               |       |           |  |             |       |     
|                      |  |              
|                      |  | (In millions)
|Proceeds received     |  | $             | 686.9 |           |  | $           | 768.4 |      |  | $ | 642.2 |  |  | $ | 684.1 | 
|Gross realized gains  |  |               | 18.3  |           |  |             | 40.6  |      |  |   | 18.8  |  |  |   | 12.9  | 
|Gross realized losses |  |               | .4    |           |  |             | 2.6   |      |  |   | 11.8  |  |  |   | 1.7   | 

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

|                                                       |  |                |          |            |  |            |      |       |  |           |      |            |  |            |          |       |  |   |         |  |  |   |       |  |  |   |       |   |  |   |         | 
|------------------------------------------------------ |  | -------------- | -------- | ---------- |  | ---------- | ---- | ----- |  | --------- | ---- | ---------- |  | ---------- | -------- | ----- |  | - | ------- |  |  | - | ----- |  |  | - | ----- | - |  | - | ------- | 
|                                                       |  |               
|                                                       |  | At December 31
|                                                       |  |               
|                                                       |  |                |          |           
|                                                       |  | 2003           |          | 2002      
|                                                       |  |                |          |           
|                                                       |  |                |          | Gross      |  | Gross      |      |       |  |           |      | Gross      |  | Gross      |          |      
|                                                       |  | Amortized      |          | Unrealized |  | Unrealized |      | Fair  |  | Amortized |      | Unrealized |  | Unrealized |          | Fair 
|                                                       |  | Cost           |          | Gains      |  | Losses     |      | Value |  | Cost      |      | Gains      |  | Losses     |          | Value
|                                                       |  |                |          |            |  |            |      |       |  |           |      |            |  |            |          |      
|                                                       |  |               
|                                                       |  | (In millions) 
|Corporate debt securities                              |  | $              | 5,638.3  |            |  | $          | 10.8 |       |  |           |     |            |  | $          | 5,649.1  |       |  | $ | 2,030.4 |  |  | $ | 124.9 |  |  | $ | (47.7 | ) |  | $ | 2,107.6 | 
|U.S. government and federal agency debt
    securities |  |                | 2,430.1  |            |  |            |     |       |  | $         | (1.8 | )          |  |            | 2,428.3  |       |  |   | 1,804.4 |  |  |   | 16.6  |  |  |   | (.2   | ) |  |   | 1,820.8 | 
|Money market funds                                     |  |                | 427.9    |            |  |            |     |       |  |           |     |            |  |            | 427.9    |       |  |   | 1,610.5 |  |  |   |      |  |  |   |      |   |  |   | 1,610.5 | 
|Non-government mortgage backed securities              |  |                | 371.1    |            |  |            | .6   |       |  |           | (.3  | )          |  |            | 371.4    |       |  |   | 655.6   |  |  |   | 10.1  |  |  |   | (1.7  | ) |  |   | 664.0   | 
|Marketable equity securities                           |  |                | 13.6     |            |  |            | 3.9  |       |  |           |     |            |  |            | 17.5     |       |  |   | 28.6    |  |  |   |      |  |  |   | (8.8  | ) |  |   | 19.8    | 
|Time deposits                                          |  |                | 885.5    |            |  |            |     |       |  |           |     |            |  |            | 885.5    |       |  |   | 9.9     |  |  |   |      |  |  |   |      |   |  |   | 9.9     | 
|Other                                                  |  |                | 724.7    |            |  |            | 1.6  |       |  |           | (.2  | )          |  |            | 726.1    |       |  |   | 412.1   |  |  |   | 14.0  |  |  |   | (1.4  | ) |  |   | 424.7   | 
|                                                       |  |                |          |            |  |            |      |       |  |           |      |            |  |            |          |       |  |   |         |  |  |   |       |  |  |   |       |   |  |   |         | 
|Total investment securities                            |  | $              | 10,491.2 |            |  | $          | 16.9 |       |  | $         | (2.3 | )          |  | $          | 10,505.8 |       |  | $ | 6,551.5 |  |  | $ | 165.6 |  |  | $ | (59.8 | ) |  | $ | 6,657.3 | 
|                                                       |  |                |          |            |  |            |      |       |  |           |      |            |  |            |          |       |  |   |         |  |  |   |       |  |  |   |       |   |  |   |         | 

The amortized cost of our investment securities
portfolio was adjusted to fair market value at the time of
Households merger with HSBC. As a result, all unrealized
gains and losses have arisen since March 29, 2003.

See Note 12, Fair Value of Financial
Instruments, for further discussion of the relationship
between the fair value of our assets and liabilities.

81



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

|                                                        |                |                                             |   |            |   |            |   |          |   |       |   |       |   |  |   |       |   |  |   |         |  
|------------------------------------------------------- | -------------- | ------------------------------------------- | - | ---------- | - | ---------- | - | -------- | - | ----- | - | ----- | - |  | - | ----- | - |  | - | ------- | -
|                                                        |                |                                            
|                                                        |                | At December 31, 2003                       
|                                                        |                |                                            
|                                                        |                | Due                                         |   | After 1    |   | After 5    |   |         
|                                                        |                | Within                                      |   | but within |   | but within |   | After    |   |      
|                                                        |                | 1 year                                      |   | 5 years    |   | 10 years   |   | 10 years |   | Total
|                                                        |                |                                             |   |            |   |            |   |          |   |      
|                                                        |                |                                            
|                                                        |                | (All dollar amounts are stated in millions)
|Corporate debt securities:                              |                |                                             |   |            |   |            |   |          |   |       |   |       |   |  |   |       |   |  |   |        
|                                                        | Amortized cost |                                             | $ | 3,726.7    |   |            | $ | 953.9    |   |       | $ | 320.1 |   |  | $ | 637.6 |   |  | $ | 5,638.3 |  
|                                                        | Fair value     |                                             |   | 3,720.9    |   |            |   | 958.1    |   |       |   | 319.7 |   |  |   | 650.4 |   |  |   | 5,649.1 |  
|                                                        | Yield(1)       |                                             |   | 1.11       | % |            |   | 4.51     | % |       |   | 5.23  | % |  |   | 6.52  | % |  |   | 2.53    | %
|U.S. government and federal agency debt
    securities: |                |                                             |   |            |   |            |   |          |   |       |   |       |   |  |   |       |   |  |   |        
|                                                        | Amortized cost |                                             | $ | 2,048.4    |   |            | $ | 277.6    |   |       | $ | 20.4  |   |  | $ | 83.7  |   |  | $ | 2,430.1 |  
|                                                        | Fair value     |                                             |   | 2,048.4    |   |            |   | 277.0    |   |       |   | 20.1  |   |  |   | 82.8  |   |  |   | 2,428.3 |  
|                                                        | Yield(1)       |                                             |   | 1.04       | % |            |   | 2.79     | % |       |   | 3.22  | % |  |   | 4.31  | % |  |   | 1.37    | %
|Non-government mortgage backed securities:              |                |                                             |   |            |   |            |   |          |   |       |   |       |   |  |   |       |   |  |   |        
|                                                        | Amortized cost |                                             | $ | 6.0        |   |            | $ | 18.4     |   |       | $ | 18.3  |   |  | $ | 328.4 |   |  | $ | 371.1   |  
|                                                        | Fair value     |                                             |   | 6.0        |   |            |   | 18.5     |   |       |   | 18.1  |   |  |   | 328.8 |   |  |   | 371.4   |  
|                                                        | Yield(1)       |                                             |   | 5.20       | % |            |   | 3.99     | % |       |   | 2.53  | % |  |   | 3.00  | % |  |   | 3.06    | %



---



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



|   |            
|-- | -----------
|4. | Receivables

|                                                           |                              |                |           |          |  |   |          |          | 
|---------------------------------------------------------- | ---------------------------- | -------------- | --------- | -------- |  | - | -------- | -------- | 
|                                                           |                              |               
|                                                           |                              | At December 31
|                                                           |                              |               
|                                                           |                              | 2003           |           | 2002    
|                                                           |                              |                |           |         
|                                                           |                              |               
|                                                           |                              | (In millions) 
|Real estate secured                                        |                              | $              | 48,979.8  |          |  | $ | 44,052.1 |         
|Auto finance                                               |                              |                | 4,121.5   |          |  |   | 2,028.1  |         
|MasterCard/Visa                                            |                              |                | 9,530.3   |          |  |   | 7,600.2  |         
|Private label                                              |                              |                | 9,732.4   |          |  |   | 9,365.2  |         
|Personal non-credit card                                   |                              |                | 9,643.5   |          |  |   | 11,706.9 |         
|Commercial and other                                       |                              |                | 396.7     |          |  |   | 457.2    |         
|                                                           |                              |                |           |          |  |   |          |         
|                                                           | Total owned receivables      |                |           | 82,404.2 |  |   |          | 75,209.7 | 
|Purchase accounting fair value adjustments                 |                              |                | 360.2     |          |  |   |         |         
|Accrued finance charges                                    |                              |                | 1,455.6   |          |  |   | 1,446.7  |         
|Credit loss reserve for owned receivables                  |                              |                | (3,542.9  | )        |  |   | (3,156.9 | )       
|Unearned credit insurance premiums and claims
    reserves |                              |                | (457.1    | )        |  |   | (632.7   | )       
|Interest-only strip receivables                            |                              |                | 902.4     |          |  |   | 1,083.3  |         
|Amounts due and deferred from receivable sales             |                              |                | 116.7     |          |  |   | 878.3    |         
|                                                           |                              |                |           |          |  |   |          |         
|                                                           | Total owned receivables, net |                |           | 81,239.1 |  |   |          | 74,828.4 | 
|Receivables serviced with limited recourse                 |                              |                | 25,078.2  |          |  |   | 23,422.2 |         
|                                                           |                              |                |           |          |  |   |          |         
|Total managed receivables, net                             |                              | $              | 106,317.3 |          |  | $ | 98,250.6 |         
|                                                           |                              |                |           |          |  |   |          |         

Purchase accounting fair value adjustments
represent adjustments which have been pushed down to
record our receivables at fair value at the merger date.

82



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

|                         |  |                |          |      |  |   |          | 
|------------------------ |  | -------------- | -------- | ---- |  | - | -------- | 
|                         |  |               
|                         |  | At December 31
|                         |  |               
|                         |  | 2003           |          | 2002
|                         |  |                |          |     
|                         |  |               
|                         |  | (In millions) 
|Real estate secured      |  | $              | 193.6    |      |  | $ | 456.3    | 
|Auto finance             |  |                | 4,674.8  |      |  |   | 5,418.6  | 
|MasterCard/Visa          |  |                | 9,253.1  |      |  |   | 9,272.5  | 
|Private label            |  |                | 5,261.3  |      |  |   | 3,577.1  | 
|Personal non-credit card |  |                | 5,695.4  |      |  |   | 4,697.7  | 
|                         |  |                |          |      |  |   |          | 
|Total                    |  | $              | 25,078.2 |      |  | $ | 23,422.2 | 
|                         |  |                |          |      |  |   |          | 

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

|                         |  |                |           |      |  |   |          | 
|------------------------ |  | -------------- | --------- | ---- |  | - | -------- | 
|                         |  |               
|                         |  | At December 31
|                         |  |               
|                         |  | 2003           |           | 2002
|                         |  |                |           |     
|                         |  |               
|                         |  | (In millions) 
|Real estate secured      |  | $              | 49,173.4  |      |  | $ | 44,508.4 | 
|Auto finance             |  |                | 8,796.3   |      |  |   | 7,446.7  | 
|MasterCard/Visa          |  |                | 18,783.4  |      |  |   | 16,872.7 | 
|Private label            |  |                | 14,993.7  |      |  |   | 12,942.3 | 
|Personal non-credit card |  |                | 15,338.9  |      |  |   | 16,404.6 | 
|Commercial and other     |  |                | 396.7     |      |  |   | 457.2    | 
|                         |  |                |           |      |  |   |          | 
|Managed receivables      |  | $              | 107,482.4 |      |  | $ | 98,631.9 | 
|                         |  |                |           |      |  |   |          | 

We maintain facilities with third parties which
provide for the securitization of receivables on a revolving
basis totaling $16.1 billion, of which $12.25 billion
were utilized at December 31, 2003. 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, 2003 were as follows:

|                         |  |                      |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |          |  |  |   |          | 
|------------------------ |  | -------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | -------- |  |  | - | -------- | 
|                         |  |                     
|                         |  | At December 31, 2003
|                         |  |                     
|                         |  | 2004                 |         | 2005 |  | 2006 |         | 2007 |  | 2008 |         | Thereafter |  | Total
|                         |  |                      |         |      |  |      |         |      |  |      |         |            |  |      
|                         |  |                     
|                         |  | (In millions)       
|Real estate secured      |  | $                    | 186.5   |      |  | $    | 46.8    |      |  | $    | 75.8    |            |  | $     | 106.9   |  |  | $ | 160.6   |  |  | $ | 48,403.2 |  |  | $ | 48,979.8 | 
|Auto finance             |  |                      | 1,061.6 |      |  |      | 927.9   |      |  |      | 798.5   |            |  |       | 652.7   |  |  |   | 502.6   |  |  |   | 178.2    |  |  |   | 4,121.5  | 
|MasterCard/Visa          |  |                      | 1,154.2 |      |  |      | 1,009.2 |      |  |      | 887.0   |            |  |       | 781.1   |  |  |   | 688.5   |  |  |   | 5,010.3  |  |  |   | 9,530.3  | 
|Private label            |  |                      | 6,044.5 |      |  |      | 2,202.0 |      |  |      | 912.1   |            |  |       | 388.8   |  |  |   | 177.5   |  |  |   | 7.5      |  |  |   | 9,732.4  | 
|Personal non-credit card |  |                      | 1,380.8 |      |  |      | 469.6   |      |  |      | 802.8   |            |  |       | 1,557.2 |  |  |   | 1,714.1 |  |  |   | 3,719.0  |  |  |   | 9,643.5  | 
|Commercial and other     |  |                      | 49.6    |      |  |      | 52.5    |      |  |      | 7.4     |            |  |       | 8.9     |  |  |   | 4.3     |  |  |   | 274.0    |  |  |   | 396.7    | 
|                         |  |                      |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |          |  |  |   |          | 
|Total                    |  | $                    | 9,877.2 |      |  | $    | 4,708.0 |      |  | $    | 3,483.6 |            |  | $     | 3,495.6 |  |  | $ | 3,247.6 |  |  | $ | 57,592.2 |  |  | $ | 82,404.2 | 
|                         |  |                      |         |      |  |      |         |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |          |  |  |   |          | 

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 37 percent in 2003 and 44 percent in 2002.

83



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##### Table of Contents



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

|                                            |  |                      |          |         |  |   |          | 
|------------------------------------------- |  | -------------------- | -------- | ------- |  | - | -------- | 
|                                            |  |                     
|                                            |  | At December 31, 2003
|                                            |  |                     
|                                            |  | Over 1               |          |        
|                                            |  | But Within           |          | Over   
|                                            |  | 5 Years              |          | 5 Years
|                                            |  |                      |          |        
|                                            |  |                     
|                                            |  | (In millions)       
|Receivables at predetermined interest rates |  | $                    | 10,807.6 |         |  | $ | 49,127.5 | 
|Receivables at floating or adjustable rates |  |                      | 4,127.2  |         |  |   | 8,464.7  | 
|                                            |  |                      |          |         |  |   |          | 
|Total                                       |  | $                    | 14,934.8 |         |  | $ | 57,592.2 | 
|                                            |  |                      |          |         |  |   |          | 

Nonaccrual owned consumer receivables totaled
$2.8 billion at December 31, 2003 and
$2.4 billion at December 31, 2002. Interest income
that would have been recorded if such nonaccrual receivables had
been current and in accordance with contractual terms was
approximately $363.3 million in 2003 and
$371.6 million in 2002. Interest income that was included
in finance and other interest income, prior to these loans being
placed on nonaccrual status, was approximately
$185.3 million in 2003 and $195.4 million in 2002.

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 $2.2 billion at
December 31, 2003 and $1.6 billion at
December 31, 2002. Interest-only strip receivables also
included fair value mark-to-market adjustments of
$246.5 million at year-end 2003 and $356.8 million at
year-end 2002.

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, were required
to transfer cash collections to the trusts on a daily basis. As
a result of the upgrade of our debt ratings following the merger
with HSBC, we are no longer required to make daily cash
transfers.

We issued securities backed by dedicated home
equity loan receivables of $3.3 billion in 2003 and
$7.5 billion in 2002. 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 $8.0 billion at
December 31, 2003 and $8.5 billion at
December 31, 2002 which secured the outstanding debt
related to these transactions.

