<PAGE>

================================================================================
                         UNITED STATES SECURITIES AND
                              EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               -----------------
                                  FORM 10-K/A

(Mark One)

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

                  For the fiscal year ended December 31, 2001

                                      OR

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

            For the transition period from _________ to ___________

                          Commission file number 1-75

                         Household Finance Corporation
            (Exact name of registrant as specified in its charter)

                     Delaware                  36-1239445
             (State of Incorporation)       (I.R.S. Employer
                                           Identification No.)

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

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

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

                                        Name of each exchange on
                Title of each class         which registered
                -------------------         ----------------
             6 3/4% Notes, due May 15,
                        2011             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 [X]  No [_]

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

   As of March 15, 2002, there were 1,000 shares of 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/A with the reduced
disclosure format.

================================================================================

<PAGE>

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART/Item No.                                                                            Page
-------------                                                                            ----
<C>           <S>                                                                        <C>
PART I
Item 1.       Business..................................................................   1
              Restatement...............................................................   1
              Regulation................................................................   2
              Cautionary Statement on Forward-Looking Statements........................   3
Item 2.       Properties................................................................   4
Item 3.       Legal Proceedings.........................................................   4
Item 4.       Submission of Matters to a Vote of Security Holders.......................   5

PART II
Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters.....   5
Item 6.       Selected Financial Data...................................................   5
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of
                Operations..............................................................   6
              Selected Quarterly Financial Data.........................................  33
Item 7A.      Quantitative and Qualitative Disclosure About Market Risk.................  33
Item 8.       Financial Statements and Supplementary Data...............................  33
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure................................................................  34

PART III
Item 10.      Directors and Executive Officers of the Registrant........................  34
Item 11.      Executive Compensation....................................................  34
Item 12.      Security Ownership of Certain Beneficial Owners and Management............  34
Item 13.      Certain Relationships and Related Transactions............................  34

PART IV
Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........  35
              Restated Financial Statements.............................................  35
              Reports on Form 8-K.......................................................  35
              Exhibits..................................................................  35
              Signatures................................................................  36

Independent Auditors' Report............................................................ F-1
Consolidated Statements of Income....................................................... F-2
Consolidated Balance Sheets............................................................. F-3
Consolidated Statements of Cash Flows................................................... F-4
Consolidated Statements of Changes in Common Shareholder's Equity....................... F-5
Notes to Consolidated Financial Statements.............................................. F-7
</TABLE>


                                       i

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                                    PART I

Item 1. Business.

General

   Household Finance Corporation ("HFC") is a wholly-owned subsidiary of
Household International, Inc. ("Household International" or the "parent
company"). HFC and its subsidiaries may also be referred to in this Form 10-K/A
as "we," "us" or "our." We offer real estate secured loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards, tax refund
anticipation loans, retail installment sales finance loans and other types of
unsecured loans to consumers in the United States. Where applicable laws
permit, credit and specialty insurance is offered to our customers in
connection with our products in the United States and Canada.

   We have one reportable segment, Consumer, which includes our consumer
lending, mortgage services, retail services, credit card services and auto
finance businesses. Information about operating segments which are not
individually reportable are included in the "All Other" segment which includes
our insurance and tax services and commercial businesses, as well as our
corporate and treasury activities.

   The consumer lending business originates real estate and personal non-credit
card products through its retail branch network, direct mail, telemarketing,
strategic alliances and Internet applications. The mortgage services business
originates and purchases real estate secured volume primarily through brokers
and correspondents. 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
affinity and co-branding relationships and mass-media advertisement (The GM
Card(R)). We also supplement internally-generated receivable growth with
portfolio acquisitions and purchases from an affiliate.

Restatement

   Household Finance Corporation has restated its consolidated financial
statements for the years ended December 31, 1999, 2000 and 2001. This Form
10-K/A and the exhibits included herewith include all adjustments relating to
the restatement for all such prior periods but does not update through the date
of this filing other disclosures contained in the Form 10-K as filed on March
21, 2002. For discussions of current developments and results of operations for
periods subsequent to December 31, 2001 you should refer to our Forms 10-Q/A
for the quarterly periods ended March 31, and June 30, 2002, each filed with
the Securities and Exchange Commission on August 27, 2002. These Forms 10-Q/A
reflect the adjustments relating to the restatement in all periods covered by
the reports. The restatement relates to two distinct events.

   First, on July 1, 2002, Household International, Inc. contributed all of the
capital stock of Household Bank (SB), N.A. ("HBSB"), a wholly owned subsidiary
of Household Bank, f.s.b., to HFC. HBSB, in turn, purchased all of the assets
of Beneficial Bank USA, a wholly-owned credit card banking subsidiary of HFC.
Subsequently, we merged our wholly-owned banking subsidiary, Household Bank
(Nevada), N.A. with and into HBSB with HBSB being the surviving entity. The
merger completed the consolidation of all of Household International, Inc.'s
credit card banks into one credit card banking subsidiary of HFC. HFC has
previously published selected financial information of the combined company as
of and for the month ended July 31, 2002 in a Form 8-K dated August 26, 2002.
In accordance with the guidance established for mergers involving affiliates
under common control, the financial statements of HFC have been restated to
include the results of HBSB for all periods presented, similar to a pooling of
interests.