84



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The following table sets forth the activity in
our credit loss reserves for the periods indicated:

|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  
|-------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                                             |  |                       
|                                                                                             |  | Year Ended December 31
|                                                                                             |  |                       
|                                                                                             |  | 2003                   |          | 2002 |  | 2001
|                                                                                             |  |                        |          |      |  |     
|                                                                                             |  |                       
|                                                                                             |  | (In millions)         
|Owned Receivables:                                                                           |  |                        |          |      |  |      |          |   |  |   |          |  
|Credit loss reserves at January 1                                                            |  | $                      | 3,156.9  |      |  | $    | 2,440.6  |   |  | $ | 1,940.6  |  
|Provision for credit losses                                                                  |  |                        | 3,705.6  |      |  |      | 3,463.7  |   |  |   | 2,606.4  |  
|Charge-offs                                                                                  |  |                        | (3,621.4 | )    |  |      | (3,104.3 | ) |  |   | (2,418.6 | )
|Recoveries                                                                                   |  |                        | 256.7    |      |  |      | 209.2    |   |  |   | 189.8    |  
|Other, net                                                                                   |  |                        | 45.1     |      |  |      | 147.7    |   |  |   | 122.4    |  
|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  
|Total credit loss reserves for owned receivables
    at December 31                          |  | $                      | 3,542.9  |      |  | $    | 3,156.9  |   |  | $ | 2,440.6  |  
|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  
|Receivables Serviced with Limited
    Recourse:                                              |  |                        |          |      |  |      |          |   |  |   |          |  
|Credit loss reserves at January 1                                                            |  | $                      | 1,638.3  |      |  | $    | 1,062.1  |   |  | $ | 1,001.4  |  
|Provision for credit losses                                                                  |  |                        | 2,177.4  |      |  |      | 1,838.8  |   |  |   | 1,063.1  |  
|Charge-offs                                                                                  |  |                        | (1,690.0 | )    |  |      | (1,385.5 | ) |  |   | (1,055.5 | )
|Recoveries                                                                                   |  |                        | 90.5     |      |  |      | 85.5     |   |  |   | 58.6     |  
|Other, net                                                                                   |  |                        | 30.1     |      |  |      | (37.4    | ) |  |   | (5.5     | )
|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  
|Total credit loss reserves for receivables
    serviced with limited recourse at December 31 |  |                        | 2,246.3  |      |  |      | 1,638.3  |   |  |   | 1,062.1  |  
|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  
|Total credit loss reserves for managed
    receivables at December 31                        |  | $                      | 5,789.2  |      |  | $    | 4,795.2  |   |  | $ | 3,502.7  |  
|                                                                                             |  |                        |          |      |  |      |          |   |  |   |          |  



|   |                      
|-- | ---------------------
|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.

|                                    |  |               |       |           |  |             |       |      |  |   |         |  |  |   |         | 
|----------------------------------- |  | ------------- | ----- | --------- |  | ----------- | ----- | ---- |  | - | ------- |  |  | - | ------- | 
|                                    |  |               |       |           |  |            
|                                    |  | March 29      |       | January 1 |  | Year ended 
|                                    |  | through       |       | through   |  | December 31
|                                    |  | December 31,  |       | March 28, |  |            
|                                    |  | 2003          |       | 2003      |  | 2002        |       | 2001
|                                    |  |               |       |           |  |             |       |     
|                                    |  |              
|                                    |  | (In millions)
|Net initial gains                   |  | $             | 135.0 |           |  | $           | 40.9  |      |  | $ | 296.8   |  |  | $ | 154.2   | 
|Net replenishment gains             |  |               | 389.1 |           |  |             | 128.8 |      |  |   | 505.4   |  |  |   | 403.1   | 
|Servicing revenue and excess spread |  |               | 459.4 |           |  |             | 243.5 |      |  |   | 1,208.8 |  |  |   | 1,095.1 | 
|                                    |  |               |       |           |  |             |       |      |  |   |         |  |  |   |         | 
|Total                               |  | $             | 983.5 |           |  | $           | 413.2 |      |  | $ | 2,011.0 |  |  | $ | 1,652.4 | 
|                                    |  |               |       |           |  |             |       |      |  |   |         |  |  |   |         | 

85



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##### Table of Contents



Our interest-only strip receivables, net of the
related loss reserves and excluding the mark-to-market
adjustment recorded in accumulated other comprehensive income
decreased $395.1 million in the period March 29 to
December 31, 2003, decreased $32.4 million in the
period January 1 to March 28, 2003, increased
$123.9 million in 2002 and increased $118.1 million in
2001.

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:

|                                |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       |  | 
|------------------------------- | ------------------------------------ | ------- | ----- | ------------ | - | ------- | ---- | ---------- | - | ----- | ---- | ---- | - | - | ---- | ---- | - | - | ----- |  | 
|                                |                                      |         |       |              |   |         |      | Personal   |   |      
|                                |                                      | Auto    |       | Master Card/ |   | Private |      | Non-Credit |   |      
|Year Ended December 31          |                                      | Finance |       | Visa         |   | Label   |      | Card       |   | Total
|                                |                                      |         |       |              |   |         |      |            |   |      
|2003                            |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|Net initial gains (in millions) |                                      | $       | 56.5  |              |   | $       | 24.6 |            |   | $     | 50.8 |      |   | $ | 44.0 |      |   | $ | 175.9 | 
|Key economic assumptions(1)     |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|                                | Weighted-average life (in years)     |         |       | 2.1          |   |         |      | .4         |   |       |      | .7   |   |   |      | 1.7  |   |   |       |  | 
|                                | Payment speed                        |         |       | 35.4         | % |         |      | 93.3       | % |       |      | 74.5 | % |   |      | 43.3 | % |   |       |  | 
|                                | Expected credit losses (annual rate) |         |       | 6.1          |   |         |      | 5.1        |   |       |      | 5.7  |   |   |      | 12.0 |   |   |       |  | 
|                                | Discount rate on cash flows          |         |       | 10.0         |   |         |      | 9.0        |   |       |      | 10.0 |   |   |      | 11.0 |   |   |       |  | 
|                                | Cost of funds                        |         |       | 2.2          |   |         |      | 1.8        |   |       |      | 1.8  |   |   |      | 2.1  |   |   |       |  | 
|                               
|2002                            |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|Net initial gains (in millions) |                                      | $       | 139.7 |              |   | $       | 44.4 |            |   | $     | 57.3 |      |   | $ | 55.4 |      |   | $ | 296.8 | 
|Key economic assumptions:(1)    |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|                                | Weighted-average life (in years)     |         |       | 2.2          |   |         |      | .4         |   |       |      | .7   |   |   |      | 1.4  |   |   |       |  | 
|                                | Payment speed                        |         |       | 34.1         | % |         |      | 92.8       | % |       |      | 72.8 | % |   |      | 49.4 | % |   |       |  | 
|                                | Expected credit losses (annual rate) |         |       | 5.9          |   |         |      | 5.4        |   |       |      | 5.7  |   |   |      | 9.9  |   |   |       |  | 
|                                | Discount rate on cash flows          |         |       | 10.0         |   |         |      | 9.0        |   |       |      | 10.0 |   |   |      | 11.0 |   |   |       |  | 
|                                | Cost of funds                        |         |       | 4.3          |   |         |      | 3.1        |   |       |      | 3.3  |   |   |      | 2.4  |   |   |       |  | 
|                               
|2001                            |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|Net initial gains (in millions) |                                      | $       | 100.3 |              |   | $       | 7.3  |            |   | $     | 13.1 |      |   | $ | 33.5 |      |   | $ | 154.2 | 
|Key economic assumptions:(1)    |                                      |         |       |              |   |         |      |            |   |       |      |      |   |   |      |      |   |   |       | 
|                                | Weighted-average life (in years)     |         |       | 2.2          |   |         |      | .4         |   |       |      | .9   |   |   |      | 1.2  |   |   |       |  | 
|                                | Payment speed                        |         |       | 34.2         | % |         |      | 93.6       | % |       |      | 67.1 | % |   |      | 51.8 | % |   |       |  | 
|                                | Expected credit losses (annual rate) |         |       | 4.8          |   |         |      | 5.1        |   |       |      | 5.5  |   |   |      | 7.6  |   |   |       |  | 
|                                | Discount rate on cash flows          |         |       | 10.0         |   |         |      | 9.0        |   |       |      | 10.0 |   |   |      | 11.0 |   |   |       |  | 
|                                | Cost of funds                        |         |       | 4.5          |   |         |      | 6.2        |   |       |      | 5.7  |   |   |      | 4.1  |   |   |       |  | 



---



|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $30.7 billion in
2003, $25.8 billion in 2002 and $24.4 billion in 2001.
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 $517.9 million in 2003, $505.4 million in 2002
and $403.1 million in 2001.

86



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##### Table of Contents



Cash flows received from securitization trusts
were as follows:

|                                                  |  |               |      |         |  |             |         |         |  |               |       |       |  |   |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------- |  | ------------- | ---- | ------- |  | ----------- | ------- | ------- |  | ------------- | ----- | ----- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                  |  | Real Estate   |      | Auto    |  | MasterCard/ |         | Private |  | Personal Non- |       |      
|Year Ended December 31                            |  | Secured       |      | Finance |  | Visa        |         | Label   |  | Credit Card   |       | Total
|                                                  |  |               |      |         |  |             |         |         |  |               |       |      
|                                                  |  |              
|                                                  |  | (In millions)
|2003                                              |  |               |      |         |  |             |         |         |  |               |       |       |  |   |         |  |  |   |         |  |  |   |         | 
|Proceeds from initial securitizations             |  |               |     |         |  | $           | 1,523.0 |         |  | $             | 670.0 |       |  | $ | 1,250.0 |  |  | $ | 3,320.0 |  |  | $ | 6,763.0 | 
|Servicing fees received                           |  | $             | 3.5  |         |  |             | 117.2   |         |  |               | 199.0 |       |  |   | 82.5    |  |  |   | 133.6   |  |  |   | 535.8   | 
|Other cash flow received on retained interests(1) |  |               | 10.3 |         |  |             | 71.7    |         |  |               | 811.1 |       |  |   | 249.2   |  |  |   | 148.1   |  |  |   | 1,290.4 | 
|                                                 
|2002                                              |  |               |      |         |  |             |         |         |  |               |       |       |  |   |         |  |  |   |         |  |  |   |         | 
|Proceeds from initial securitizations             |  |               |     |         |  | $           | 3,288.6 |         |  | $             | 944.0 |       |  | $ | 1,747.2 |  |  | $ | 3,560.7 |  |  | $ | 9,540.5 | 
|Servicing fees received                           |  | $             | 7.4  |         |  |             | 102.5   |         |  |               | 201.0 |       |  |   | 58.0    |  |  |   | 110.4   |  |  |   | 479.3   | 
|Other cash flow received on retained interests(1) |  |               | 35.4 |         |  |             | 174.4   |         |  |               | 851.7 |       |  |   | 215.2   |  |  |   | 135.7   |  |  |   | 1,412.4 | 
|                                                 
|2001                                              |  |               |      |         |  |             |         |         |  |               |       |       |  |   |         |  |  |   |         |  |  |   |         | 
|Proceeds from initial securitizations             |  |               |     |         |  | $           | 2,573.9 |         |  | $             | 261.1 |       |  | $ | 500.0   |  |  | $ | 1,975.0 |  |  | $ | 5,310.0 | 
|Servicing fees received                           |  | $             | 12.0 |         |  |             | 84.9    |         |  |               | 179.1 |       |  |   | 34.9    |  |  |   | 69.8    |  |  |   | 380.7   | 
|Other cash flow received on retained interests(1) |  |               | 67.5 |         |  |             | 111.9   |         |  |               | 506.1 |       |  |   | 157.9   |  |  |   | 106.6   |  |  |   | 950.0   | 



---



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

87



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##### Table of Contents



At December 31, 2003, 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, 2003.

|                                                                   |                                            |                                         |      |         |   |             |       |               |   |               |       |       |   |   |       |       |   |   |       |        |  
|------------------------------------------------------------------ | ------------------------------------------ | --------------------------------------- | ---- | ------- | - | ----------- | ----- | ------------- | - | ------------- | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ------ | -
|                                                                   |                                            | Real Estate                             |      | Auto    |   | MasterCard/ |       |               |   | Personal Non-
|                                                                   |                                            | Secured                                 |      | Finance |   | Visa        |       | Private Label |   | Credit Card  
|                                                                   |                                            |                                         |      |         |   |             |       |               |   |              
|                                                                   |                                            |                                        
|                                                                   |                                            | (Dollar amounts are stated in millions)
|Carrying value (fair value) of interest-only
    strip receivables |                                            | $                                       | 4.7  |         |   | $           | 156.6 |               |   | $             | 298.4 |       |   | $ | 146.4 |       |   | $ | 296.3 |       
|Weighted-average life (in years)                                   |                                            |                                         | .7   |         |   |             | 1.9   |               |   |               | .6    |       |   |   | .7    |       |   |   | 1.6   |       
|Payment speed assumption (annual rate)                             |                                            |                                         | 21.7 | %       |   |             | 38.1  | %             |   |               | 82.4  | %     |   |   | 76.2  | %     |   |   | 43.5  | %     
|                                                                   | Impact on fair value of 10% adverse change |                                         | $    | (.1     | ) |             | $     | (30.7         | ) |               | $     | (22.4 | ) |   | $     | (11.7 | ) |   | $     | (23.6  | )
|                                                                   | Impact on fair value of 20% adverse change |                                         |      | (.1     | ) |             |       | (58.9         | ) |               |       | (42.0 | ) |   |       | (21.7 | ) |   |       | (45.8  | )
|Expected credit losses (annual rate)                               |                                            |                                         | 1.8  | %       |   |             | 7.4   | %             |   |               | 5.5   | %     |   |   | 5.8   | %     |   |   | 10.7  | %     
|                                                                   | Impact on fair value of 10% adverse change |                                         | $    | (.2     | ) |             | $     | (52.2         | ) |               | $     | (25.2 | ) |   | $     | (18.1 | ) |   | $     | (63.3  | )
|                                                                   | Impact on fair value of 20% adverse change |                                         |      | (.5     | ) |             |       | (103.9        | ) |               |       | (50.4 | ) |   |       | (35.9 | ) |   |       | (126.5 | )
|Discount rate on residual cash flows
    (annual rate)             |                                            |                                         | 13.0 | %       |   |             | 10.0  | %             |   |               | 9.0   | %     |   |   | 10.0  | %     |   |   | 11.0  | %     
|                                                                   | Impact on fair value of 10% adverse change |                                         |      |        |   |             | $     | (9.7          | ) |               | $     | (2.9  | ) |   | $     | (.7   | ) |   | $     | (3.5   | )
|                                                                   | Impact on fair value of 20% adverse change |                                         | $    | (.1     | ) |             |       | (19.1         | ) |               |       | (5.8  | ) |   |       | (1.3  | ) |   |       | (6.9   | )
|Variable returns to investors (annual rate)                        |                                            |                                         | 1.3  | %       |   |             |      |               |   |               | 1.5   | %     |   |   | 2.7   | %     |   |   | 1.9   | %     
|                                                                   | Impact on fair value of 10% adverse change |                                         | $    | (.2     | ) |             |       |              |   |               | $     | (6.3  | ) |   | $     | (8.7  | ) |   | $     | (11.0  | )
|                                                                   | Impact on fair value of 20% adverse change |                                         |      | (.4     | ) |             |       |              |   |               |       | (12.7 | ) |   |       | (17.4 | ) |   |       | (22.0  | )

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 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, 2003,
static pool credit losses for auto finance loans securitized in
2003 were estimated to be 11.5 percent, for auto finance
loans securitized in 2002 were estimated to be 12.9 percent
and for auto finance loans securitized in 2001 were estimated to
be 15.2 percent.

88



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##### Table of Contents



Receivables and two-month-and-over contractual
delinquency for our managed and serviced with limited recourse
portfolios were as follows:

|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |       |      | 
|----------------------------------------------- | ------------------------------------------------ | -------------- | -------- | ----------- | --------- | ----------- | ---- | ----------- | ---- | - | -------- | --------- | -------- |  | ---- | ----- | ---- | 
|                                                |                                                  |               
|                                                |                                                  | At December 31
|                                                |                                                  |               
|                                                |                                                  |                |          |            
|                                                |                                                  | 2003           |          | 2002       
|                                                |                                                  |                |          |            
|                                                |                                                  | Receivables    |          | Delinquent  |           | Receivables |      | Delinquent 
|                                                |                                                  | Outstanding    |          | Receivables |           | Outstanding |      | Receivables
|                                                |                                                  |                |          |             |           |             |      |            
|                                                |                                                  |               
|                                                |                                                  | (In millions) 
|Managed receivables:                            |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|                                                | First mortgage(1)                                |                | $        | 32.0        |           |             |      | 8.75        | %    |   | $        | 39.9      |          |  |      | 10.03 | %   
|                                                | Real estate secured                              |                |          | 49,173.4    |           |             |      | 4.38        |      |   |          | 44,508.4  |          |  |      | 3.91  |     
|                                                | Auto finance                                     |                |          | 8,796.3     |           |             |      | 3.85        |      |   |          | 7,446.7   |          |  |      | 3.65  |     
|                                                | MasterCard/Visa                                  |                |          | 18,783.4    |           |             |      | 4.32        |      |   |          | 16,872.7  |          |  |      | 4.33  |     
|                                                | Private label                                    |                |          | 14,993.7    |           |             |      | 5.29        |      |   |          | 12,942.3  |          |  |      | 6.36  |     
|                                                | Personal non-credit card                         |                |          | 15,338.9    |           |             |      | 11.53       |      |   |          | 16,404.6  |          |  |      | 9.92  |     
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|                                                |                                                  | Total consumer |          |             | 107,117.7 |             |      |             | 5.48 |   |          |           | 98,214.6 |  |      |       | 5.29 | 
|                                                | Commercial                                       |                |          | 364.7       |           |             |      |            |      |   |          | 417.3     |          |  |      |      |     
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|                                                | Total managed receivables                        |                | $        | 107,482.4   |           |             |      | 5.46        | %    |   | $        | 98,631.9  |          |  |      | 5.27  | %   
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|Receivables serviced with limited
    recourse: |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|                                                | Real estate secured                              |                | $        | (193.6      | )         |             |      | 11.05       | %    |   | $        | (456.3    | )        |  |      | 6.82  | %   
|                                                | Auto finance                                     |                |          | (4,674.8    | )         |             |      | 5.02        |      |   |          | (5,418.6  | )        |  |      | 3.54  |     
|                                                | MasterCard/Visa                                  |                |          | (9,253.1    | )         |             |      | 2.31        |      |   |          | (9,272.5  | )        |  |      | 2.66  |     
|                                                | Private label                                    |                |          | (5,261.3    | )         |             |      | 3.79        |      |   |          | (3,577.1  | )        |  |      | 4.96  |     
|                                                | Personal non-credit card                         |                |          | (5,695.4    | )         |             |      | 12.31       |      |   |          | (4,697.7  | )        |  |      | 11.17 |     
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|                                                | Total receivables serviced with limited recourse |                |          | (25,078.2   | )         |             |      | 5.46        |      |   |          | (23,422.2 | )        |  |      | 5.00  |     
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      
|Owned consumer receivables                      |                                                  | $              | 82,039.5 |             |           |             | 5.48 | %           |      | $ | 74,792.4 |           |          |  | 5.38 | %    
|                                                |                                                  |                |          |             |           |             |      |             |      |   |          |           |          |  |      |      



---



|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Includes our liquidating legacy first and reverse
    mortgage portfolios.