   The second portion of the restatement relates to a MasterCard and Visa
affinity credit card relationship and a marketing agreement with a third party
credit card marketing company. All were part of our Consumer segment. In
consultation with our prior auditors, Arthur Andersen LLP, we treated payments
made in connection

                                      1

<PAGE>

with these agreements that were entered into between 1996 and 1999 as prepaid
assets and amortized them in accordance with the underlying economics of the
agreements. Our current auditors, KPMG LLP, have advised us that, in their
view, these payments should have either been charged against earnings at the
time they were made or amortized over a shorter period of time. There is no
significant change as a result of these adjustments on the prior periods net
earnings trends previously reported. The balance of retained earnings at
December 31, 1998 has been restated from amounts previously reported to reflect
a retroactive charge of $70.2 million, after tax, for these items. This
restatement was previously disclosed in Exhibit 99.4 to our Quarterly report on
Form 10-Q for the period ended June 30, 2002.

Regulation

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

   There has been a significant amount of legislative activity, nationally,
locally and at the state level, aimed at curbing lending abuses deemed to be
"predatory". A predatory loan or lending practice is not a legally defined term
and does not have a commonly recognized definition. Most legislative activity
in this area targets 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 are working with regulators and consumer groups to create
appropriate safeguards to eliminate these abusive practices while allowing
middle-market borrowers to continue to have unrestricted access to credit for
personal purposes, such as the purchase of homes, automobiles, and consumer
goods. As part of this effort we have adopted a set of lending best practice
initiatives. These initiatives, which may be modified from time-to-time, are
discussed at our parent company's corporate web site, www.household.com, under
the heading "Customer Commitment". Notwithstanding these efforts, it is
possible that broad legislative initiatives will be passed which will impose
additional costs and rules on our business. Although we have the ability to
react quickly to new laws and regulations, it is too early to estimate the
effect, if any, these activities will have on us in a particular locality or
nationally.

   Banking Institutions. HFC has banking institutions that are chartered by the
Office of the Comptroller of the Currency ("OCC"). Since deposits maintained at
our banking institutions are insured by the Federal Deposit Insurance
Corporation ("FDIC"), the FDIC also has jurisdiction over those institutions
and is actively involved in reviewing the financial and managerial strength of
our banking subsidiaries. Our banking institutions primarily originate
receivables in our MasterCard and Visa credit card business. These institutions
improve our operational efficiencies by offering loan products with common
characteristics across the United States. Generally, these banking institutions
sell the receivables they originate to non-banking subsidiaries of HFC, so that
we can manage all of our customers with uniform policies, regardless through
which legal entity a loan was made. In addition, this structure allows us and
our parent to better manage the levels of regulatory capital required to be
maintained at these banking institutions. All receivables purchased from
affiliates retain their existing product and delinquency status.

   Our banking institutions are subject to capital requirements, regulations
and guidelines imposed by the OCC and FDIC. For example, these institutions are
subject to federal regulations concerning their general investment

                                      2

<PAGE>

authority as well as their 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.

   We have been advised by the Office of Thrift Supervision ("OTS"), OCC and
FDIC that in accordance with their 2001 Guidance for Subprime Lending Programs,
they will impose additional capital requirements on institutions which hold
nonprime or subprime assets that will be greater than the historical levels we
have been obligated to maintain at our banking institutions. As such, HFC will
maintain the regulatory capital of its institutions at these specified higher
levels. We do not expect this action will have a material adverse effect on our
business or our financial condition.

   Household International has a Regulatory Capital Maintainance/Dividend
Agreement with the OTS. Under this Agreement, as amended, as long as Household
International is the parent company of Household Bank, f.s.b. (the "Bank"),
Household International and HFC agree to maintain the capital of the Bank at
the required levels. However, HFC is only required to provide additional
capital if Household International fails to maintain the Bank's required
capital levels. We do not currently believe that direct capital infusions by
HFC into the Bank will be required.

   Our banking institutions are 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,
including the OCC and 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. Under FIRREA, the FDIC
may assess an affiliated insured depository institution for the estimated
losses incurred by the FDIC upon the default of any affiliated insured
institution.

Cautionary Statement on Forward-Looking Statements

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

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

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

                                      3

<PAGE>

    .  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 policies, practices or standards, as they may be
       adopted by regulatory agencies and the Financial Accounting Standards
       Board;

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

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

    .  the effectiveness of models or programs to predict loan delinquency or
       loss and initiatives to improve collections in all business areas;

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

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

    .  a reduction of our short-term 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 of
       any of our business units, including, but not limited to, additional
       compliance requirements;

    .  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; and

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

Item 2. Properties.

   Substantially all of our branch offices, servicing locations and
headquarters are leased, except for processing facilities in Las Vegas, Nevada
and Tampa, Florida. We believe that such properties are in good condition and
are adequate to meet our current and reasonably anticipated needs.

Item 3. Legal Proceedings.

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

   During the past several years, the press has widely reported certain
industry related concerns which may impact us. Some of these involve the amount
of litigation instituted against finance and insurance companies operating in
the states of Alabama and Mississippi and the large awards obtained from juries
in those states. Like other companies in this industry, we are involved in a
number of lawsuits pending against them in Alabama and

                                      4

<PAGE>

Mississippi, many of which relate to the financing of merchandise. The Alabama
and Mississippi cases generally allege inadequate disclosure or
misrepresentation of financing terms. In many suits, other parties are also
named as defendants. Unspecified compensatory and punitive damages are sought.
Several of these suits purport to be class actions or have multiple plaintiffs.
The judicial climate in Alabama and Mississippi is such that the outcome of all
of these cases is unpredictable. Although we believe we 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 these claims have been partially
covered by insurance.

   We have also been named in purported class actions by consumer groups (such
as AARP and ACORN) claiming that our loan products or our lending policies and
practices are unfair or misleading to consumers. We do not believe that any of
these legal actions has merit or will result in a material financial impact on
HFC. We do expect, however, that these consumer groups will continue to target
HFC in the media and with legal actions to pressure HFC and the nonprime
lending industry into accepting concessions that would more heavily regulate
the nonprime lending industry. (See "Regulation" above.)

   We have developed and implemented compliance functions to monitor our
operations to comply with all applicable laws, rules and regulations. In
November 2001, litigation was instituted by California regulators asserting
that they believed we had overcharged certain California customers who obtained
loans from HFC. We confirmed with this regulator that unintentional errors had
occurred and entered into a settlement agreement for full refunds of the
improper charges as well as a payment to the state in the amount of $8.9
million. The amounts paid pursuant to this agreement, as well as the other
conditions we agreed to, did not and will not have a material adverse impact on
our financial condition or our business operations. As a result of this
incident, we have reviewed our compliance function and implemented certain
changes, including requiring that our compliance officer for our consumer
lending business report directly to senior management. Although exam reports
from other regulatory bodies may, from time-to-time, cite specific issues
relating to a specific loan, we do not believe, and we are not aware of, any
unaddressed systemic issue affecting our compliance with any state or federal
lending laws within any of our businesses.

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

   Omitted.

                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.

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

   HFC paid cash dividends to Household International of $650 million in 2001,
$425 million in 2000 and $803 million in 1999. HBSB also paid cash dividends of
$225 million to an affiliate in 2001.

Item 6. Selected Financial Data.

   Omitted.

                                      5

<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

                             FINANCIAL HIGHLIGHTS

                Household Finance Corporation and Subsidiaries
                                  (RESTATED)

<TABLE>
<CAPTION>
                                                                2001           2000          1999
                                                             ---------       ---------     ---------
                                                            (All dollar amounts are stated in millions)
<S>                                                         <C>             <C>           <C>
Statement of Income Data--Year Ended December 31
Net interest margin and other revenues..................... $ 8,662.7       $ 6,937.2     $ 5,667.0
Provision for credit losses on owned receivables...........   2,606.4         1,929.8       1,498.3
Operating expenses.........................................   3,110.5         2,606.5       2,079.9
Policyholders' benefits....................................     268.1           231.7         224.7
Income taxes...............................................     949.8           773.1         658.6
                                                             ---------       ---------     ---------
Net income................................................. $ 1,727.9       $ 1,396.1     $ 1,205.5
                                                             =========       =========     =========
Selected Financial Information and Ratios:
Owned Basis:
Total assets............................................... $74,529.5       $63,353.8     $50,377.8
Total receivables..........................................  67,341.6        55,685.6      42,621.7
Debt to equity ratio.......................................    7.3:1 (1)        6.5:1         6.4:1
Return on average owned assets.............................     2.56 %          2.42 %        2.51 %
Return on average common shareholder's equity..............      20.8(1)         19.1          18.9
Net interest margin........................................      8.59            8.23          7.87
Efficiency ratio...........................................      37.1            38.9          38.2
Consumer net charge-off ratio..............................      3.72            3.51          3.87
Reserves as a percent of receivables.......................      3.62            3.48          3.64
Reserves as a percent of net charge-offs...................     109.5           111.4         101.3
Reserves as a percent of nonperforming loans...............      91.5            93.4          90.0
Managed Basis:(2)
Total assets............................................... $94,288.8       $82,277.1     $68,711.8
Total receivables..........................................  87,100.9        74,608.9      60,955.7
Return on average managed assets...........................      2.01            1.86          1.84
Tangible shareholder's equity to tangible managed assets(3)      8.15            8.08          7.56
Net interest margin........................................      9.05            8.47          8.25
Efficiency ratio...........................................      32.9            33.5          32.2
Consumer net charge-off ratio..............................      4.12            3.97          4.32
Reserves as a percent of receivables.......................      4.02            3.94          3.93
Reserves as a percent of net charge-offs...................     108.6           110.5          97.0
Reserves as a percent of nonperforming loans...............     105.4           109.8         102.4
                                                             ---------       ---------     ---------
</TABLE>
--------
(1) On January 1, 2001, we adopted Statement of Financial Accounting Standards
    No. 133, "Accounting for Derivative Financial Instruments and Hedging
    Activities," which requires unrealized gains and losses on cash flow
    hedging instruments to be recorded in shareholder's equity, net of tax.
    These unrealized gains and losses represent timing differences and will
    result in no net economic impact to our earnings. Excluding unrealized
    gains and losses on cash flow hedging instruments in 2001, the debt to
    equity ratio was 6.8:1 and return on average common shareholder's equity
    was 20.2 percent.
(2) We monitor our operations and evaluate trends on both an owned basis as
    shown in our historical financial statements and on a managed basis.
    Managed basis reporting adjustments assume that securitized receivables
    have not been sold and are still on our balance sheet. See page 7 for
    further information on managed basis reporting.
(3) The ratio of tangible equity to tangible managed assets is a non-GAAP ratio
    that is used by rating agencies as a measure to evaluate capital adequacy.
    This ratio may differ from similarly named measures presented by other
    companies. Tangible shareholder's equity includes common shareholder's
    equity, excluding unrealized gains and losses on investments and cash flow
    hedging instruments, less acquired intangibles and goodwill. Tangible
    managed assets represents total managed assets less acquired intangibles,
    goodwill and derivative assets.