Average receivables and net charge-offs for our
managed and serviced with limited recourse portfolios were as
follows:

|                     |                           |                |   |             |           |             |  |             |      |  |   |          |          |  |  |      |      | 
|-------------------- | ------------------------- | -------------- | - | ----------- | --------- | ----------- |  | ----------- | ---- |  | - | -------- | -------- |  |  | ---- | ---- | 
|                     |                           |               
|                     |                           | At December 31
|                     |                           |               
|                     |                           |                |   |            
|                     |                           | 2003           |   | 2002       
|                     |                           |                |   |            
|                     |                           | Average        |   | Net         |           | Average     |  | Net        
|                     |                           | Receivables    |   | Charge-offs |           | Receivables |  | Charge-offs
|                     |                           |                |   |             |           |             |  |            
|                     |                           |               
|                     |                           | (In millions) 
|Managed receivables: |                           |                |   |             |           |             |  |             |      |  |   |          |          |  |  |     
|                     | First mortgage(1)         |                | $ | 35.5        |           |             |  | .85         | %    |  | $ | 32.5     |          |  |  | .62  | %   
|                     | Real estate secured       |                |   | 48,163.0    |           |             |  | 1.02        |      |  |   | 42,059.7 |          |  |  | .99  |     
|                     | Auto finance              |                |   | 7,921.9     |           |             |  | 7.00        |      |  |   | 6,934.7  |          |  |  | 6.63 |     
|                     | MasterCard/Visa           |                |   | 16,970.2    |           |             |  | 7.87        |      |  |   | 15,709.9 |          |  |  | 7.50 |     
|                     | Private label             |                |   | 13,709.9    |           |             |  | 6.02        |      |  |   | 11,870.7 |          |  |  | 5.96 |     
|                     | Personal non-credit card  |                |   | 15,803.9    |           |             |  | 11.11       |      |  |   | 15,020.0 |          |  |  | 9.57 |     
|                     |                           |                |   |             |           |             |  |             |      |  |   |          |          |  |  |     
|                     |                           | Total consumer |   |             | 102,604.4 |             |  |             | 4.84 |  |   |          | 91,627.5 |  |  |      | 4.58 | 
|                     | Commercial                |                |   | 389.9       |           |             |  | .46         |      |  |   | 427.3    |          |  |  | (.35 | )   
|                     |                           |                |   |             |           |             |  |             |      |  |   |          |          |  |  |     
|                     | Total managed receivables |                | $ | 102,994.3   |           |             |  | 4.82        | %    |  | $ | 92,054.8 |          |  |  | 4.56 | %   
|                     |                           |                |   |             |           |             |  |             |      |  |   |          |          |  |  |     

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|                                                |                                                  |                |          |             |   |             |      |             |   |   |          |           |   |  |      |      |  
|----------------------------------------------- | ------------------------------------------------ | -------------- | -------- | ----------- | - | ----------- | ---- | ----------- | - | - | -------- | --------- | - |  | ---- | ---- | -
|                                                |                                                  |               
|                                                |                                                  | At December 31
|                                                |                                                  |               
|                                                |                                                  |                |          |            
|                                                |                                                  | 2003           |          | 2002       
|                                                |                                                  |                |          |            
|                                                |                                                  | Average        |          | Net         |   | Average     |      | Net        
|                                                |                                                  | Receivables    |          | Charge-offs |   | Receivables |      | Charge-offs
|                                                |                                                  |                |          |             |   |             |      |            
|                                                |                                                  |               
|                                                |                                                  | (In millions) 
|Receivables serviced with limited
    recourse: |                                                  |                |          |             |   |             |      |             |   |   |          |           |   |  |      |     
|                                                | Real estate secured                              |                | $        | (271.9      | ) |             |      | 1.69        | % |   | $        | (572.1    | ) |  |      | 1.26 | %
|                                                | Auto finance                                     |                |          | (4,998.8    | ) |             |      | 8.23        |   |   |          | (4,412.6  | ) |  |      | 7.00 |  
|                                                | MasterCard/Visa                                  |                |          | (9,071.0    | ) |             |      | 5.36        |   |   |          | (9,143.1  | ) |  |      | 5.48 |  
|                                                | Private label                                    |                |          | (4,073.4    | ) |             |      | 5.25        |   |   |          | (2,840.4  | ) |  |      | 3.75 |  
|                                                | Personal non-credit card                         |                |          | (4,448.8    | ) |             |      | 10.86       |   |   |          | (3,981.6  | ) |  |      | 9.46 |  
|                                                |                                                  |                |          |             |   |             |      |             |   |   |          |           |   |  |      |     
|                                                | Total receivables serviced with limited recourse |                |          | (22,863.9   | ) |             |      | 7.00        |   |   |          | (20,949.8 | ) |  |      | 6.21 |  
|                                                |                                                  |                |          |             |   |             |      |             |   |   |          |           |   |  |      |     
|Owned consumer receivables                      |                                                  | $              | 79,740.5 |             |   |             | 4.22 | %           |   | $ | 70,677.7 |           |   |  | 4.10 | %   
|                                                |                                                  |                |          |             |   |             |      |             |   |   |          |           |   |  |      |     



---



|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Includes our liquidating legacy first and reverse
    mortgage portfolios.

6.     Acquired
Intangibles

Acquired intangibles consisted of the following:

|                                                             |  |               |         |              |  |          |       |  |  |   |         | 
|------------------------------------------------------------ |  | ------------- | ------- | ------------ |  | -------- | ----- |  |  | - | ------- | 
|                                                             |  |               |         | Accumulated  |  | Carrying
|                                                             |  | Gross         |         | Amortization |  | Value   
|                                                             |  |               |         |              |  |         
|                                                             |  |              
|                                                             |  | (In millions)
|December 31, 2003                                            |  |               |         |              |  |          |       |  |  |   |         | 
|Purchased credit card relationships and related
    programs |  | $             | 1,272.0 |              |  | $        | 121.0 |  |  | $ | 1,151.0 | 
|Retail services merchant relationships                       |  |               | 270.1   |              |  |          | 41.1  |  |  |   | 229.0   | 
|Other loan related relationships                             |  |               | 326.1   |              |  |          | 33.8  |  |  |   | 292.3   | 
|Trade names                                                  |  |               | 700.0   |              |  |          |      |  |  |   | 700.0   | 
|Technology, customer lists and other contracts               |  |               | 281.0   |              |  |          | 26.0  |  |  |   | 255.0   | 
|                                                             |  |               |         |              |  |          |       |  |  |   |         | 
|Acquired intangibles                                         |  | $             | 2,849.2 |              |  | $        | 221.9 |  |  | $ | 2,627.3 | 
|                                                             |  |               |         |              |  |          |       |  |  |   |         | 
|December 31, 2002                                            |  |               |         |              |  |          |       |  |  |   |         | 
|Purchased credit card relationships                          |  | $             | 1,027.3 |              |  | $        | 659.5 |  |  | $ | 367.8   | 
|Other intangibles                                            |  |               | 26.5    |              |  |          | 7.9   |  |  |   | 18.6    | 
|                                                             |  |               |         |              |  |          |       |  |  |   |         | 
|Acquired intangibles                                         |  | $             | 1,053.8 |              |  | $        | 667.4 |  |  | $ | 386.4   | 
|                                                             |  |               |         |              |  |          |       |  |  |   |         | 

Weighted-average amortization periods for our
acquired intangibles as of December 31, 2003 were as
follows:

|                                                             |  |             |     | 
|------------------------------------------------------------ |  | ----------- | --- | 
|                                                             |  | (In months)
|Purchased credit card relationships and related
    programs |  |             | 75  | 
|Retail services merchant relationships                       |  |             | 60  | 
|Other loan related relationships                             |  |             | 110 | 
|Technology, customer lists and other contracts               |  |             | 61  | 
|                                                             |  |             |     | 
|Acquired intangibles                                         |  |             | 74  | 
|                                                             |  |             |     | 

Acquired intangible amortization expense totaled
$221.9 million in the period March 29 through
December 31, 2003, $12.3 million in the period
January 1 through March 28, 2003, $57.8 million
in 2002 and $99.0 million in 2001.

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

|                        |  |               |       | 
|----------------------- |  | ------------- | ----- | 
|Year Ending December 31 |  |              
|                        |  | (In millions)
|2004                    |  | $             | 318.8 | 
|2005                    |  |               | 298.1 | 
|2006                    |  |               | 290.7 | 
|2007                    |  |               | 273.0 | 
|2008                    |  |               | 200.9 | 

7.   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. Completion of the transitional goodwill
impairment test in 2002 resulted in none of our goodwill being
impaired.

As a result of push-down accounting, goodwill of
approximately $2.1 billion was recorded upon completion of
HSBCs acquisition of Household. This replaced
$1.1 billion of goodwill related to previous acquisitions
that was recorded prior to the merger. Goodwill established as a
result of the merger has not been allocated to our Consumer
segment, which is consistent with managements view of our
reportable segment results.

Beginning January 1, 2002, goodwill is
reviewed for impairment annually using discounted cash flows but
impairment may be reviewed earlier if circumstances indicate
that the carrying amount may not be recoverable. We consider
significant and long-term changes in industry and economic
conditions to be our primary indicator of potential impairment.
Our goodwill was not impaired prior to Households merger
with HSBC on March 28, 2003. Consistent with business
combination guidance, our goodwill will not be tested again for
impairment until 2004 as no circumstances indicating impairment
have arisen subsequent to the merger. For purposes of conducting
impairment testing, our goodwill will be allocated to our
operating units in 2004.

The following table discloses the impact of
goodwill amortization on net income for the periods indicated.

|                                     |  |               |         |           |  |                        |       |      |  |   |         |  |  |   |         | 
|------------------------------------ |  | ------------- | ------- | --------- |  | ---------------------- | ----- | ---- |  | - | ------- |  |  | - | ------- | 
|                                     |  | March 29      |         | January 1 |  |                       
|                                     |  | through       |         | through   |  | Year Ended December 31
|                                     |  | December 31,  |         | March 28, |  |                       
|                                     |  | 2003          |         | 2003      |  | 2002                   |       | 2001
|                                     |  |               |         |           |  |                        |       |     
|                                     |  |              
|                                     |  | (In millions)
|Reported net income                  |  | $             | 1,449.4 |           |  | $                      | 460.7 |      |  | $ | 1,636.5 |  |  | $ | 1,727.9 | 
|Add back: Goodwill amortization, net |  |               |        |           |  |                        |      |      |  |   |        |  |  |   | 46.1    | 
|                                     |  |               |         |           |  |                        |       |      |  |   |         |  |  |   |         | 
|Adjusted net income                  |  | $             | 1,449.4 |           |  | $                      | 460.7 |      |  | $ | 1,636.5 |  |  | $ | 1,774.0 | 
|                                     |  |               |         |           |  |                        |       |      |  |   |         |  |  |   |         | 

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8.     Properties and
Equipment, Net

|                                          |  |                |       |             |  |               |         |  |  |  |         | 
|----------------------------------------- |  | -------------- | ----- | ----------- |  | ------------- | ------- |  |  |  | ------- | 
|                                          |  |                |       |            
|                                          |  | At December 31 |       |            
|                                          |  |                |       | Depreciable
|                                          |  | 2003           |       | 2002        |  | Life in Years
|                                          |  |                |       |             |  |              
|                                          |  |               
|                                          |  | (In millions) 
|Land                                      |  | $              | 9.1   |             |  | $             | 9.2     |  |  |  |        | 
|Buildings and improvements                |  |                | 211.6 |             |  |               | 514.6   |  |  |  | 10  40 | 
|Furniture and equipment                   |  |                | 250.3 |             |  |               | 844.0   |  |  |  | 3  10  | 
|                                          |  |                |       |             |  |               |         |  |  |  |         | 
|Total                                     |  |                | 471.0 |             |  |               | 1,367.8 |  |  |  |         | 
|Accumulated depreciation and amortization |  |                | 79.4  |             |  |               | 964.7   |  |  |  |         | 
|                                          |  |                |       |             |  |               |         |  |  |  |         | 
|Properties and equipment, net             |  | $              | 391.6 |             |  | $             | 403.1   |  |  |  |         | 
|                                          |  |                |       |             |  |               |         |  |  |  |         | 

As a result of Households merger with HSBC,
the amortized cost of our property and equipment was adjusted to
fair market value and accumulated depreciation and amortization
on a predecessor basis was eliminated at the time of
the merger.

Depreciation and amortization expense totaled
$79.4 million in the period March 29 through
December 31, 2003, $26.0 million in the period
January 1 through March 28, 2003, $112.9 million
in 2002 and $113.3 million in 2001.

9.     Commercial
Paper, Bank and Other Borrowings

|                                    |                  |                                             |         |            |   |       |       |     |   |   |          |     |  
|----------------------------------- | ---------------- | ------------------------------------------- | ------- | ---------- | - | ----- | ----- | --- | - | - | -------- | --- | -
|                                    |                  |                                             |         | Bank and   |   |      
|                                    |                  | Commercial                                  |         | Other      |   |      
|                                    |                  | Paper                                       |         | Borrowings |   | Total
|                                    |                  |                                             |         |            |   |      
|                                    |                  |                                            
|                                    |                  | (All dollar amounts are stated in millions)
|2003                                |                  |                                             |         |            |   |       |       |     |   |   |          |    
|Balance                             |                  | $                                           | 7,949.5 |            |   | $     | 34.3  |     |   | $ | 7,983.8  |    
|Highest aggregate month-end balance |                  |                                             |         |            |   |       |       |     |   |   | 8,821.6  |    
|Average borrowings                  |                  |                                             | 5,962.4 |            |   |       | 34.0  |     |   |   | 5,996.4  |    
|Weighted-average interest rate:     |                  |                                             |         |            |   |       |       |     |   |   |          |    
|                                    | At year-end      |                                             |         | 1.1        | % |       |       | 1.5 | % |   |          | 1.1 | %
|                                    | Paid during year |                                             |         | 1.2        |   |       |       | 1.6 |   |   |          | 1.2 |  
|2002                                |                  |                                             |         |            |   |       |       |     |   |   |          |    
|Balance                             |                  | $                                           | 4,108.2 |            |   | $     | 35.1  |     |   | $ | 4,143.3  |    
|Highest aggregate month-end balance |                  |                                             |         |            |   |       |       |     |   |   | 8,920.5  |    
|Average borrowings                  |                  |                                             | 5,615.9 |            |   |       | 89.6  |     |   |   | 5,705.5  |    
|Weighted-average interest rate:     |                  |                                             |         |            |   |       |       |     |   |   |          |    
|                                    | At year-end      |                                             |         | 1.7        | % |       |       | 1.7 | % |   |          | 1.7 | %
|                                    | Paid during year |                                             |         | 1.9        |   |       |       | 2.0 |   |   |          | 1.9 |  
|2001                                |                  |                                             |         |            |   |       |       |     |   |   |          |    
|Balance                             |                  | $                                           | 8,766.5 |            |   | $     | 308.1 |     |   | $ | 9,074.6  |    
|Highest aggregate month-end balance |                  |                                             |         |            |   |       |       |     |   |   | 11,560.6 |    
|Average borrowings                  |                  |                                             | 8,831.5 |            |   |       | 143.0 |     |   |   | 8,974.5  |    
|Weighted-average interest rate:     |                  |                                             |         |            |   |       |       |     |   |   |          |    
|                                    | At year-end      |                                             |         | 2.0        | % |       |       | 1.9 | % |   |          | 2.0 | %
|                                    | Paid during year |                                             |         | 4.1        |   |       |       | 3.5 |   |   |          | 4.1 |  

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Interest expense for commercial paper, bank and
other borrowings totaled $54.1 million in the period
March 29 through December 31, 2003, $17.4 million
in the period January 1 through March 28, 2003,
$110.8 million in 2002 and $363.9 million in 2001.

We maintain various bank credit agreements
primarily to support commercial paper borrowings. At
December 31, 2003, we had committed back-up bank lines of
credit of $10.1 billion, including $2.5 billion with
HSBC. At December 31, 2002 we had committed back-up lines
of credit of $10.1 billion, of which $400 million was
also available to Household. None of these back-up lines were
used in 2003 or 2002. Formal credit lines are reviewed annually
and expire at various dates through 2007. 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, 2003
totaled $7.6 million, including $1.6 million for the
HSBC lines.