                                      6

<PAGE>

                              BASIS OF REPORTING

   This amended and restated Form 10-K/A reflects restatements related to the
merger of Household Bank (SB), N.A. ("HBSB") into HFC as well as certain
MasterCard and Visa agreements. This Form 10-K/A and the exhibits included
herewith include all adjustments relating to the restatements for all periods
but does not update through the date of this filing other disclosures contained
in the Form 10-K as filed on March 21, 2002. For discussions of current
developments and results of operations for periods subsequent to December 31,
2001 you should refer to our Forms 10-Q/A for the quarterly periods ended March
31, and June 30, 2002, each filed with the Securities and Exchange Commission
on August 27, 2002. These Forms 10-Q/A reflect the adjustments relating to the
restatement in all periods covered by the reports.

   Bank Merger Restatement On July 1, 2002, Household International, Inc.
contributed all of the capital stock of HBSB, a wholly owned subsidiary of
Household Bank, f.s.b., to HFC. HBSB, in turn, purchased all of the assets of
Beneficial Bank USA, a wholly-owned credit card banking subsidiary of HFC.
Subsequently, we merged our wholly-owned banking subsidiary, Household Bank
(Nevada), N.A. with and into HBSB with HBSB being the surviving entity. The
merger completed the consolidation of all of Household International, Inc.'s
credit card banks into one credit card banking subsidiary of HFC. We believe
the combination of the banks will streamline and simplify our regulatory
reporting process as well as optimize capital and liquidity management. In
accordance with the guidance established for mergers involving affiliates under
common control, the financial statements of HFC include the results of HBSB for
all periods presented similar to a pooling of interests. HFC has previously
published selected financial information of the combined company as of and for
the month ended July 31, 2002 in a Form 8-K dated August 26, 2002.

   MasterCard and Visa Restatement The MasterCard and Visa restatement relates
to a MasterCard and Visa affinity credit card relationship and a marketing
agreement with a third party credit card marketing company. All were part of
our Consumer segment. In consultation with our prior auditors, Arthur Andersen
LLP, we treated payments made in connection with these agreements that were
entered into between 1992 and 1999 as prepaid assets and amortized them in
accordance with the underlying economics of the agreements. Our current
auditors, KPMG LLP, have advised us that, in their view, these payments should
have either been charged against earnings at the time they were made or
amortized over a shorter period of time. We believe this is a good faith
difference of opinion but we are following the advice of our current auditors.
There is no significant change as a result of these adjustments on the prior
period net earnings trends previously reported. The balance of retained
earnings at December 31, 1998 has been restated from amounts previously
reported to reflect a retroactive charge of $70.2 million, after tax, for these
items. This restatement was previously disclosed in Exhibit 99.4 to our
quarterly report on Form 10-Q for the period ended June 30, 2002.

   The cumulative MasterCard and Visa restatement is as follows for the periods
presented below:

<TABLE>
<CAPTION>
                                                             % Change from
            Restatements to Reported Income             Prior Period Net Income
            ----------------------------                ----------------------
                                             % Change
            Pre-Tax    Tax Effect After Tax to Reported As Reported As Restated
            -------    ---------- --------- ----------- ----------- -----------
               (All dollar amounts are
                 stated in millions)
  <S>       <C>        <C>        <C>       <C>         <C>         <C>
  2001..... $ (89.8)     $33.1     $(56.7)     (3.2)%      22.6%       23.8%
  2000.....   (94.6)      34.8      (59.8)     (4.1)       15.6        15.8
  1999.....   (85.8)      31.5      (54.3)     (4.3)       23.7        20.9
  1994-1998  (111.1)      40.9      (70.2)
</TABLE>

   Managed Basis Reporting We monitor our operations and evaluate trends on a
managed basis which assumes that securitized receivables have not been sold and
are still on our balance sheet. We manage our operations on a managed basis
because the receivables that we securitize are subjected to underwriting
standards

                                      7

<PAGE>

comparable to our owned portfolio, are serviced by operating personnel without
regard to ownership and result in a similar credit loss exposure for us. In
addition, we fund our operations, review our operating results and make
decisions about allocating resources such as employees and capital on a managed
basis. See "Asset Securitizations" on pages 24 and 25 and Notes 6, "Asset
Securitizations," and 17, "Segment Reporting," to the accompanying consolidated
financial statements for additional information related to our businesses and
our securitizations.