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|10. | Senior and Senior Subordinated Debt (With
    Original Maturities Over One Year)

|                                               |                         |                                                                                 |                                  |      |         |         |          |   |          |         | 
|---------------------------------------------- | ----------------------- | ------------------------------------------------------------------------------- | -------------------------------- | ---- | ------- | ------- | -------- | - | -------- | ------- | 
|                                               |                         |                                                                                
|                                               |                         | At December 31                                                                 
|                                               |                         |                                                                                
|                                               |                         | 2003                                                                            |                                  | 2002
|                                               |                         |                                                                                 |                                  |     
|                                               |                         |                                                                                
|                                               |                         | (All dollar amounts are                                                        
|                                               |                         | stated in millions)                                                            
|Senior debt                                    |                         |                                                                                 |                                  |      |         |         |          |  
|                                               | Fixed rate:             |                                                                                 |                                  |      |         |         |          |   |         
|                                               |                         | 8.875% Adjustable Conversion-Rate Equity Security
    Units                     |                                  | $    | 519.1   |         |          | $ | 511.0    |        
|                                               |                         | Secured financings:                                                             |                                  |      |         |         |          |   |          |        
|                                               |                         |                                                                                 | 7.00% to 7.49%; due 2004 to 2005 |      |         | 79.4    |          |   |          | 120.1   | 
|                                               |                         |                                                                                 | 7.50% to 7.99%; due 2004 to 2005 |      |         | 16.0    |          |   |          | 24.2    | 
|                                               |                         |                                                                                 | 8.00% to 8.99%; due 2004 to 2005 |      |         | 17.4    |          |   |          | 26.3    | 
|                                               |                         | Other fixed rate senior debt:                                                   |                                  |      |         |         |          |   |          |        
|                                               |                         |                                                                                 | 2.15% to 3.99%; due 2004 to 2007 |      |         | 3,250.3 |          |   |          | 203.0   | 
|                                               |                         |                                                                                 | 4.00% to 4.99%; due 2004 to 2007 |      |         | 7,015.7 |          |   |          | 808.9   | 
|                                               |                         |                                                                                 | 5.00% to 5.49%; due 2004 to 2017 |      |         | 4,207.4 |          |   |          | 4,098.5 | 
|                                               |                         |                                                                                 | 5.50% to 5.99%; due 2004 to 2022 |      |         | 5,305.4 |          |   |          | 4,956.7 | 
|                                               |                         |                                                                                 | 6.00% to 6.49%; due 2004 to 2032 |      |         | 9,003.0 |          |   |          | 8,296.1 | 
|                                               |                         |                                                                                 | 6.50% to 6.99%; due 2004 to 2022 |      |         | 9,174.5 |          |   |          | 9,756.8 | 
|                                               |                         |                                                                                 | 7.00% to 7.49%; due 2004 to 2032 |      |         | 6,391.0 |          |   |          | 7,851.6 | 
|                                               |                         |                                                                                 | 7.50% to 7.99%; due 2004 to 2032 |      |         | 7,752.6 |          |   |          | 7,956.9 | 
|                                               |                         |                                                                                 | 8.00% to 9.25%; due 2004 to 2012 |      |         | 3,537.3 |          |   |          | 3,809.1 | 
|                                               | Variable interest rate: |                                                                                 |                                  |      |         |         |          |   |         
|                                               |                         | Secured financings  1.89% to 2.62%;
    due 2004 to 2009                       |                                  |      | 6,610.7 |         |          |   | 7,314.0  |        
|                                               |                         | Other variable interest rate senior
    debt  1.17% to 5.00%; due 2004 to 2018 |                                  |      | 8,503.5 |         |          |   | 14,612.7 |        
|Senior subordinated
    debt 4.56%, due 2005  |                         |                                                                                 | 170.0                            |      |         |         | 170.0    |  
|Purchase accounting fair value
    adjustments |                         |                                                                                 | 3,125.8                          |      |         |         |         |  
|Unamortized discount                           |                         |                                                                                 | (81.5                            | )    |         |         | (240.3   | )
|                                               |                         |                                                                                 |                                  |      |         |         |          |  
|Total senior and senior subordinated
    debt  |                         | $                                                                               | 74,597.6                         |      |         | $       | 70,275.6 |  
|                                               |                         |                                                                                 |                                  |      |         |         |          |  

Purchase accounting fair value adjustments
represent adjustments which have been pushed down to
record our senior and senior subordinated debt at fair value at
the merger date.

Senior and senior subordinated debt included
$6.7 billion of debt secured by $8.0 billion of real
estate secured receivables at December 31, 2003 and
$7.5 billion of debt secured by $8.5 billion of real
estate secured receivables at December 31, 2002.

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At December 31, 2003, senior and senior
subordinated debt included carrying value adjustments relating
to derivative financial instruments which decreased the debt
balance by $97.1 million and a foreign currency translation
adjustment relating to our foreign denominated debt which
increased the debt balance by $3.2 billion. 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.

Weighted-average interest rates were
4.9 percent at both December 31, 2003 (excluding
purchase accounting adjustments) and 2002. Interest expense for
senior and senior subordinated debt was $1.4 billion in the
period March 29 through December 31, 2003,
$765.0 million in the period January 1 through
March 28, 2003, $2.9 billion in 2002 and
$2.8 billion in 2001. 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 11,
Derivative Financial Instruments and Concentrations of
Credit Risk.

In 2002, we issued $542 million of
8.875 percent Adjustable Conversion-Rate Equity Security
Units. The Adjustable Conversion-Rate Equity Security Units each
consisted of an HFC senior unsecured note with a principal
amount of $25 and a contract to purchase, for $25, between
2.6041 and 3.1249 HSBC ordinary shares, depending on the market
value at the time, on February 15, 2006 or 2.6041 HSBC
ordinary shares if early settlement is elected by the holder.
The senior unsecured notes will mature on February 15, 2008.

Maturities of senior and senior subordinated debt
at December 31, 2003 were as follows:

|           |  |               |          | 
|---------- |  | ------------- | -------- | 
|           |  | (In millions)
|           |  |              
|2004       |  | $             | 11,965.7 | 
|2005       |  |               | 11,943.6 | 
|2006       |  |               | 8,234.0  | 
|2007       |  |               | 6,296.2  | 
|2008       |  |               | 9,751.3  | 
|Thereafter |  |               | 26,406.8 | 
|           |  |               |          | 
|Total      |  | $             | 74,597.6 | 
|           |  |               |          | 

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



|    |                                                                       
|--- | ----------------------------------------------------------------------
|11. | Derivative Financial Instruments and
    Concentrations of Credit Risk

In the normal course of business and in
connection with our asset/liability management program, we enter
into various transactions involving derivative financial
instruments. These instruments primarily are used to manage our
exposure to fluctuations in interest rates and currency exchange
rates. We do not serve as a 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. Historically, the Finance Committee of the Board of
Directors of Household had set acceptable limits for each of
these risks annually and reviewed the limits semiannually. As a
result of the active involvement and guidance provided by HSBC,
the Finance Committee was dissolved in the first quarter of
2004. In addition, the Household Asset Liability Committee
(ALCO) meets regularly to review risks and approve
appropriate risk management strategies within limits established
by Households Board of Directors and HSBC. 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

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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.

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

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

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

Counterparty credit risk is the possibility that
a loss may occur because the counterparty to a transaction fails
to perform according to the terms of the contract. We control
the counterparty credit (or repayment) risk in derivative
instruments through established credit approvals, risk control
limits and ongoing monitoring procedures. Our exposure to credit
risk for futures is limited as these contracts are traded on
organized exchanges. Each day, changes in futures contract
values are settled in cash. In contrast, swap agreements and
forward contracts have credit risk relating to the performance
of the counterparty. During the third quarter of 2003, we began
utilizing an affiliate, HSBC Bank USA, as the primary provider
of new derivative products. We have never suffered a loss due to
counterparty failure.

Going forward, it is expected that most of our
existing third party derivative contracts will be assigned to
HSBC Bank USA, making them our primary counterparty in
derivative transactions. Most swap agreements require that
payments be made to, or received from, the counterparty when the
fair value of the agreement reaches a certain level. Generally,
third-party swap counterparties provide collateral in the form
of cash which are recorded in our balance sheet as other assets
or derivative related liabilities and totaled $.4 billion
at December 31, 2003. Affiliate swap counterparties
generally provide collateral in the form of securities which are
not recorded on our balance sheet and totaled $.5 billion
at December 31, 2003. At December 31, 2003, we had
derivative contracts with a notional value of approximately
$64.6 billion, including $39.4 billion outstanding
with HSBC Bank USA. Derivative financial instruments are
generally expressed in terms of

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notional principal or contract amounts which are
much larger than the amounts potentially at risk for nonpayment
by counterparties.


Fair Value and Cash Flow
HedgesTo 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. Under the Financial
Accounting Standards Boards interpretations of SFAS
No. 133, the shortcut method of accounting was no longer
allowed for interest rate swaps which were outstanding at the
time of Households merger with HSBC. Prior to
December 31, 2003, we restructured our interest rate swap
portfolio to regain use of the shortcut method and to reduce the
potential volatility of future earnings. As of December 31,
2003, 85 percent of our swap portfolio (based on notional
amounts) were accounted for using the shortcut method. 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 gain of $81.6 million
($52.1 million after-tax) in the period March 29
through December 31, 2003, a gain of $2.3 million
($1.5 million after-tax) in the period January 1
through March 28, 2003, 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. The gain
for the period March 29 through December 31, 2003
includes $81.0 million ($51.7 million after-tax)
resulting from the discontinuation of the shortcut method of
accounting for interest rate swaps due to the merger. All of our
fair value hedges were associated with debt in 2003, 2002 and
2001. We recorded fair value adjustments for open fair value
hedges which increased the carrying value of our debt by
$84.2 million at December 31, 2003 and
$1.8 billion at December 31, 2002. Fair value
adjustments for open fair value hedges on a
predecessor basis are included in the purchase
accounting fair value adjustment to debt as a result of
push-down accounting effective March 29, 2003 when the
successor period began.

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. Gains
and (losses) on derivative instruments designated as cash flow
hedges (net of tax) are reported in accumulated other
comprehensive income and totaled a gain of $88.8 million at
December 31, 2003 and a loss of ($685.0) million at
December 31, 2002. Accumulated other comprehensive income
on a predecessor basis was eliminated as a result of
push-down accounting effective March 29, 2003 when the
successor period began. We expect $40.0 million
($25.4 million after-tax) of currently unrealized net gains
will be reclassified to earnings within one year, however, these
unrealized gains will be offset by increased 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 2003, 2002 and 2001.

At December 31, 2003, $2.9 billion of
derivative instruments, at fair value, were recorded in
derivative financial assets and $101.4 million in
derivative related liabilities. At December 31, 2002,
$1.8 billion of derivative instruments, at fair value, were
recorded in derivative financial assets and $90.6 million
in derivative related liabilities.

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Information related to deferred gains and losses
on terminated derivatives was as follows:

|                                                                                           |                                        |               |       |           |   |   |       |           |  
|------------------------------------------------------------------------------------------ | -------------------------------------- | ------------- | ----- | --------- | - | - | ----- | --------- | -
|                                                                                           |                                        | 2003          |       | 2002     
|                                                                                           |                                        |               |       |          
|                                                                                           |                                        |              
|                                                                                           |                                        | (In millions)
|Deferred gains                                                                             |                                        | $             | 133.9 |           |   | $ | 634.2 |          
|Deferred losses                                                                            |                                        |               | 315.2 |           |   |   | 53.5  |          
|Weighted-average amortization period:                                                      |                                        |               |       |           |   |   |       |          
|                                                                                           | Deferred gains                         |               |       | 6.1 years |   |   |       | 5.1 years |  
|                                                                                           | Deferred losses                        |               |       | 8.7       |   |   |       | 4.5       |  
|Increases (decreases) to carrying values
    resulting from net deferred gains and losses: |                                        |               |       |           |   |   |       |          
|                                                                                           | Senior and senior subordinated debt    |               | $     | (181.3    | ) |   | $     | 597.5     |  
|                                                                                           | Accumulated other comprehensive income |               |       |          |   |   |       | (16.8     | )

Amortization of net deferred gains (losses)
totaled $(7.6) million in the period March 29 through
December 31, 2003, $86.2 million in the period
January 1 through March 28, 2003, $145.6 million
in 2002 and $41.9 million in 2002.

Non-Qualifying Hedging Activities.We may also 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
$(4.8) million ($(3.0) million after-tax) in the
period March 29 through December 31, 2003,
$(1.3) million ($(.8) million after-tax) in the period
January 1 through March 28, 2003, $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
InstrumentsThe following table
summarizes derivative financial instrument activity:

|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |          |           |  
|------------------------------------------------- | ----------------------- | --------------------- | --------- | ------------------- | - | --------- | --------- | --------------------- | - | ----- | -------- | --------- | - | ---- | --------- | ------- | --------- | ----- | -------- | ------- | - | - | -------- | ---- | - | - | -------- | ----- | - | - | -------- | --- | - | - | --------- | -------- | --------- | -
|                                                  |                         |                       |           |                     |   |          
|                                                  |                         | Non-Exchange Traded   |           | Non-Exchange Traded |   |          
|                                                  |                         |                       |           |                     |   |          
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |          
|                                                  |                         | Interest Rate Futures |           |                     |   |           |           | Foreign Exchange Rate |   |       |          |          
|                                                  |                         | Contracts             |           |                     |   |           |           | Contracts             |   |       |          |          
|                                                  |                         |                       |           | Options             |   | Interest  |           | Currency              |   |       |          | Caps and  |   |     
|                                                  |                         | Purchased             |           | Sold                |   | Purchased |           | Rate Swaps            |   | Swaps |          | Purchased |   | Sold |           | Floors  |           | Total
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |      
|2003                                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2002                             |                         |                       |          |                     |   |           |          |                       |   | $     | 3,400.0  |           |   | $    | 42,682.3  |         |           | $     | 10,210.3 |         |   |   |         |      |   | $ | (193.1   | )     |   | $ | 7,194.2  |     |   | $ | 63,679.9  |         
|New contracts                                     |                         | $                     | 600.0     |                     |   | $         | (600.0    | )                     |   |       |         |           |   |      | 7,377.4   |         |           |       | 1,163.8  |         |   | $ | 2,613.6  |      |   |   | (2,005.2 | )     |   |   |         |     |   |   | 14,360.0  |         
|New contracts purchased from subsidiaries of HSBC |                         |                       |          |                     |   |           |          |                       |   |       | 3,385.0  |           |   |      | 25,311.9  |         |           |       | 10,399.3 |         |   |   | 2,661.3  |      |   |   | (53.1    | )     |   |   | 4,332.8  |     |   |   | 46,143.4  |         
|Matured or expired contracts                      |                         |                       |          |                     |   |           |          |                       |   |       | (4,404.0 | )         |   |      | (14,894.6 | )       |           |       | (1,468.3 | )       |   |   | (2,069.7 | )    |   |   | (1.1     | )     |   |   | (4,931.8 | )   |   |   | (27,767.3 | )       
|Terminated contracts                              |                         |                       |          |                     |   |           |          |                       |   |       | (481.0   | )         |   |      | (11,780.3 | )       |           |       | (116.7   | )       |   |   |         |      |   |   |         |       |   |   |         |     |   |   | (12,378.0 | )       
|In-substance maturities (1)                       |                         |                       | (600.0    | )                   |   |           | 600.0     |                       |   |       |         |           |   |      |          |         |           |       |         |         |   |   | (1,999.1 | )    |   |   | 1,999.1  |       |   |   |         |     |   |   | (5,198.2  | )       
|Assignment of contracts to subsidiaries of HSBC   |                         |                       |          |                     |   |           |          |                       |   |       |         |           |   |      | (9,043.2  | )       |           |       | (5,193.7 | )       |   |   |         |      |   |   |         |       |   |   |         |     |   |   | (14,236.9 | )       
|Loss of shortcut accounting(2):                   |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  |                         | Terminated contracts  |           |                     |  |           |           |                       |  |       |          |           |  |      |           |         | (26,310.1 | )     |          |         |  |   |          |      |  |   |          |       |  |   |          |     |  |   |           |          | (26,310.1 | )
|                                                  |                         | New contracts         |           |                     |  |           |           |                       |  |       |          |           |  |      |           |         | 26,310.1  |       |          |         |  |   |          |      |  |   |          |       |  |   |          |     |  |   |           |          | 26,310.1  |  
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2003                             |                         |                       |          |                     |   |           |          |                       |   | $     | 1,900.0  |           |   | $    | 39,653.5  |         |           | $     | 14,994.7 |         |   | $ | 1,206.1  |      |   | $ | (253.4   | )     |   | $ | 6,595.2  |     |   | $ | 64,602.9  |         
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Fair value, 2003(3):                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Fair value hedges       |                       |           |                    |   |           |           |                      |   |       |          |          |   |      | $         | 70.3    |           |       | $        | 14.2    |   |   | $        |     |   |   | $        | (11.0 | ) |   |          |    |   |   | $         | 73.5     |          
|                                                  | Cash flow hedges        |                       |           |                    |   |           |           |                      |   |       |          |          |   |      |           | (112.9  | )         |       |          | 2,837.1 |   |   |          | 40.9 |   |   |          |      |   |   |          |    |   |   |           | 2,765.1  |          
|                                                  | Non-hedging derivatives |                       |           |                    |   |           |           |                      |   |       |          |          |   |      |           | (.4     | )         |       |          |        |   |   |          |     |   |   |          |      |   |   |          |    |   |   |           | (.4      | )        
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Total                   |                       |           |                    |   |           |           |                      |   |       |          |          |   |      | $         | (43.0   | )         |       | $        | 2,851.3 |   |   | $        | 40.9 |   |   | $        | (11.0 | ) |   |          |    |   |   | $         | 2,838.2  |          
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|2002                                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2001                             |                         | $                     | 1,419.0   |                     |   | $         | (9,000.0  | )                     |   | $     | 2,000.0  |           |   | $    | 28,325.2  |         |           | $     | 6,730.8  |         |   | $ |         |      |   | $ | (174.5   | )     |   | $ | 2,989.9  |     |   | $ | 50,639.4  |         
|New contracts                                     |                         |                       | 23,113.0  |                     |   |           | (8,218.0  | )                     |   |       | 8,800.0  |           |   |      | 30,194.7  |         |           |       | 3,869.9  |         |   |   | 506.2    |      |   |   | (506.0   | )     |   |   | 6,161.6  |     |   |   | 81,369.4  |         
|Matured or expired contracts                      |                         |                       | (7,932.0  | )                   |   |           | 618.0     |                       |   |       | (3,400.0 | )         |   |      | (10,049.2 | )       |           |       | (343.9   | )       |   |   | (.1      | )    |   |   | (18.7    | )     |   |   | (1,949.1 | )   |   |   | (24,273.6 | )       
|Terminated contracts                              |                         |                       |          |                     |   |           |          |                       |   |       | (4,000.0 | )         |   |      | (5,788.4  | )       |           |       | (46.5    | )       |   |   |         |      |   |   |         |       |   |   | (8.2     | )   |   |   | (9,843.1  | )       
|In-substance maturities (1)                       |                         |                       | (16,600.0 | )                   |   |           | 16,600.0  |                       |   |       |         |           |   |      |          |         |           |       |         |         |   |   | (506.1   | )    |   |   | 506.1    |       |   |   |         |     |   |   | (34,212.2 | )       
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2002                             |                         | $                     |          |                     |   | $         |          |                       |   | $     | 3,400.0  |           |   | $    | 42,682.3  |         |           | $     | 10,210.3 |         |   | $ |         |      |   | $ | (193.1   | )     |   | $ | 7,194.2  |     |   | $ | 63,679.9  |         
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Fair value, 2002(3):                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Fair value hedges       |                       |           |                    |   |           |           |                      |   |       |          |          |   |      | $         | 1,802.3 |           |       | $        | (1.8    | ) |   |          |     |   |   |          |      |   |   |          |    |   |   | $         | 1,800.5  |          
|                                                  | Cash flow hedges        |                       |           |                    |   |           |           |                      |   |       |          |          |   |      |           | (451.1  | )         |       |          | 361.2   |   |   |          |     |   |   | $        | 1.9   |   |   |          |    |   |   |           | (91.8    | )        
|                                                  | Non-hedging derivatives |                       |           |                    |   |           |           |                      |   |       |          |          |   |      |           | .2      |           |       |          |        |   |   |          |     |   |   |          |      |   |   | $        | 5.5 |   |   |           | .2       |          
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Total                   |                       |           |                    |   |           |           |                      |   |       |          |          |   |      | $         | 1,351.4 |           |       | $        | 359.4   |   |   | $        |     |   |   | $        | (1.9  | ) |   | $        | 5.5 |   |   | $         | 1,708.9  |          
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|2001                                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2000                             |                         |                       |          |                     |   |           |          |                       |   |       |         |           |   | $    | 23,055.1  |         |           | $     | 5,301.5  |         |   |   |         |      |   | $ | (52.3    | )     |   | $ | 2,352.9  |     |   | $ | 30,761.8  |         
|New contracts                                     |                         | $                     | 36,615.0  |                     |   | $         | (22,706.0 | )                     |   | $     | 4,750.0  |           |   |      | 21,608.6  |         |           |       | 1,991.0  |         |   | $ | 273.0    |      |   |   | (447.5   | )     |   |   | 3,481.8  |     |   |   | 91,872.9  |         
|Matured or expired contracts                      |                         |                       | (21,790.0 | )                   |   |           | 300.0     |                       |   |       |         |           |   |      | (7,508.6  | )       |           |       | (396.1   | )       |   |   |         |      |   |   | 52.3     |       |   |   | (1,997.8 | )   |   |   | (32,044.8 | )       
|Terminated contracts                              |                         |                       |          |                     |   |           |          |                       |   |       | (2,750.0 | )         |   |      | (8,829.9  | )       |           |       | (165.6   | )       |   |   |         |      |   |   |         |       |   |   | (847.0   | )   |   |   | (12,592.5 | )       
|In-substance maturities (1)                       |                         |                       | (13,406.0 | )                   |   |           | 13,406.0  |                       |   |       |         |           |   |      |          |         |           |       |         |         |   |   | (273.0   | )    |   |   | 273.0    |       |   |   |         |     |   |   | (27,358.0 | )       
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Notional amount, 2001                             |                         | $                     | 1,419.0   |                     |   | $         | (9,000.0  | )                     |   | $     | 2,000.0  |           |   | $    | 28,325.2  |         |           | $     | 6,730.8  |         |   | $ |         |      |   | $ | (174.5   | )     |   | $ | 2,989.9  |     |   | $ | 50,639.4  |         
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|Fair value, 2001(3):                              |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Fair value hedges       |                       |           |                    |   |           |           |                      |   |       |          |          |   |      | $         | (162.2  | )         |       | $        | (.6     | ) |   |          |     |   |   |          |      |   |   |          |    |   |   | $         | (162.8   | )        
|                                                  | Cash flow hedges        |                       |           |                    |   |           |           |                      |   |       |          |          |   |      |           | (301.1  | )         |       |          | (964.8  | ) |   | $        |     |   |   | $        |      |   |   |          |    |   |   |           | (1,265.9 | )        
|                                                  | Non-hedging derivatives |                       | $         | .4                  |   |           | $         | (3.4                  | ) |       | $        | .4        |   |      |           |        |           |       |          |        |   |   |          |     |   |   |          | 2.8   |   |   | $        | (.2 | ) |   |           |         |          
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         
|                                                  | Total                   |                       | $         | .4                  |   |           | $         | (3.4                  | ) |       | $        | .4        |   |      | $         | (463.3  | )         |       | $        | (965.4  | ) |   | $        |     |   |   | $        | 2.8   |   |   | $        | (.2 | ) |   | $         | (1,428.7 | )        
|                                                  |                         |                       |           |                     |   |           |           |                       |   |       |          |           |   |      |           |         |           |       |          |         |   |   |          |      |   |   |          |       |   |   |          |     |   |   |           |         