   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.

                         CRITICAL ACCOUNTING POLICIES

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

   The significant accounting policies used in preparation of our financial
statements are more fully described in Note 1 to the consolidated financial
statements on pages F-7 to F-11. Certain critical accounting policies are
complex and involve significant judgment by our management, including the use
of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses. As a result, changes in these estimates and
assumptions could significantly affect our financial position or our results of
operations. We base our 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 or conditions.

   We believe that of our significant accounting policies, the following
involve a high degree of judgment and complexity in the preparation of our
consolidated financial statements:

   Provision and Credit Loss Reserves Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing owned
portfolio. Probable losses are estimated for consumer receivables based on
contractual delinquency and historical loss experience. For commercial loans,
probable losses are calculated using estimates of amounts and timing of future
cash flows expected to be received on loans. In addition, loss reserves on
consumer receivables are maintained to reflect our judgment of portfolio risk
factors, which may not be fully reflected in the statistical calculation which
uses roll rates and migration analysis. These risk factors include economic
conditions, bankruptcy trends, product mix, geographic concentrations and other
similar items. Charge-off and customer account management policies are also
considered when establishing loss reserve requirements to ensure appropriate
allowances exist for products with longer charge-off periods and for customers
benefiting from account management decisions. Loss reserve estimates are
reviewed periodically and adjustments are reported in earnings when they become
known. The use of different estimates or assumptions could produce different
provisions for credit losses.

   Receivables Sold and Serviced With Limited Recourse and Securitization
Revenue Upon sale, securitized 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
includes 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

                                      8

<PAGE>

losses under the recourse provisions based on historical experience and
estimates of expected future performance. These future cash flows are recorded
in the form of an interest-only strip receivable. Our interest- only strip
receivables are reported at fair value using discounted cash flow estimates as
a separate component of receivables, net of our estimate of probable losses
under the recourse provisions. Cash flow estimates include estimates of
prepayments, the impact of interest rate movements on yields of receivables and
securities issued, delinquency of receivables sold, servicing fees and
estimated probable losses under the recourse provisions. Unrealized gains and
losses are recorded as adjustments to common shareholder's equity in
accumulated other comprehensive income, net of income taxes. Any decline in the
value of our interest-only strip receivable, which is deemed to be other than
temporary, is charged against current earnings. The key assumptions used to
value interest-only strip receivables represent our best estimate and the use
of different estimates or assumptions could produce different financial results.

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operations Summary

..  Our net income increased 24 percent in 2001 to $1.7 billion, compared to
   $1.4 billion in 2000 and $1.2 billion in 1999. Strong revenue growth, driven
   by significant receivable growth across all businesses, was the key to our
   improved results in both years. Partially offsetting the revenue growth were
   higher operating expenses as a result of the receivable growth, increased
   investments in sales and collection personnel, and higher technology
   spending. The provision for credit losses also increased in both years as a
   result of portfolio growth and uncertain economic conditions.

..  Owned receivables grew 21 percent to $67.3 billion in 2001. Growth was
   strongest in our consumer lending and mortgage services businesses,
   especially in our real estate secured portfolio, and in our auto finance,
   MasterCard and Visa and private label businesses.

..  Our return on average common shareholder's equity ("ROE") was 20.8 percent
   in 2001, compared to 19.1 percent in 2000 and 18.9 percent in 1999. Our
   return on average owned assets ("ROA") was 2.56 percent in 2001, compared to
   2.42 percent in 2000 and 2.51 percent in 1999.

..  Our owned net interest margin was 8.59 percent in 2001, compared to 8.23
   percent in 2000 and 7.87 percent in 1999. In 2001, the increase was
   primarily due to lower funding costs as a result of easing in United States
   monetary policy during the year. Fed fund rates were reduced 11 times for a
   total of 475 basis points during 2001. The increase in 2000 was primarily
   due to improved pricing in our MasterCard and Visa portfolio and the
   addition of the higher yielding subprime credit card portfolio, partially
   offset by higher interest costs. Net interest margin in both years was
   impacted by a shift in the portfolio to lower margin real estate secured
   receivables.

..  Our owned consumer charge-off ratio was 3.72 percent in 2001, 3.51 percent
   in 2000 and 3.87 percent in 1999. Our delinquency ratio was 4.93 percent at
   December 31, 2001, compared to 4.60 percent at December 31, 2000. Both
   ratios were negatively affected in 2001 by the weakening economy.

..  During 2001, we recorded owned loss provision greater than charge-offs of
   $377.6 million, increasing our owned loss reserves to an all-time high of
   $2.4 billion. Loss provision reflected our continued receivable growth,
   recent increases in personal bankruptcy filings and continued uncertainty
   over the impact of the weakening economy on charge-off and delinquency
   trends.

..  Our owned basis efficiency ratio was 37.1 percent in 2001, 38.9 percent in
   2000 and 38.2 percent in 1999. The efficiency ratio is the ratio of
   operating expenses to the sum of our net interest margin and other revenues
   less policyholders' benefits. The ratios for both years reflect investments
   in personnel, technology and marketing. In 2001, these additional costs were
   offset by growth in net revenues. In 2000, the ratio included higher
   e-commerce costs.