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Under the Financial Accounting Standards
    Boards interpretations of SFAS No. 133, the shortcut
    method of accounting was no longer allowed for interest rate
    swaps which were outstanding at the time of the merger. During
    2003, we restructured our interest rate swap portfolio to regain
    use of the shortcut method and to reduce the potential
    volatility of future earnings.                                                                                                               
|   
|(3) | (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 12, 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, 2003. The critical terms
of the derivatives have been designed to match those of the
related asset or liability.

|                                                              |  |               |          |          |  |                |          |  |  |   |         | 
|------------------------------------------------------------- |  | ------------- | -------- | -------- |  | -------------- | -------- |  |  | - | ------- | 
|                                                              |  |               |          |          |  | Foreign       
|                                                              |  | Interest Rate |          | Currency |  | Exchange      
|                                                              |  | Swaps         |          | Swaps    |  | Rate Contracts
|                                                              |  |               |          |          |  |               
|                                                              |  |              
|                                                              |  | (In millions)
|Investment securities                                         |  | $             | 6.4      |          |  |                |         |  |  |   |        | 
|Commercial paper, bank and other borrowings                   |  |               |         |          |  |                |         |  |  | $ | 1,245.3 | 
|Advances to foreign affiliates                                |  |               |         |          |  |                |         |  |  |   | 214.2   | 
|Senior debt and senior subordinated debt                      |  |               | 39,647.1 |          |  | $              | 14,994.7 |  |  |   |        | 
|                                                              |  |               |          |          |  |                |          |  |  |   |         | 
|Total items hedged using derivative financial
    instruments |  | $             | 39,653.5 |          |  | $              | 14,994.7 |  |  | $ | 1,459.5 | 
|                                                              |  |               |          |          |  |                |          |  |  |   |         | 

The following table summarizes the maturities and
related weighted-average receive/pay rates of interest rate
swaps outstanding at December 31, 2003:

|                                               |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |          |  
|---------------------------------------------- | ----------------------------- | ------------------------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | ---- | ------- | ------- | - | ---------- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | -------- | -------- | - | - | -------- | -------- | -
|                                               |                               | 2004                                        |         | 2005    |   | 2006 |         | 2007    |   | 2008 |         | 2009    |   | Thereafter |         | Total  
|                                               |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |        
|                                               |                               |                                            
|                                               |                               | (All dollar amounts are stated in millions)
|Pay a fixed rate/receive a floating
    rate:  |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |         
|                                               | Notional value                |                                             | $       | 5,151.0 |   |      | $       | 4,103.0 |   |      | $       | 2,711.1 |   |            | $       | 1,857.4 |   |   | $       | 453.0   |   |   |         |        |   |   | $        | 326.7    |   |   | $        | 14,602.2 |  
|                                               | Weighted-average receive rate |                                             |         | 1.51    | % |      |         | 1.24    | % |      |         | 1.24    | % |            |         | 1.13    | % |   |         | 1.26    | % |   |         |        |   |   |          | 4.70     | % |   |          | 1.40     | %
|                                               | Weighted-average pay rate     |                                             |         | 2.81    | % |      |         | 2.11    | % |      |         | 3.38    | % |            |         | 2.81    | % |   |         | 3.94    | % |   |         |        |   |   |          | 5.46     | % |   |          | 2.82     | %
|Pay a floating rate/ receive a fixed
    rate: |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |         
|                                               | Notional value                |                                             | $       | 350.6   |   |      | $       | 133.0   |   |      | $       |        |   |            | $       | 2,386.7 |   |   | $       | 4,855.8 |   |   | $       | 1,458.4 |   |   | $        | 15,866.8 |   |   | $        | 25,051.3 |  
|                                               | Weighted-average receive rate |                                             |         | 1.19    | % |      |         | 1.59    | % |      |         |        |   |            |         | 2.93    | % |   |         | 3.46    | % |   |         | 3.81    | % |   |          | 4.82     | % |   |          | 4.25     | %
|                                               | Weighted-average pay rate     |                                             |         | 1.14    | % |      |         | 3.55    | % |      |         |        |   |            |         | 2.21    | % |   |         | 1.20    | % |   |         | 1.16    | % |   |          | 1.25     | % |   |          | 1.24     | %
|                                               |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |         
|Total notional value                           |                               | $                                           | 5,501.6 |         |   | $    | 4,236.0 |         |   | $    | 2,711.1 |         |   | $          | 4,244.1 |         |   | $ | 5,308.8 |         |   | $ | 1,458.4 |         |   | $ | 16,193.5 |          |   | $ | 39,653.5 |         
|                                               |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |         
|Total weighted-average rates on
    swaps      |                               |                                             |         |         |   |      |         |         |   |      |         |         |   |            |         |         |   |   |         |         |   |   |         |         |   |   |          |          |   |   |          |         
|                                               | Receive rate                  |                                             |         | 1.49    | % |      |         | 1.25    | % |      |         | 1.24    | % |            |         | 2.14    | % |   |         | 3.28    | % |   |         | 3.81    | % |   |          | 4.82     | % |   |          | 3.20     | %
|                                               | Pay rate                      |                                             |         | 2.71    | % |      |         | 2.16    | % |      |         | 3.38    | % |            |         | 1.91    | % |   |         | 1.44    | % |   |         | 1.16    | % |   |          | 1.34     | % |   |          | 1.82     | %

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 84 basis
points in 2003, decreased by 40 basis points in 2002 and
increased by 17 basis points in 2001.

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, 2003 and 2002. We lend nationwide and our
receivables are distributed as follows at December 31, 2003:

|                                                             |  |                  |    |                  |  |  |    |  
|------------------------------------------------------------ |  | ---------------- | -- | ---------------- |  |  | -- | -
|                                                             |  | Percent of Total |    | Percent of Total
|                                                             |  | Owned            |    | Managed         
|State/ Region                                                |  | Receivables      |    | Receivables     
|                                                             |  |                  |    |                 
|California                                                   |  |                  | 14 | %                |  |  | 14 | %
|Midwest (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH,
    SD, WI) |  |                  | 22 |                  |  |  | 23 |  
|Southeast (AL, FL, GA, KY, MS, NC, SC, TN)                   |  |                  | 20 |                  |  |  | 19 |  
|Middle Atlantic (DE, DC, MD, NJ, PA, VA, WV)                 |  |                  | 15 |                  |  |  | 15 |  
|Southwest (AZ, AR, LA, NM, OK, TX)                           |  |                  | 10 |                  |  |  | 11 |  
|Northeast (CT, ME, MA, NH, NY, RI, VT)                       |  |                  | 10 |                  |  |  | 10 |  
|West (AK, CO, HI, ID, MT, NV, OR, UT, WA, WY)                |  |                  | 9  |                  |  |  | 8  |  

12.     Fair Value of
Financial Instruments

In accordance with the guidelines for accounting
for business combinations, the purchase price paid by HSBC plus
related purchase accounting adjustments have been
pushed-down and recorded in our financial statements
for the period subsequent to March 28, 2003. This has
resulted in a new basis of accounting reflecting the fair market
value of our assets and liabilities for the
successor period beginning March 29, 2003. We
have estimated the fair value of our financial instruments in
accordance with SFAS No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS
No. 107). Fair value estimates, methods and
assumptions set forth below for our financial instruments are
made solely to comply with the requirements of SFAS No. 107
and should be read in conjunction with the financial statements
and notes in this Annual Report.

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

As required under generally accepted accounting
principles, a number of other assets recorded on the balance
sheets (such as acquired credit card relationships, 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:

|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|------------------------------------------- |  | -------------- | --------- | ---------- |  | ---------- | --------- | -------- |  | ---------- | -------- | ---------- |  | - | --------- | - |  | - | --------- | - |  | - | -------- | -
|                                            |  |               
|                                            |  | At December 31
|                                            |  |               
|                                            |  |                |           |           
|                                            |  | 2003           |           | 2002      
|                                            |  |                |           |           
|                                            |  | Carrying       |           | Estimated  |  |            |           | Carrying |  | Estimated  |          |           
|                                            |  | Value          |           | Fair Value |  | Difference |           | Value    |  | Fair Value |          | Difference
|                                            |  |                |           |            |  |            |           |          |  |            |          |           
|                                            |  |               
|                                            |  | (In millions) 
|Assets:                                     |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Cash                                        |  | $              | 395.0     |            |  | $          | 395.0     |          |  |            |         |            |  | $ | 667.9     |   |  | $ | 667.9     |   |  |   |         |  
|Investment securities                       |  |                | 10,545.0  |            |  |            | 10,545.0  |          |  |            |         |            |  |   | 6,707.6   |   |  |   | 6,707.6   |   |  |   |         |  
|Receivables                                 |  |                | 81,239.1  |            |  |            | 81,641.7  |          |  | $          | 402.6    |            |  |   | 74,828.4  |   |  |   | 77,176.9  |   |  | $ | 2,348.5  |  
|Derivative financial assets                 |  |                | 2,939.7   |            |  |            | 2,939.7   |          |  |            |         |            |  |   | 1,805.0   |   |  |   | 1,805.0   |   |  |   |         |  
|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Total assets                                |  |                | 95,118.8  |            |  |            | 95,521.4  |          |  | $          | 402.6    |            |  |   | 84,008.9  |   |  |   | 86,357.4  |   |  |   | 2,348.5  |  
|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Liabilities:                                |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Due to affiliates                           |  |                | (2,107.7  | )          |  |            | (2,112.0  | )        |  |            | (4.3     | )          |  |   | (86.9     | ) |  |   | (86.9     | ) |  |   |         |  
|Commercial paper, bank and other borrowings |  |                | (7,983.8  | )          |  |            | (7,983.8  | )        |  |            |         |            |  |   | (4,143.3  | ) |  |   | (4,143.3  | ) |  |   |         |  
|Senior and senior subordinated debt         |  |                | (74,597.6 | )          |  |            | (75,607.4 | )        |  |            | (1,009.8 | )          |  |   | (70,275.6 | ) |  |   | (71,952.4 | ) |  |   | (1,676.8 | )
|Insurance policy and claim reserves         |  |                | (1,127.0  | )          |  |            | (1,123.7  | )        |  |            | 3.3      |            |  |   | (890.9    | ) |  |   | (1,212.3  | ) |  |   | (321.4   | )
|Derivative financial liabilities            |  |                | (101.4    | )          |  |            | (101.4    | )        |  |            |         |            |  |   | (90.6     | ) |  |   | (90.6     | ) |  |   |         |  
|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Total liabilities                           |  |                | (85,917.5 | )          |  |            | (86,928.3 | )        |  |            | (1,010.8 | )          |  |   | (75,487.3 | ) |  |   | (77,485.5 | ) |  |   | (1,998.2 | )
|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  
|Total                                       |  | $              | 9,201.3   |            |  | $          | 8,593.1   |          |  | $          | (608.2   | )          |  | $ | 8,521.6   |   |  | $ | 8,871.9   |   |  | $ | 350.3    |  
|                                            |  |                |           |            |  |            |           |          |  |            |          |            |  |   |           |   |  |   |           |   |  |   |          |  

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.

Due to Affiliates:The estimated fair value of our 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.

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.

Senior and Senior Subordinated Debt:The estimated fair value of our 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.

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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, 2003 and 2002. 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 11, Derivative Financial Instruments and
Concentrations of Credit Risk, for additional discussion
of the nature of these items.



|    |       
|--- | ------
|13. | Leases

We lease certain offices, buildings and equipment
for periods which generally do not exceed 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 $95.7 million in
the period March 29 through December 31, 2003,
$31.5 million in the period January 1 through
March 28, 2003, $116.8 million in 2002 and
$107.7 million in 2001.

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:

|                              |  |               |       |          |  |     |       |  |  |   |       | 
|----------------------------- |  | ------------- | ----- | -------- |  | --- | ----- |  |  | - | ----- | 
|                              |  | Minimum       |       | Minimum  |  |    
|                              |  | Rental        |       | Sublease |  |    
|Year Ending December 31       |  | Payments      |       | Income   |  | Net
|                              |  |               |       |          |  |    
|                              |  |              
|                              |  | (In millions)
|2004                          |  | $             | 149.7 |          |  | $   | 22.7  |  |  | $ | 127.0 | 
|2005                          |  |               | 116.3 |          |  |     | 22.1  |  |  |   | 94.2  | 
|2006                          |  |               | 106.1 |          |  |     | 21.8  |  |  |   | 84.3  | 
|2007                          |  |               | 76.3  |          |  |     | 21.8  |  |  |   | 54.5  | 
|2008                          |  |               | 62.9  |          |  |     | 21.8  |  |  |   | 41.1  | 
|Thereafter                    |  |               | 165.2 |          |  |     | 32.6  |  |  |   | 132.6 | 
|                              |  |               |       |          |  |     |       |  |  |   |       | 
|Net minimum lease commitments |  | $             | 676.5 |          |  | $   | 142.8 |  |  | $ | 533.7 | 
|                              |  |               |       |          |  |     |       |  |  |   |       | 



|    |                       
|--- | ----------------------
|14. | Employee Benefit Plans

Defined Benefit Plans.Substantially all of our employees are
covered by defined benefit pension plans which are sponsored by
Household. At December 31, 2003, plan assets included an
investment in 177,624 HSBC American depositary shares with a
fair value of $14.0 million.

The fair value of Households pension plan
assets exceeded the projected benefit obligations by
$53.2 million at December 31, 2003 and
$9.9 million at December 31, 2002. The assumptions
used in

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determining the benefit obligation of
Households domestic defined benefit plans at
December 31 were as follows:


|                           |  |      |      |      |  |      |      |   |  |  |     |  
|-------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | --- | -
|                           |  | 2003 |      | 2002 |  | 2001
|                           |  |      |      |      |  |     
|Discount rate              |  |      | 6.25 | %    |  |      | 6.75 | % |  |  | 7.5 | %
|Salary increase assumption |  |      | 3.75 |      |  |      | 4.0  |   |  |  | 4.0 |  

Postretirement Plans Other Than Pensions.We participate in Household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 has
instituted dollar limits on its payments under the plans to
control the cost of future medical benefits.

Household 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.
While no separate actuarial valuation has been made for our
participation in Households plans for postretirement
medical, dental and life benefits, our share of the liability
and expense has been estimated. Households accumulated
postretirement benefit obligation was $251.8 million at
December 31, 2003 and $243.6 million at
December 31, 2002. Our estimated share of Households
accrued postretirement benefit obligation was
$234.8 million at December 31, 2003 and
$157.7 million at December 31, 2002. In addition, our
estimated share of postretirement benefit expense recognized was
$14.5 million in 2003, $12.8 million in 2002 and
$14.5 million in 2001.

Households accumulated postretirement
benefit obligation was determined using the following
assumptions:

|                           |  |      |      |      |  |      |      |   |  |  |     |  
|-------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | --- | -
|                           |  | 2003 |      | 2002 |  | 2001
|                           |  |      |      |      |  |     
|Discount rate              |  |      | 6.25 | %    |  |      | 6.75 | % |  |  | 7.5 | %
|Salary increase assumption |  |      | 3.75 |      |  |      | 4.0  |   |  |  | 4.0 |  

A 12.8 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s service and
interest costs and the postretirement benefit obligation as
follows:

|                                                            |  |               |      |           |  |   |      |  
|----------------------------------------------------------- |  | ------------- | ---- | --------- |  | - | ---- | -
|                                                            |  | 1 Percent     |      | 1 Percent
|                                                            |  | Increase      |      | Decrease 
|                                                            |  |               |      |          
|                                                            |  |              
|                                                            |  | (In millions)
|Effect on total of service and interest cost
    components |  | $             | .5   |           |  | $ | (.4  | )
|Effect on postretirement benefit obligation                 |  |               | 11.0 |           |  |   | (9.6 | )

In December 2003, President Bush signed into law
a new Medicare bill that provides prescription drug coverage to
Medicare-eligible retirees. In its present form, our retiree
medical plans provide prescription drugs to certain
Medicare-eligible retirees. The results contained in these
financial statements do not anticipate any changes to our
retiree medical plans in light of the expected Medicare
legislation. We are currently studying the impact of the new
legislation and the resulting impact, if any, on our financial
statements. Specific authoritative guidance on the accounting
for the federal subsidy is pending and that guidance, when
issued, may require us to change previously reported information.

Supplemental Retirement Plan.Household 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.

Defined Contribution Plans.We also participate in various 401(k)
savings plans and profit sharing plans for employees meeting
certain eligibility requirements. Under the Household plan, each
participants

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contribution is matched by the company up to a
maximum of 6 percent of the participants
compensation. Prior to the merger with HSBC, company
contributions were in the form of Household common stock.
Subsequent to the merger, company contributions are in the form
of cash. Our expense for these plans was $42.0 million in
the period March 29 through December 31, 2003,
$18.8 million in the period January 1 through
March 28, 2003, $55.0 million in 2002 and
$46.5 million in 2001.


Stock Compensation PlansOur eligible employees may participate
in various stock compensation plans which are currently
sponsored by HSBC and were sponsored by Household prior to the
merger.

The HSBC Sharesave Contribution Plan (the
HSBC Sharesave Plan), which replaced the former
Household employee stock purchase plan, allows eligible
employees to enter into savings contracts to save up to
approximately $400 per month, with the option to use the
savings to acquire shares. There are currently two types of
plans offered which allow the participant to select saving
contracts of either a 3 or 5 year length. The options are
exercisable within six months following the third or fifth year,
respectively, of the commencement of the related savings
contract, at a 20 percent discount for options granted in
2003. Prior to the merger, Household also maintained an Employee
Stock Purchase Plan (the ESPP). The ESPP provided a
means for employees to purchase shares of Households
common stock at 85 percent of the lesser of its market
price at the beginning or end of a one-year subscription period.
The ESPP was terminated on March 7, 2003.

The HSBC Holdings Group Share Option Plan (the
Group Share Option Plan), which replaced the former
Household stock option plans, is a long-term incentive
compensation plan available to certain HFC employees. Grants are
usually made each year. Options granted to HFC employees in 2003
will vest 75 percent in year 3 with the remaining
25 percent vesting in year 4 and expire 10 years from
the date of grant. Options are granted at market value.
Beginning in 2004, options granted under the Group Share Option
Plan will be exercisable between the third and tenth
anniversaries of the date of grant subject to vesting
conditions. Prior to the merger with HSBC, certain Household
employees were eligible to participate in Households stock
option plan. Employee stock options generally vested equally
over four years and expired 10 years from the date of
grant. Upon completion of the merger with HSBC, all options
granted prior to November 2002 vested and became outstanding
options to purchase HSBC ordinary shares. Options granted under
the former Household plans subsequent to October 2002 were
converted into options to purchase ordinary shares of HSBC, but
did not vest under the change in control.

Subsequent to the merger, key employees are also
provided awards in the form of restricted shares
(RSRs) under HSBCs Restricted Share Plan.
Awards to HFC employees in 2003 generally vest over a 3 or
5 year period and do not require the achievement of
performance targets. Beginning in 2004, awards granted under
HSBCs Restricted Share Plan will vest over five years and
may require the achievement of certain performance targets.
Prior to the merger, Households executive compensation
plans also provided for issuance of RSRs which entitled an
employee to receive a stated number of shares of Household
common stock if the employee satisfied the conditions set by the
Compensation Committee for the award. Upon completion of the
merger with HSBC, all RSRs granted under the former Household
plan prior to November 2002 vested and became outstanding shares
of HSBC. RSRs granted under the former Household plan subsequent
to October 2002 were converted into rights to receive HSBC
ordinary shares. Upon vesting, the employee can elect to receive
either HSBC ordinary shares or ADRs.

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|    |             
|--- | ------------
|15. | Income Taxes

Total income taxes were allocated as follows:

|                                                                                 |                                                                                       |               |       |           |  |              |       |       |   |   |       |       |   |   |       |        |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------- | ----- | --------- |  | ------------ | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ------ | -
|                                                                                 |                                                                                       |               |       |           |  |             
|                                                                                 |                                                                                       | March 29      |       | January 1 |  | Year Ended  
|                                                                                 |                                                                                       | through       |       | through   |  | December 31,
|                                                                                 |                                                                                       | December 31,  |       | March 28, |  |             
|                                                                                 |                                                                                       | 2003          |       | 2003      |  | 2002         |       | 2001 
|                                                                                 |                                                                                       |               |       |           |  |              |       |      
|                                                                                 |                                                                                       |              
|                                                                                 |                                                                                       | (In millions)
|Provision for income taxes related to operations                                 |                                                                                       | $             | 767.1 |           |  | $            | 240.6 |       |   | $ | 850.0 |       |   | $ | 949.8 |       
|Income taxes related to adjustments included in
    common shareholders equity: |                                                                                       |               |       |           |  |              |       |       |   |   |       |       |   |   |       |       
|                                                                                 | Unrealized gains (losses) on investments and
    interest-only strip receivables, net |               |       | 96.6      |  |              |       | (16.5 | ) |   |       | 60.4  |   |   |       | 92.1   |  
|                                                                                 | Unrealized gains (losses) on cash flow hedging
    instruments                        |               |       | 47.8      |  |              |       | 63.4  |   |   |       | (23.3 | ) |   |       | (360.7 | )
|                                                                                 |                                                                                       |               |       |           |  |              |       |       |   |   |       |       |   |   |       |       
|Total                                                                            |                                                                                       | $             | 911.5 |           |  | $            | 287.5 |       |   | $ | 887.1 |       |   | $ | 681.2 |       
|                                                                                 |                                                                                       |               |       |           |  |              |       |       |   |   |       |       |   |   |       |       

Provisions for income taxes related to operations
were:

|                         |  |               |       |           |  |              |       |      |  |   |         |   |  |   |       | 
|------------------------ |  | ------------- | ----- | --------- |  | ------------ | ----- | ---- |  | - | ------- | - |  | - | ----- | 
|                         |  |               |       |           |  |             
|                         |  | March 29      |       | January 1 |  | Year Ended  
|                         |  | through       |       | through   |  | December 31,
|                         |  | December 31,  |       | March 28, |  |             
|                         |  | 2003          |       | 2003      |  | 2002         |       | 2001
|                         |  |               |       |           |  |              |       |     
|                         |  |              
|                         |  | (In millions)
|Current:                 |  |               |       |           |  |              |       |      |  |   |         |   |  |   |       | 
|United States            |  | $             | 853.6 |           |  | $            | 102.7 |      |  | $ | 1,010.9 |   |  | $ | 927.2 | 
|Foreign                  |  |               | 3.7   |           |  |              | .6    |      |  |   | 2.9     |   |  |   | 2.9   | 
|                         |  |               |       |           |  |              |       |      |  |   |         |   |  |   |       | 
|Total current            |  |               | 857.3 |           |  |              | 103.3 |      |  |   | 1,013.8 |   |  |   | 930.1 | 
|Deferred  United States |  |               | (90.2 | )         |  |              | 137.3 |      |  |   | (163.8  | ) |  |   | 19.7  | 
|                         |  |               |       |           |  |              |       |      |  |   |         |   |  |   |       | 
|Total income taxes       |  | $             | 767.1 |           |  | $            | 240.6 |      |  | $ | 850.0   |   |  | $ | 949.8 | 
|                         |  |               |       |           |  |              |       |      |  |   |         |   |  |   |       | 

Income before income taxes were:

|                                 |  |               |         |           |  |              |       |      |  |   |         |  |  |   |         | 
|-------------------------------- |  | ------------- | ------- | --------- |  | ------------ | ----- | ---- |  | - | ------- |  |  | - | ------- | 
|                                 |  |               |         |           |  |             
|                                 |  | March 29      |         | January 1 |  | Year Ended  
|                                 |  | through       |         | through   |  | December 31,
|                                 |  | December 31,  |         | March 28, |  |             
|                                 |  | 2003          |         | 2003      |  | 2002         |       | 2001
|                                 |  |               |         |           |  |              |       |     
|                                 |  |              
|                                 |  | (In millions)
|United States                    |  | $             | 2,205.9 |           |  | $            | 699.5 |      |  | $ | 2,479.2 |  |  | $ | 2,669.3 | 
|Foreign                          |  |               | 10.6    |           |  |              | 1.8   |      |  |   | 7.3     |  |  |   | 8.4     | 
|                                 |  |               |         |           |  |              |       |      |  |   |         |  |  |   |         | 
|Total income before income taxes |  | $             | 2,216.5 |           |  | $            | 701.3 |      |  | $ | 2,486.5 |  |  | $ | 2,677.7 | 
|                                 |  |               |         |           |  |              |       |      |  |   |         |  |  |   |         | 

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

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Effective tax rates are analyzed as follows:

|                                            |                                               |              |      |           |   |             |      |      |   |  |      |      |   |  |      |      |  
|------------------------------------------- | --------------------------------------------- | ------------ | ---- | --------- | - | ----------- | ---- | ---- | - |  | ---- | ---- | - |  | ---- | ---- | -
|                                            |                                               |              |      |           |   |            
|                                            |                                               | March 29     |      | January 1 |   | Year Ended 
|                                            |                                               | through      |      | through   |   | December 31
|                                            |                                               | December 31, |      | March 28, |   |            
|                                            |                                               | 2003         |      | 2003      |   | 2002        |      | 2001
|                                            |                                               |              |      |           |   |             |      |     
|Statutory federal income tax rate           |                                               |              | 35.0 | %         |   |             | 35.0 | %    |   |  | 35.0 | %    |   |  | 35.0 | %   
|Increase (decrease) in rate resulting from: |                                               |              |      |           |   |             |      |      |   |  |      |      |   |  |      |     
|                                            | State and local taxes, net of federal benefit |              |      | 1.6       |   |             |      | 1.6  |   |  |      | 2.5  |   |  |      | 2.8  |  
|                                            | Tax credits                                   |              |      | (2.8      | ) |             |      | (3.1 | ) |  |      | (3.4 | ) |  |      | (2.8 | )
|                                            | Other                                         |              |      | .8        |   |             |      | .8   |   |  |      | .1   |   |  |      | .5   |  
|                                            |                                               |              |      |           |   |             |      |      |   |  |      |      |   |  |      |     
|Effective tax rate                          |                                               |              | 34.6 | %         |   |             | 34.3 | %    |   |  | 34.2 | %    |   |  | 35.5 | %   
|                                            |                                               |              |      |           |   |             |      |      |   |  |      |      |   |  |      |     

Provision for U.S. income taxes had not been
made at December 31, 2003 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 million.

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

|                                       |  |                |         |      |  |   |         | 
|-------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                       |  |               
|                                       |  | At December 31
|                                       |  |               
|                                       |  | 2003           |         | 2002
|                                       |  |                |         |     
|                                       |  |               
|                                       |  | (In millions) 
|Deferred Tax Assets                    |  |                |         |      |  |   |         | 
|Credit loss reserves                   |  | $              | 1,985.0 |      |  | $ | 1,607.9 | 
|Debt                                   |  |                | 550.1   |      |  |   |        | 
|Market value adjustments               |  |                |        |      |  |   | 226.0   | 
|Settlement charge and related expenses |  |                | 14.1    |      |  |   | 186.6   | 
|Other                                  |  |                | 491.5   |      |  |   | 431.6   | 
|                                       |  |                |         |      |  |   |         | 
|Total deferred tax assets              |  | $              | 3,040.7 |      |  | $ | 2,452.1 | 
|                                       |  |                |         |      |  |   |         | 
|Deferred Tax Liabilities               |  |                |         |      |  |   |         | 
|Receivables sold                       |  | $              | 1,108.6 |      |  | $ | 1,016.4 | 
|Intangibles                            |  |                | 813.5   |      |  |   |        | 
|Fee income                             |  |                | 449.7   |      |  |   | 408.2   | 
|Receivables                            |  |                | 373.1   |      |  |   |        | 
|Leveraged lease transactions, net      |  |                | 191.8   |      |  |   | 372.5   | 
|Deferred loan origination costs        |  |                | 87.8    |      |  |   | 223.8   | 
|Market value adjustments               |  |                | 27.3    |      |  |   |        | 
|Other                                  |  |                | 186.8   |      |  |   | 217.6   | 
|                                       |  |                |         |      |  |   |         | 
|Total deferred tax liabilities         |  | $              | 3,238.6 |      |  | $ | 2,238.5 | 
|                                       |  |                |         |      |  |   |         | 
|Net deferred tax asset (liability)     |  | $              | (197.9  | )    |  | $ | 213.6   | 
|                                       |  |                |         |      |  |   |         | 



|    |                             
|--- | ----------------------------
|16. | Transactions with 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.

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In addition to funding received from HSBC and its
subsidiaries, we periodically advance funds to Household and
affiliates or receive amounts in excess of current requirements.
Interest rates (both the underlying benchmark rate and credit
spreads) on these advances are comparable to rates for third
party debt with similar maturities. The maturities of HSBC debt,
however, were generally shorter than those we would have issued
to third parties. In early 2004 we received regulatory approval
to extend the maturities of future debt issuances to a HSBC
subsidiary, which will replace shorter-term affiliate funding
issued in 2003. Amounts due to (from) affiliates consisted of
the following:

|                                      |  |                |          |      |  |   |        |  
|------------------------------------- |  | -------------- | -------- | ---- |  | - | ------ | -
|                                      |  |               
|                                      |  | At December 31
|                                      |  |               
|                                      |  | 2003           |          | 2002
|                                      |  |                |          |     
|                                      |  |               
|                                      |  | (In millions) 
|HSBC and subsidiaries                 |  | $              | 3,911.0  |      |  |   |       |  
|Parent company and other subsidiaries |  |                | (1,281.7 | )    |  | $ | (159.2 | )
|Household Global Funding, Inc.        |  |                | (527.6   | )    |  |   | 264.9  |  
|Household Bank, f.s.b.                |  |                |         |      |  |   | (18.8  | )
|                                      |  |                |          |      |  |   |        |  
|Due to affiliates                     |  | $              | 2,101.7  |      |  | $ | 86.9   |  
|                                      |  |                |          |      |  |   |        |  

Interest expense on amounts due (to) from
affiliates was as follows:

|                                                                      |  |               |       |           |  |              |      |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------- |  | ------------- | ----- | --------- |  | ------------ | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                      |  |               |       |           |  |             
|                                                                      |  | March 29      |       | January 1 |  | Year Ended  
|                                                                      |  | through       |       | through   |  | December 31,
|                                                                      |  | December 31,  |       | March 28, |  |             
|                                                                      |  | 2003          |       | 2003      |  | 2002         |      | 2001
|                                                                      |  |               |       |           |  |              |      |     
|                                                                      |  |              
|                                                                      |  | (In millions)
|HSBC and subsidiaries                                                 |  | $             | 30.1  |           |  |              |     |      |  |   |      |   |  |   |      |  
|Parent company and other subsidiaries                                 |  |               | (11.9 | )         |  | $            | (1.2 | )    |  | $ | (11.6 | ) |  | $ | (5.5  | )
|Household Global Funding, Inc.                                        |  |               | 1.9   |           |  |              | 3.4  |      |  |   | (1.4  | ) |  |   | (17.3 | )
|Household Bank, f.s.b.                                                |  |               |      |           |  |              |     |      |  |   | 25.4  |   |  |   | 171.4 |  
|                                                                      |  |               |       |           |  |              |      |      |  |   |       |   |  |   |       |  
|Net interest income (expense) on amounts due (to)
    from affiliates |  | $             | 20.1  |           |  | $            | 2.2  |      |  | $ | 12.4  |   |  | $ | 148.6 |  
|                                                                      |  |               |       |           |  |              |      |      |  |   |       |   |  |   |       |  

Transactions with HSBC and
subsidiariesDuring 2003, we
implemented a $2.5 billion revolving credit facility with
HSBC, none of which has been drawn.