                                      9

<PAGE>

Segment Results--Managed Basis

   Our Consumer segment reported higher net income in 2001 compared to prior
years. Net income increased to $1.5 billion, compared to $1.4 billion in 2000
and $1.1 billion in 1999. Net interest margin, fee income and other revenues
increased $1.2 billion to $9.1 billion in 2001 as a result of strong receivable
growth. The higher revenues were partially offset by higher credit loss
provision and spending. Our credit loss provision rose $.6 billion to $3.6
billion as a result of increased levels of receivables and the weakening
economy. During 2001, we recorded managed loss provision greater than
charge-offs of $.4 billion to increase loss reserves. Higher salary expenses,
including higher sales incentive compensation, were the result of increased
receivable levels, additional collectors, and investments in the growth of our
businesses. Managed receivables grew to $86.6 billion at year-end 2001, up 17
percent from $74.0 billion in 2000 and $60.3 billion in 1999. The receivable
growth was driven by solid growth in all products with the strongest growth in
our real estate secured and auto finance receivables. Growth in MasterCard and
Visa receivables reflects growth in our Union Plus(R) ("UP"), our affinity card
relationship with the AFL-CIO labor federation, Household bank branded base,
and Renaissance portfolios. Credit card growth in both years was partially
offset by attrition in our legacy undifferentiated Household Bank branded
portfolio on which we have limited marketing efforts. Growth in private label
receivables in 2001 reflects a $725 million fourth quarter acquisition. In
2000, in addition to strong organic growth, we took advantage of consolidation
in the home equity industry by acquiring two real estate secured portfolios
totaling $3.7 billion. ROMA was 1.89 percent in 2001, compared to 1.95 percent
in 2000 and 1.78 percent in 1999. The decline in ROMA in 2001 reflects higher
loan loss provision and the continued shift in our portfolio to lower margin
real estate secured receivables.

   See Note 17, "Segment Reporting," to the accompanying consolidated financial
statements for additional segment information.

Balance Sheet Review

   Owned assets totaled $74.5 billion at December 31, 2001 and $63.4 billion at
year-end 2000. Owned receivables may vary from period to period depending on
the timing and size of securitization transactions. We had initial
securitizations of $5.3 billion of receivables in 2001 and $6.3 billion in
2000. We refer to securitized receivables that are serviced for investors and
are not on our balance sheet as our off-balance sheet portfolio.

   Receivables growth has been a key contributor to our 2001 results. The
strongest growth was in our real estate secured portfolio. Growth in our owned
portfolio is shown in the following table:

<TABLE>
<CAPTION>
                              December 31, Increase (Decrease) Increase (Decrease)
                                  2001      in 2001/2000        in 2000/1999
                              ------------ ------------------  ------------------
                              (All dollar amounts are stated in millions)
     <S>                      <C>          <C>          <C>    <C>          <C>
     Owned receivables:
     Real estate secured.....  $37,198.4   $ 7,050.5     23%   $ 8,918.2    42 %
     Auto finance............    2,332.2       689.2     42        417.5     34
     MasterCard/Visa.........    6,962.0     1,131.3     19      1,701.5     41
     Private label...........    9,847.9     1,179.2     14        122.0      1
     Personal non-credit card   10,558.6     1,671.4     19      2,071.9     30
     Commercial..............      442.5       (65.6)   (13)      (167.2)   (25)
                               ---------    ---------    ---    ---------    ---
     Total...................  $67,341.6   $11,656.0     21%   $13,063.9    31 %
                               =========    =========    ===    =========    ===
</TABLE>

..   Real estate secured receivables increased $7.1 billion to $37.2 billion
    during 2001 as a result of growth in our HFC and Beneficial branches and
    mortgage services business. During 2001, we increased our branch sales
    force by almost 750 account executives and increased the focus on training,
    motivating and retaining our account executives. These efforts, combined
    with the centralized lead management and point of sale system in our
    branches, resulted in higher productivity per account executive and were a
    primary driver of the receivable growth. Reduced competition also
    contributed to the growth in both our branch and our

                                      10

<PAGE>

   mortgage service businesses. During 2001, we also tightened underwriting and
   increased our emphasis on first lien mortgages. Internal growth was
   supplemented by acquisitions from an affiliate of $2.1 billion in 2001.

   Our auto finance business reported strong, but controlled, growth during
   2001, increasing receivables by $.7 billion to $2.3 billion at December 31,
   2001, while raising cutoff scores and maintaining stringent underwriting
   criteria. A strong market, larger and more efficient sales force, increased
   dealer penetration and strong Internet originations also contributed to the
   growth. We also purchased $.4 billion of auto finance receivables from an
   affiliate in 2001. We securitized $2.6 billion of receivables in 2001 as
   compared to $1.9 billion in 2000.

   MasterCard and Visa receivables increased $1.1 billion to $7.0 billion
   during 2001. Our UP portfolio reported strong growth due to new accounts and
   balance transfers. Our non-prime portfolio, which includes both the subprime
   Renaissance and the near-prime new Household Bank branded base portfolios,
   also grew. This growth was offset by continued attrition, as expected, in
   our legacy undifferentiated Household Bank branded base portfolio. We also
   securitized $.3 billion (excluding replenishments) of MasterCard and Visa
   receivables in 2001 as compared to $1.9 billion in 2000.