During the third quarter of 2003, we began
utilizing an affiliate, HSBC Bank USA, as the primary provider
of new derivative products. At December 31, 2003, we had
derivative contracts with a notional value of approximately
$39.4 billion outstanding with this affiliate. Going
forward, it is expected that most of our existing third party
derivative contracts will be assigned to HSBC Bank USA making
them our primary counterparty in derivative transactions.

On December 31, 2003, we sold
$2.8 billion of real estate secured receivables from our
mortgage services business to HSBC Bank USA. We recorded a
pre-tax gain of $16.0 million on the sale. Under a separate
servicing agreement, we have agreed to service all real estate
secured receivables sold to HSBC Bank USA including all future
business they purchase from correspondents.

During the period March 29 through
December 31, 2003, we paid $26.8 million for various
fees and services, primarily related to funding, to subsidiaries
of HSBC. Included in this total were loan commitment fees, debt
issuance costs, and fees for banking services. Fees paid to HSBC
subsidiaries are consistent with amounts which would be paid to
third parties. In many cases, these fees were based on
third-party market quotes.

During the fourth quarter of 2003, we reached an
agreement with HSBC Bank USA whereby risk associated with HSBC
Bank USAs credit life and disability insurance policies
was transferred to us. Also during the fourth quarter of 2003,
our credit card services business entered into a credit card
servicing and processing agreement and our auto finance business
entered into a loan origination and servicing agreement with
subsidiaries of HSBC. Fees received pursuant to such agreements
were not significant.

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Transactions with parent
companyHousehold designated us, under
a written contractual arrangement, as the issuer of new GM
Card® accounts. In effect, Household licensed to us the GM
Card® 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
based on the number of GM Card® account relationships.
License fee expense is included in other operating expenses and
was $35.1 million in the period March 29 through
December 31, 2003, $11.7 million in the period
January 1 through March 28, 2003, $47.9 million
in 2002 and $52.2 million in 2001.

We were allocated costs incurred on our behalf by
Household for administrative expenses, including insurance,
credit administration, legal and other fees. These
administrative expenses were recorded in other operating
expenses and totaled approximately $26.8 million in the
period March 29 through December 31, 2003,
$12.5 million in the period January 1 through
March 28, 2003, $42.2 million in 2002 and
$64.8 million in 2001.

Transactions with Household Global Funding,
Inc.At December 31, 2003, we
guaranteed $2.4 billion of our United Kingdom
affiliates debt and $1.8 billion of our Canadian
affiliates debt. We receive a fee for providing these
guarantees.

Transactions with Household Bank,
f.s.b.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. Net interest income
on these sales totaled $.7 million in 2002 and
$17.4 million in 2001.

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 completed the
sale of substantially all of the assets and deposits of the
Thrift. Our purchases from the Thrift in 2002 were as follows:

|                                                                           |  |               |         | 
|-------------------------------------------------------------------------- |  | ------------- | ------- | 
|                                                                           |  | Year Ended   
|                                                                           |  | December 31, 
|                                                                           |  | 2002         
|                                                                           |  |              
|                                                                           |  | (In millions)
|Delinquent receivables                                                     |  | $             | 68.8    | 
|Receivables purchased in conjunction with
    disposition of Thrift assets |  |               | 1,065.5 | 
|Other receivable purchases                                                 |  |               | 1,966.4 | 
|                                                                           |  |               |         | 
|Total                                                                      |  | $             | 3,100.7 | 
|                                                                           |  |               |         | 

Prior to March 1, 2002, we also purchased
real estate secured and personal non-credit card receivables at
various stages of contractual delinquency from the Thrift.
Delinquent loan purchases totaled $68.8 million in 2002. We
also purchased $2.0 billion of non-delinquent real estate
secured, auto and personal non-credit card receivables from the
Thrift in 2002. A portion of the auto and personal non-credit
card receivables were subsequently securitized.

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
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 and $68.1 million in
2001.

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

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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.




|          |                                          
|--------- | -----------------------------------------
|17.     C | ommitments 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, 2003, our mortgage services
business had commitments with numerous correspondents to
purchase up to $1.8 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 13 for discussion of lease
commitments.

18.     Attorney
General Settlement

On October 11, 2002, Household 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 HFC
and Beneficial Corporation and their subsidiaries conducting
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, which became
effective on December 16, 2002. Pursuant to the Multi-State
Settlement Agreement, we funded a $484 million settlement
fund that was divided among the states (and 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. No
fines, penalties or punitive damages were assessed by the states
pursuant to the Multi-State Settlement Agreement.

In August 2003, notices of a claims procedure
were distributed to holders of approximately 591,000 accounts
identified as having potential claims. As of February 1,
2004, approximately 80% of customers had accepted funds in
settlement and had executed a release of all civil claims
against us relating to the specified consumer lending practices.
The bulk of the checks were mailed in December 2003. 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 of
$525.0 million ($333.2 million after-tax) during the
third quarter of 2002 related to the Multi-State Settlement
Agreement. The charge reflects the costs of this settlement
agreement and related matters and has been reflected in the
statement of income in total costs and expenses.

19.     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, auto finance, MasterCard and Visa,
private

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label 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 card loans 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 may
purchase loans of a similar nature from other lenders. 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 for our Consumer 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.

Income statement information included in the
table for the year ended December 31, 2003 combines
January 1 through March 28 2003 (the predecessor
period) and March 29 to December 31, 2003 (the
successor period) in order to present
combined financial results for the year. Fair value
adjustments related to purchase accounting and related
amortization have been allocated to Corporate, which is included
in the All Other caption within our segment
disclosure. As a result, managed and owned basis consolidated
totals for the year ended December 31, 2003 include
combined information from both the successor and
predecessor periods which impacts comparability to
prior periods.

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Reportable Segments  Managed
Basis

|                                         |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|---------------------------------------- |  | ------------- | --------- | ----- |  | ------ | -------- | ------------ |  | ------------ | --------- | -------------- |  | ------------ | -------- | ---- |  | - | --------- |  |  | - | --------- | ---- |  | - | --------- | 
|                                         |  |               |           |       |  |        |          |              |  | Managed      |           |                |  |             
|                                         |  |               |           |       |  |        |          | Adjustments/ |  | Basis        |           |                |  | Owned Basis 
|                                         |  |               |           | All   |  |        |          | Reconciling  |  | Consolidated |           | Securitization |  | Consolidated
|                                         |  | Consumer      |           | Other |  | Totals |          | Items        |  | Totals       |           | Adjustments    |  | Totals      
|                                         |  |               |           |       |  |        |          |              |  |              |           |                |  |             
|                                         |  |              
|                                         |  | (In millions)
|For the Year Ended December 31,
    2003 |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|Net interest margin                      |  | $             | 9,365.1   |       |  | $      | 505.2    |              |  | $            | 9,870.3   |                |  |              |         |      |  | $ | 9,870.3   |  |  | $ | (2,710.5  | )(6) |  | $ | 7,159.8   | 
|Fee income                               |  |               | 1,798.2   |       |  |        | 7.6      |              |  |              | 1,805.8   |                |  |              |         |      |  |   | 1,805.8   |  |  |   | (715.2    | )(6) |  |   | 1,090.6   | 
|Other revenues, excluding fee income     |  |               | 713.4     |       |  |        | 752.2    |              |  |              | 1,465.6   |                |  | $            | (147.2   | )(2) |  |   | 1,318.4   |  |  |   | 1,248.3   | (6)  |  |   | 2,566.7   | 
|Intersegment revenues                    |  |               | 137.3     |       |  |        | 9.9      |              |  |              | 147.2     |                |  |              | (147.2   | )(2) |  |   |          |  |  |   |          |      |  |   |          | 
|Provision for credit losses              |  |               | 5,872.8   |       |  |        | 3.4      |              |  |              | 5,876.2   |                |  |              | 6.8      | (3)  |  |   | 5,883.0   |  |  |   | (2,177.4  | )(6) |  |   | 3,705.6   | 
|Depreciation and amortization            |  |               | 67.9      |       |  |        | 294.2    |              |  |              | 362.1     |                |  |              |         |      |  |   | 362.1     |  |  |   |          |      |  |   | 362.1     | 
|Income tax expense (benefit)             |  |               | 922.9     |       |  |        | 140.5    |              |  |              | 1,063.4   |                |  |              | (55.7    | )(4) |  |   | 1,007.7   |  |  |   |          |      |  |   | 1,007.7   | 
|Net income                               |  |               | 1,570.8   |       |  |        | 437.6    |              |  |              | 2,008.4   |                |  |              | (98.3    | )    |  |   | 1,910.1   |  |  |   |          |      |  |   | 1,910.1   | 
|Receivables                              |  |               | 106,566.0 |       |  |        | 916.4    |              |  |              | 107,482.4 |                |  |              |         |      |  |   | 107,482.4 |  |  |   | (25,078.2 | )(7) |  |   | 82,404.2  | 
|Assets                                   |  |               | 112,181.3 |       |  |        | 23,948.1 |              |  |              | 136,129.4 |                |  |              | (8,091.3 | )(5) |  |   | 128,038.1 |  |  |   | (25,078.2 | )(7) |  |   | 102,959.9 | 
|Expenditures for long- lived assets(1)   |  |               | 33.5      |       |  |        | 82.8     |              |  |              | 116.3     |                |  |              |         |      |  |   | 116.3     |  |  |   |          |      |  |   | 116.3     | 
|                                         |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|For the Year Ended December 31,
    2002 |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|Net interest margin                      |  | $             | 8,533.4   |       |  | $      | 159.6    |              |  | $            | 8,693.0   |                |  |              |         |      |  | $ | 8,693.0   |  |  | $ | (2,522.4  | )(6) |  | $ | 6,170.6   | 
|Fee income                               |  |               | 1,532.1   |       |  |        | 6.1      |              |  |              | 1,538.2   |                |  |              |         |      |  |   | 1,538.2   |  |  |   | (669.4    | )(6) |  |   | 868.8     | 
|Other revenues, excluding fee income     |  |               | 1,061.9   |       |  |        | 858.1    |              |  |              | 1,920.0   |                |  | $            | (181.5   | )(2) |  |   | 1,738.5   |  |  |   | 1,353.0   | (6)  |  |   | 3,091.5   | 
|Intersegment revenues                    |  |               | 179.3     |       |  |        | 2.2      |              |  |              | 181.5     |                |  |              | (181.5   | )(2) |  |   |          |  |  |   |          |      |  |   |          | 
|Provision for credit losses              |  |               | 5,238.4   |       |  |        | 81.5     |              |  |              | 5,319.9   |                |  |              | (17.4    | )(3) |  |   | 5,302.5   |  |  |   | (1,838.8  | )(6) |  |   | 3,463.7   | 
|Depreciation and amortization            |  |               | 79.8      |       |  |        | 113.5    |              |  |              | 193.3     |                |  |              |         |      |  |   | 193.3     |  |  |   |          |      |  |   | 193.3     | 
|Income tax expense (benefit)             |  |               | 840.8     |       |  |        | 69.2     |              |  |              | 910.0     |                |  |              | (60.0    | )(4) |  |   | 850.0     |  |  |   |          |      |  |   | 850.0     | 
|Settlement charge and related expenses   |  |               | 525.0     |       |  |        |         |              |  |              | 525.0     |                |  |              |         |      |  |   | 525.0     |  |  |   |          |      |  |   | 525.0     | 
|Net income                               |  |               | 1,380.1   |       |  |        | 360.6    |              |  |              | 1,740.7   |                |  |              | (104.2   | )    |  |   | 1,636.5   |  |  |   |          |      |  |   | 1,636.5   | 
|Operating net income(8)                  |  |               | 1,713.3   |       |  |        | 360.6    |              |  |              | 2,073.9   |                |  |              | (104.2   | )    |  |   | 1,969.7   |  |  |   |          |      |  |   | 1,969.7   | 
|Receivables                              |  |               | 97,421.7  |       |  |        | 1,210.2  |              |  |              | 98,631.9  |                |  |              |         |      |  |   | 98,631.9  |  |  |   | (23,422.2 | )(7) |  |   | 75,209.7  | 
|Assets                                   |  |               | 103,563.2 |       |  |        | 16,424.8 |              |  |              | 119,988.0 |                |  |              | (8,192.9 | )(5) |  |   | 111,795.1 |  |  |   | (23,422.2 | )(7) |  |   | 88,372.9  | 
|Expenditures for long- lived assets(1)   |  |               | 31.1      |       |  |        | 95.7     |              |  |              | 126.8     |                |  |              |         |      |  |   | 126.8     |  |  |   |          |      |  |   | 126.8     | 
|                                         |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|For the Year Ended December 31,
    2001 |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 
|Net interest margin                      |  | $             | 7,088.4   |       |  | $      | 102.2    |              |  | $            | 7,190.6   |                |  |              |         |      |  | $ | 7,190.6   |  |  | $ | (1,944.1  | )(6) |  | $ | 5,246.5   | 
|Fee income                               |  |               | 1,459.8   |       |  |        | 6.7      |              |  |              | 1,466.5   |                |  |              |         |      |  |   | 1,466.5   |  |  |   | (638.8    | )(6) |  |   | 827.7     | 
|Other revenues, excluding fee income     |  |               | 510.9     |       |  |        | 788.1    |              |  |              | 1,299.0   |                |  | $            | (230.3   | )(2) |  |   | 1,068.7   |  |  |   | 1,519.8   | (6)  |  |   | 2,588.5   | 
|Intersegment revenues                    |  |               | 228.6     |       |  |        | 1.7      |              |  |              | 230.3     |                |  |              | (230.3   | )(2) |  |   |          |  |  |   |          |      |  |   |          | 
|Provision for credit losses              |  |               | 3,639.2   |       |  |        | 25.3     |              |  |              | 3,664.5   |                |  |              | 5.0      | (3)  |  |   | 3,669.5   |  |  |   | (1,063.1  | )(6) |  |   | 2,606.4   | 
|Depreciation and amortization            |  |               | 181.5     |       |  |        | 106.6    |              |  |              | 288.1     |                |  |              |         |      |  |   | 288.1     |  |  |   |          |      |  |   | 288.1     | 
|Income tax expense (benefit)             |  |               | 972.6     |       |  |        | 63.4     |              |  |              | 1,036.0   |                |  |              | (86.2    | )(4) |  |   | 949.8     |  |  |   |          |      |  |   | 949.8     | 
|Net income                               |  |               | 1,533.8   |       |  |        | 343.2    |              |  |              | 1,877.0   |                |  |              | (149.1   | )    |  |   | 1,727.9   |  |  |   |          |      |  |   | 1,727.9   | 
|Receivables                              |  |               | 86,552.5  |       |  |        | 548.4    |              |  |              | 87,100.9  |                |  |              |         |      |  |   | 87,100.9  |  |  |   | (19,759.3 | )(7) |  |   | 67,341.6  | 
|Assets                                   |  |               | 90,109.1  |       |  |        | 12,512.7 |              |  |              | 102,621.8 |                |  |              | (8,333.0 | )(5) |  |   | 94,288.8  |  |  |   | (19,759.3 | )(7) |  |   | 74,529.5  | 
|Expenditures for long- lived assets(1)   |  |               | 20.0      |       |  |        | 115.7    |              |  |              | 135.7     |                |  |              |         |      |  |   | 135.7     |  |  |   |          |      |  |   | 135.7     | 
|                                         |  |               |           |       |  |        |          |              |  |              |           |                |  |              |          |      |  |   |           |  |  |   |           |      |  |   |           | 



---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes goodwill associated with purchase
    business combinations other than the HSBC merger and capital
    expenditures.                                                                              
|(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) | Represents receivables serviced with limited
    recourse.                                                                                                                                                 
|(8) | 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.

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Managed Receivables

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

|                         |  |                |           |      |  |      |          |  |  |   |          | 
|------------------------ |  | -------------- | --------- | ---- |  | ---- | -------- |  |  | - | -------- | 
|                         |  |               
|                         |  | At December 31
|                         |  |               
|                         |  | 2003           |           | 2002 |  | 2001
|                         |  |                |           |      |  |     
|                         |  |               
|                         |  | (In millions) 
|Real estate secured      |  | $              | 49,173.4  |      |  | $    | 44,508.4 |  |  | $ | 38,060.2 | 
|Auto finance             |  |                | 8,796.3   |      |  |      | 7,446.7  |  |  |   | 6,358.8  | 
|MasterCard/Visa          |  |                | 18,783.4  |      |  |      | 16,872.7 |  |  |   | 16,009.5 | 
|Private label            |  |                | 14,993.7  |      |  |      | 12,942.3 |  |  |   | 11,997.9 | 
|Personal non-credit card |  |                | 15,338.9  |      |  |      | 16,404.6 |  |  |   | 14,232.0 | 
|Commercial and other     |  |                | 396.7     |      |  |      | 457.2    |  |  |   | 442.5    | 
|                         |  |                |           |      |  |      |          |  |  |   |          | 
|Managed receivables      |  | $              | 107,482.4 |      |  | $    | 98,631.9 |  |  | $ | 87,100.9 | 
|                         |  |                |           |      |  |      |          |  |  |   |          | 

Geographic Data

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

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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), a wholly-owned subsidiary of Household
International, Inc., and subsidiaries as of December 31,
2003 (successor basis) and December 31, 2002 (predecessor
basis) and the related consolidated statements of income,
changes in common shareholders equity, and cash flows for
the period January 1, 2003 through March 28, 2003
(predecessor basis), for the period March 29, 2003 through
December 31, 2003 (successor basis), and for each of the
years in the two-year period ended December 31, 2002
(predecessor basis). 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 aforementioned consolidated
financial statements present fairly, in all material respects,
the financial position of Household Finance Corporation and
subsidiaries as of December 31, 2003 (successor basis), and
the results of their operations and their cash flows for the
period March 29, 2003 through December 31, 2003
(successor basis), in conformity with accounting principles
generally accepted in the United States of America. Further, in
our opinion, the aforementioned consolidated financial
statements present fairly, in all material respects, the
financial position of Household Finance Corporation and
subsidiaries as of December 31, 2002 (predecessor basis),
and the results of their operations and their cash flows for the
period January 1, 2003 through March 28, 2003
(predecessor basis) and for each of the years in the two-year
period ended December 31, 2002 (predecessor basis), in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 2 to the consolidated
financial statements, effective March 28, 2003, HSBC
Holdings plc acquired all of the outstanding stock of Household
International, Inc. in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated
financial information for the period after the acquisition is
presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.