   Private label receivables increased 14 percent to $9.8 billion during 2001.
   Growth was primarily due to organic growth by existing merchants, but was
   also attributable to the addition of new merchants and a $725 million
   portfolio acquisition in the fourth quarter. Focused marketing efforts,
   including formation of dedicated marketing teams for our larger merchants,
   and focused use of promotions, especially for our mid-size merchants,
   contributed to the organic growth. Strong sales growth by several of our
   larger merchants also contributed to the increase in receivables. During
   2001 and 2000, we securitized $.5 billion (excluding replenishments) of
   private label receivables.

   Personal non-credit card receivables increased 19 percent due to growth in
   our domestic consumer finance branches. As mentioned earlier, in 2001, we
   increased our branch sales force by almost 750 account executives and
   increased our focus on training, motivating and retaining our account
   executives. Our centralized lead management and point of sale system and
   improved customer retention also contributed to our strong branch growth.

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

<TABLE>
<CAPTION>
                                                At December 31
                                              ------------------
                                                2001      2000
                                              --------- --------
                                                (In millions)
                <S>                           <C>       <C>
                Personal unsecured........... $ 6,242.9 $5,831.2
                Union Plus personal unsecured     194.1     66.4
                Personal homeowner loans.....   4,121.6  2,989.6
                                              --------- --------
                Total........................ $10,558.6 $8,887.2
                                              ========= ========
</TABLE>

   Personal unsecured loans (cash loans with no security) are made to customers
   who do not qualify for a real estate secured or personal homeowner loan
   ("PHL"). The average personal unsecured loan is approximately $5,000 and 80
   percent of the portfolio is closed-end with terms ranging from 12 to 60
   months. The UP personal unsecured loans are part of our affinity
   relationship with the AFL-CIO and are underwritten similar to other personal
   unsecured loans. The average PHL is approximately $15,000. PHLs typically
   have terms of 120 or 180 months and are subordinate lien, home equity loans
   with high (100 percent or more) combined loan-to-value ratios which we
   underwrite, price and classify as unsecured loans. Because recovery upon
   foreclosure is unlikely after satisfying senior liens and paying the
   expenses of foreclosure, we do not consider the collateral as a source for
   repayment in our underwriting. Historically, these loans have performed
   better from a credit loss perspective than traditional unsecured loans as
   consumers are more likely to pay secured loans than unsecured loans in times
   of financial distress. During 2001, we deliberately slowed growth in the
   personal unsecured product and emphasized growth in PHLs. We also
   securitized $1.9 billion of personal non-credit card receivables in 2001 as
   compared to $2.0 billion in 2000.

                                      11

<PAGE>

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

   We also are active in cross-selling more products to our existing customers.
   This opportunity for receivable growth results from our broad product array,
   recognized brand names, varied distribution channels, and large, diverse
   customer base. As a result of these cross-selling initiatives, we increased
   our products per customer by almost 20 percent in 2001. Products per
   customer is a measurement of the number of products held by an individual
   customer whose borrowing relationship with Household is considered in good
   standing. Products include all loan and insurance products.

   From time to time we offer customers with outstanding personal non-credit
   card loans 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 in nature. We
   converted approximately $400 million of personal non-credit card loans into
   real estate secured loans in 2001 and $350 million in 2000. It is not our
   practice to re-write 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. We are currently accepting loan applications via the Internet for
   all of our products and have the ability to serve our customers entirely
   on-line or in combination with our other distribution channels.

..   Our owned consumer two-months-and-over contractual delinquency ratio was
    4.93 percent at December 31, 2001, compared to 4.60 percent at December 31,
    2000. Our owned consumer net charge-off ratio was 3.72 percent in 2001,
    3.51 percent in 2000 and 3.87 percent in 1999.

..  Our owned credit loss reserves were $2.4 billion at December 31, 2001,
   compared to $1.9 billion at December 31, 2000. Credit loss reserves as a
   percent of owned receivables were 3.62 percent at December 31, 2001,
   compared to 3.48 percent at year-end 2000.

..  Our debt to equity ratio (excluding unrealized gains and losses on cash flow
   hedging instruments in 2001) was 6.8 to 1 at December 31, 2001 compared to
   6.5 to 1 at December 31, 2000.

  Results of Operations

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

   Net Interest Margin  Our owned net interest margin on an owned basis
increased to $5.2 billion in 2001, up from $4.2 billion in 2000 and $3.3
billion in 1999. Growth in average interest-earning assets resulted in higher
net interest margin dollars in both years. In 2001, the increase was also due
to lower funding costs, partially offset by an ensuing reduction in the rates
we charge to our customers. The Federal Reserve reduced interest rates 11 times
for a total of 475 basis points during 2001. In 2000, better pricing was
partially offset by higher interest costs. In 2000, the Federal Reserve raised
interest rates 3 times for a total of 100 basis points.