/s/ KPMG LLP

Chicago, Illinois

March 1, 2004


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HOUSEHOLD FINANCE CORPORATION AND
SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)

|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------- |  | ------------- | ------- | ----------- |  | ----------- | ------- | ----------- |  | ------------- | ------- | ------------- |  | ------------- | ---- | ------------- |  | ------------- | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                          |  | Three         |         | Three       |  | Three       |         |             |  |               |         |               |  |               |      |               |  |              
|                                                          |  | months        |         | months      |  | months      |         | March 29    |  | January 1     |         |               |  | Three months  |      |               |  | Three months 
|                                                          |  | ended         |         | ended       |  | ended       |         | through     |  | through       |         | Three months  |  | ended         |      | Three months  |  | ended        
|                                                          |  | Dec. 31,      |         | Sept. 30,   |  | June 30,    |         | March 31,   |  | March 28,     |         | ended         |  | Sept. 30,     |      | ended         |  | Mar. 31,     
|                                                          |  | 2003          |         | 2003        |  | 2003        |         | 2003        |  | 2003          |         | Dec. 31, 2002 |  | 2002          |      | Jun. 30, 2002 |  | 2002         
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |              
|                                                          |  | (Successor)   |         | (Successor) |  | (Successor) |         | (Successor) |  | (Predecessor) |         | (Predecessor) |  | (Predecessor) |      | (Predecessor) |  | (Predecessor)
|                                                          |  |              
|                                                          |  | (In millions)
|Finance and other interest income                         |  | $             | 2,390.5 |             |  | $           | 2,357.1 |             |  | $             | 2,296.2 |               |  | $             | 67.7 |               |  | $             | 2,266.9 |  |  | $ | 2,359.7 |  |  | $ | 2,399.7 |  |  | $ | 2,272.6 |  |  | $ | 2,183.0 | 
|Interest expense                                          |  |               | 506.9   |             |  |             | 455.5   |             |  |               | 457.5   |               |  |               | 14.1 |               |  |               | 784.6   |  |  |   | 758.1   |  |  |   | 792.9   |  |  |   | 767.4   |  |  |   | 726.0   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Net interest margin                                       |  |               | 1,883.6 |             |  |             | 1,901.6 |             |  |               | 1,838.7 |               |  |               | 53.6 |               |  |               | 1,482.3 |  |  |   | 1,601.6 |  |  |   | 1,606.8 |  |  |   | 1,505.2 |  |  |   | 1,457.0 | 
|Provision for credit losses on owned receivables          |  |               | 851.4   |             |  |             | 922.5   |             |  |               | 979.5   |               |  |               | 31.5 |               |  |               | 920.7   |  |  |   | 955.5   |  |  |   | 901.0   |  |  |   | 773.1   |  |  |   | 834.1   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Net interest margin after provision for credit
    losses |  |               | 1,032.2 |             |  |             | 979.1   |             |  |               | 859.2   |               |  |               | 22.1 |               |  |               | 561.6   |  |  |   | 646.1   |  |  |   | 705.8   |  |  |   | 732.1   |  |  |   | 622.9   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Securitization revenue                                    |  |               | 328.7   |             |  |             | 373.5   |             |  |               | 273.1   |               |  |               | 8.2  |               |  |               | 413.2   |  |  |   | 549.5   |  |  |   | 505.7   |  |  |   | 465.3   |  |  |   | 490.5   | 
|Insurance revenue                                         |  |               | 120.7   |             |  |             | 128.3   |             |  |               | 124.5   |               |  |               | 4.0  |               |  |               | 118.8   |  |  |   | 129.4   |  |  |   | 131.2   |  |  |   | 135.7   |  |  |   | 130.1   | 
|Investment income                                         |  |               | 39.9    |             |  |             | 34.0    |             |  |               | 31.5    |               |  |               | 1.2  |               |  |               | 75.8    |  |  |   | 40.1    |  |  |   | 43.5    |  |  |   | 41.6    |  |  |   | 41.9    | 
|Fee income                                                |  |               | 293.4   |             |  |             | 279.4   |             |  |               | 239.1   |               |  |               | 8.1  |               |  |               | 270.6   |  |  |   | 261.4   |  |  |   | 244.0   |  |  |   | 177.4   |  |  |   | 186.0   | 
|Other income                                              |  |               | 99.4    |             |  |             | 33.1    |             |  |               | 122.6   |               |  |               | 4.6  |               |  |               | 231.6   |  |  |   | 44.5    |  |  |   | 125.7   |  |  |   | 58.3    |  |  |   | 158.5   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Total other revenues                                      |  |               | 882.1   |             |  |             | 848.3   |             |  |               | 790.8   |               |  |               | 26.1 |               |  |               | 1,110.0 |  |  |   | 1,024.9 |  |  |   | 1,050.1 |  |  |   | 878.3   |  |  |   | 1,007.0 | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Salaries and fringe benefits                              |  |               | 420.4   |             |  |             | 409.9   |             |  |               | 404.4   |               |  |               | 12.7 |               |  |               | 378.1   |  |  |   | 369.5   |  |  |   | 373.0   |  |  |   | 379.2   |  |  |   | 369.3   | 
|Sales incentives                                          |  |               | 59.8    |             |  |             | 72.1    |             |  |               | 78.5    |               |  |               | 1.3  |               |  |               | 34.8    |  |  |   | 71.1    |  |  |   | 57.3    |  |  |   | 64.1    |  |  |   | 51.7    | 
|Occupancy and equipment expenses                          |  |               | 79.8    |             |  |             | 75.5    |             |  |               | 80.3    |               |  |               | 2.7  |               |  |               | 77.9    |  |  |   | 73.8    |  |  |   | 74.6    |  |  |   | 74.7    |  |  |   | 74.0    | 
|Other marketing expenses                                  |  |               | 141.4   |             |  |             | 130.9   |             |  |               | 130.2   |               |  |               | 4.4  |               |  |               | 127.5   |  |  |   | 113.1   |  |  |   | 126.0   |  |  |   | 123.9   |  |  |   | 128.0   | 
|Other servicing and administrative expenses               |  |               | 223.6   |             |  |             | 228.5   |             |  |               | 220.6   |               |  |               | 7.4  |               |  |               | 268.6   |  |  |   | 216.7   |  |  |   | 196.6   |  |  |   | 155.5   |  |  |   | 200.6   | 
|Amortization of acquired intangibles and goodwill         |  |               | 73.7    |             |  |             | 74.2    |             |  |               | 72.2    |               |  |               | 1.8  |               |  |               | 12.3    |  |  |   | 12.7    |  |  |   | 12.7    |  |  |   | 12.6    |  |  |   | 19.8    | 
|Policyholders benefits                                   |  |               | 63.7    |             |  |             | 72.6    |             |  |               | 78.5    |               |  |               | 2.3  |               |  |               | 71.1    |  |  |   | 73.0    |  |  |   | 85.6    |  |  |   | 72.8    |  |  |   | 73.8    | 
|Settlement charge and related expenses                    |  |               |        |             |  |             |        |             |  |               |        |               |  |               |     |               |  |               |        |  |  |   |        |  |  |   | 525.0   |  |  |   |        |  |  |   |        | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Total costs and expenses                                  |  |               | 1,062.4 |             |  |             | 1,063.7 |             |  |               | 1,064.7 |               |  |               | 32.6 |               |  |               | 970.3   |  |  |   | 929.9   |  |  |   | 1,450.8 |  |  |   | 882.8   |  |  |   | 917.2   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Income before income taxes                                |  |               | 851.9   |             |  |             | 763.7   |             |  |               | 585.3   |               |  |               | 15.6 |               |  |               | 701.3   |  |  |   | 741.1   |  |  |   | 305.1   |  |  |   | 727.6   |  |  |   | 712.7   | 
|Income taxes                                              |  |               | 298.3   |             |  |             | 262.7   |             |  |               | 200.6   |               |  |               | 5.5  |               |  |               | 240.6   |  |  |   | 259.1   |  |  |   | 98.4    |  |  |   | 251.7   |  |  |   | 240.8   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|Net income                                                |  | $             | 553.6   |             |  | $           | 501.0   |             |  | $             | 384.7   |               |  | $             | 10.1 |               |  | $             | 460.7   |  |  | $ | 482.0   |  |  | $ | 206.7   |  |  | $ | 475.9   |  |  | $ | 471.9   | 
|                                                          |  |               |         |             |  |             |         |             |  |               |         |               |  |               |      |               |  |               |         |  |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

None.






|         |                         
|-------- | ------------------------
|Item 9A. | 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 Chief 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.

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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.




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. | Principal Accountant Fees and
    Services.

As described below, Households audit
committee pre-approves fees paid to, and services performed by,
external auditors for Household and its subsidiaries, including
HFC. The aggregate fees described below are for professional
services provided by KPMG LLP, principal accountants for
Household and its subsidiaries, during the fiscal years ended
December 31, 2003 and 2002, a significant but unallocated
portion of which are attributable to services related to HFC.

Audit FeesThe
aggregate amount billed by KPMG LLP for audit services
performed for Household and its subsidiaries during the fiscal
years ended December 31, 2003 and 2002, was $5,587,000 and
$4,479,000, respectively. Audit services include the auditing of
financial statements, quarterly reviews, statutory audits and
the preparation of comfort letters, consents and review of
registration statements.

Audit Related FeesThe aggregate amount billed by KPMG LLP in connection with
audit related services performed for Household and its
subsidiaries during the fiscal years ended December 31,
2003 and 2002, was $1,250,000 and $1,406,000, respectively.
Audit related services include employee benefit plan audits, due
diligence assistance, internal control review assistance and
audit or attestation services not required by statute or
regulation.

Tax FeesTotal fees
billed by KPMG LLP for tax related services for Household
and its subsidiaries during the fiscal years ended
December 31, 2003 and 2002, were $779,000 and $540,000,
respectively. These services include tax related research and
general tax services in connection with transactions and
legislation.

All OtherOther than
those fees described above, there were no other fees billed for
services performed by KPMG LLP for Household and its
subsidiaries during the fiscal years ended December 31,
2003 and December 31, 2002.

All of the fees described above were approved by
Households audit committee.

Audit Committee Pre-Approval Policies and
ProceduresHouseholds audit
committee pre-approves the audit and non-audit services
performed by KPMG LLP for Household and its subsidiaries,
including HFC, in order to assure that the provision of such
services does not impair KPMG LLPs independence.
Unless a type of service to be provided by KPMG LLP has
received general pre-approval, it will require specific
pre-approval by the audit committee. In addition, any proposed
services exceeding pre-approval cost levels will require
specific pre-approval by the audit committee.

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The term of any pre-approval is 12 months
from the date of pre-approval, unless the audit committee
specifically provides for a different period. The audit
committee will periodically revise the list of pre-approved
services, based on subsequent determinations, and has delegated
pre-approval authority to the Chairman and Vice Chairman of the
audit committee. In the event the Chairman or Vice Chairman
exercise such delegated authority, they shall report such
pre-approval decisions to the audit committee at its next
scheduled meeting. The audit committee does not delegate its
responsibilities to pre-approve services performed by the
independent auditor to management.




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 1, 2004 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                                    
| | Consolidated Balance Sheets                                          
| | Consolidated Statements of Cash Flows                                
| | Consolidated Statements of Changes in Common
    Shareholders Equity
| | 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,
    2003, HFC filed a Current Report on Form 8-K on
    November 23, 2003.




(c) Exhibits.

| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3(i)  |  |  | Restated Certificate of Incorporation of
    Household Finance Corporation, as amended (incorporated by
    reference to Exhibit 3(i) of our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1997).                                                                                                                                                             
| | 3(ii) |  |  | Bylaws of Household Finance Corporation
    (incorporated by reference to Exhibit 3(ii) of our Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                                                                                                   
| | 4(a)  |  |  | Standard Multiple-Series Indenture
    Provisions for Senior Debt Securities dated as of June 1,
    1992 (incorporated by reference to Exhibit 4(b) of our
    Registration Statement on Form S-3, No. 33-48854 filed
    on June 26, 1992).                                                                                                                                     
| | 4(b)  |  |  | Indenture dated as of December 1, 1993 for
    Senior Debt Securities between HFC and The Chase Manhattan Bank
    (National Association), as Trustee (incorporated by reference to
    Exhibit 4(b) of our Registration Statement on
    Form S-3, No. 33-55561 filed on September 20,
    1994).                                                                                
| | 4(c)  |  |  | The principal amount of debt outstanding under
    each other instrument defining the rights of holders of our
    long-term debt does not exceed 10 percent of our total
    assets on a consolidated basis. We agree to furnish to the
    Securities and Exchange Commission, upon request, a copy of each
    instrument defining the rights of holders of our long-term debt.
| | 12    |  |  | Statement of Computation of Ratio of Earnings to
    Fixed Charges.                                                                                                                                                                                                                                                                                                               
| | 23    |  |  | Consent of KPMG LLP, Certified Public Accountants.                                                                                                                                                                                                                                                                                                                                
| | 24    |  |  | Power of Attorney (included on page 118 of
    this Form 10-K).                                                                                                                                                                                                                                                                                                                   
| | 31    |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                           

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| |      |  |  |                                                                                                                                        
| | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------
| | 32   |  |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
| | 99.1 |  |  | Ratings of Household Finance Corporation and its
    significant subsidiaries.                                                         

117



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Household
Finance Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on
this, the 1st day of March, 2004.



| |                              
| | -----------------------------
| | HOUSEHOLD FINANCE CORPORATION



| |     |                  
| | --- | -----------------
| | By: | /s/ W.F. ALDINGER

| |                        
| | -----------------------
| |                        
| | W.F. Aldinger          
| | Chief Executive Officer

Each person whose signature appears below
constitutes and appoints P.D. Schwartz, 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 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 1st day of March, 2004.

|                                       |  |                                                                                                            
|-------------------------------------- |  | -----------------------------------------------------------------------------------------------------------
|Signature                              |  | Title                                                                                                      
|                                       |  |                                                                                                            
|                                      
|/s/ W. F. ALDINGER(W. F. Aldinger)     |  | Chief Executive Officer, Director                                                                          
|                                      
|/s/ D. A. SCHOENHOLZ(D. A. Schoenholz) |  | Director, Chairman                                                                                         
|                                      
|/s/ J.A. VOZAR(J.A. Vozar)             |  | Director                                                                                                   
|                                      
|/s/ T.M. DETELICH(T.M. Detelich)       |  | Director                                                                                                   
|                                      
|/s/ S.C. PENNEY(S.C. Penney)           |  | Chief Financial Officer
    (as Principal Financial Officer)                                               
|                                      
|/s/ S.L. MCDONALD(S.L. McDonald)       |  | Executive Vice President,
    Chief Accounting Officer and Controller
    (as Principal Accounting Officer)

118



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EXHIBIT INDEX

| |      |      |  |                                                                                                                                                                                                                                                                                                                                                                                   
| | ---- | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3    | (i)  |  | Restated Certificate of Incorporation of
    Household Finance Corporation, as amended (incorporated by
    reference to Exhibit 3(i) of our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 1997).                                                                                                                                                             
| | 3    | (ii) |  | Bylaws of Household Finance Corporation
    (incorporated by reference to Exhibit 3(ii) of our Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2001).                                                                                                                                                                                                   
| | 4    | (a)  |  | Standard Multiple-Series Indenture
    Provisions for Senior Debt Securities dated as of June 1,
    1992 (incorporated by reference to Exhibit 4(b) of our
    Registration Statement on Form S-3, No. 33-48854 filed
    on June 26, 1992).                                                                                                                                     
| | 4    | (b)  |  | Indenture dated as of December 1, 1993 for
    Senior Debt Securities between HFC and The Chase Manhattan Bank
    (National Association), as Trustee (incorporated by reference to
    Exhibit 4(b) of our Registration Statement on
    Form S-3, No. 33-55561 filed on September 20,
    1994).                                                                                
| | 4    | (c)  |  | The principal amount of debt outstanding under
    each other instrument defining the rights of holders of our
    long-term debt does not exceed 10 percent of our total
    assets on a consolidated basis. We agree to furnish to the
    Securities and Exchange Commission, upon request, a copy of each
    instrument defining the rights of holders of our long-term debt.
| | 12   |      |  | Statement of Computation of Ratio of Earnings to
    Fixed Charges.                                                                                                                                                                                                                                                                                                               
| | 23   |      |  | Consent of KPMG LLP, Certified Public Accountants.                                                                                                                                                                                                                                                                                                                                
| | 24   |      |  | Power of Attorney (included on page 118 of
    this Form 10-K).                                                                                                                                                                                                                                                                                                                   
| | 31   |      |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                           
| | 32   |      |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                           
| | 99.1 |      |  | Ratings of Household Finance Corporation and its
    significant subsidiaries.                                                                                                                                                                                                                                                                                                    

119