                                      12

<PAGE>

   As a percent of average interest-earning assets, net interest margin was
8.59 percent in 2001, 8.23 percent in 2000 and 7.87 percent in 1999. On a
percentage basis, the increase in 2001 was primarily due to lower interest
costs. The increase in 2000 was primarily due to improved pricing in our
MasterCard and Visa portfolio and the addition of the higher yielding subprime
credit card portfolio, partially offset by higher interest costs. Net interest
margin in both years was impacted by a shift in the portfolio to lower margin
real estate secured receivables.

   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 $7.2 billion in 2001, up from $5.8 billion in 2000 and $4.9
billion in 1999. As a percent of average managed interest-earning assets, net
interest margin was 9.05 percent in 2001, 8.47 percent in 2000 and 8.25 percent
in 1999. Receivable growth contributed to the dollar increases in both years.
The increase in the ratio in 2001 was primarily the result of lower interest
costs. The increase in the ratio in 2000 reflects improved pricing in our
MasterCard and Visa portfolio partially offset by the continued shift in the
portfolio to lower margin real estate secured receivables and higher interest
costs due to increases in interest rates.

   Net interest margin as a percent of receivables on a managed basis is
greater than on an owned basis because auto finance and MasterCard and Visa
receivables, which have wider spreads, are a larger portion of the off-balance
sheet portfolio than of the owned portfolio, which primarily consists of lower
margin real estate secured loans.

   We are able to adjust our pricing on many of our products, which reduces our
exposure to changes in interest rates. During 2001, we benefited from
reductions in funding costs, which were greater than the corresponding
reduction in pricing. At December 31, 2001 and 2000, we estimated that our
after-tax earnings would decline by about $82 and $69 million, respectively,
following a gradual 200 basis point increase in interest rates over a twelve
month period.

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

   At December 31, 2001, our owned loss reserve was at an all-time high,
despite a continued shift in our portfolio mix to secured loans. During 2001,
we recorded owned loss provision $377.6 million greater than charge-offs. Loss
provision in 2001 reflected our continued receivable growth, recent increases
in personal bankruptcy filings, and continued uncertainty over the impact of
the weakening economy on charge-off and delinquency trends. Additionally,
growth in our receivables and portfolio seasoning ultimately result in a higher
dollar loss reserve requirement. Loss provisions are based on an estimate of
inherent losses in our loan portfolio. See "Credit Loss Reserves" for further
discussion and overall methodology for determining loss provision and loss
reserves.

   The provision for credit losses totaled $2.6 billion in 2001, compared to
$1.9 billion in 2000 and $1.5 billion in 1999. Receivables growth in both years
and a weakened economy in 2001 contributed to a higher provision. The provision
for credit losses may vary from year to year, depending on a variety of factors
including the product mix, economic conditions, historical delinquency roll
rates of our loan products and our product vintage analyses.

   As a percent of average owned receivables, the provision was 4.34 percent,
compared to 3.88 percent in 2000 and 3.74 percent in 1999. In 2001, the
increase in this ratio reflects higher charge-offs, including bankruptcy
charge-offs, and additions to loss reserves, both resulting from the weakening
economy. In 2000, increases resulting from the Renaissance acquisition were
partially offset by improved overall credit quality as secured loans, which
have a lower loss experience, represented a larger percentage of our owned
portfolio.

                                      13

<PAGE>

   Other Revenues  Total other revenues on an owned basis were $3.4 billion in
2001, $2.7 billion in 2000 and $2.4 billion in 1999 and included the following:

<TABLE>
<CAPTION>
                                        Year ended December 31
                                      --------------------------
                                        2001     2000     1999
                                      -------- -------- --------
                                            (In millions)
               <S>                    <C>      <C>      <C>
               Securitization revenue $1,652.4 $1,251.4 $1,170.7
               Insurance revenue.....    489.2    394.8    357.7
               Investment income.....    153.4    159.0    154.4
               Fee income............    827.7    748.8    491.4
               Other income..........    293.5    183.9    209.9
                                      -------- -------- --------
               Total other revenues.. $3,416.2 $2,737.9 $2,384.1
                                      ======== ======== ========
</TABLE>

   Securitization revenue is the result of the securitization of our
receivables and includes initial and replenishment gains on sale, net of our
estimate of probable credit losses under the recourse provisions, as well as
servicing revenue and excess spread. Securitization revenue was $1.7 billion in
2001, compared to $1.3 billion in 2000 and $1.2 billion in 1999. The increases
were due to higher average securitized receivables and changes in the mix of
receivables included in these transactions. Securitization revenue will vary
each year based on the level and mix of receivables securitized in that
particular year (which will impact the gross initial gains and 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 result in
higher over-the-life losses than receivables securitized with shorter lives
depending upon loss estimates and severities.

   Securitization revenue included the following:

<TABLE>
<CAPTION>
                                               Year ended December 31
                                             --------------------------
                                               2001     2000     1999
                                             -------- -------- --------
                                                   (In millions)
         <S>                                 <C>      <C>      <C>
         Net initial gains.................. $  154.2 $  141.5 $  114.6
         Net replenishment gains............    521.7    317.1    245.0
         Servicing revenue and excess spread    976.5    792.8    811.1
                                             -------- -------- --------
         Total.............................. $1,652.4 $1,251.4 $1,170.7
                                             ======== ======== ========
</TABLE>

   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.

   The change in our interest-only strip receivables, net of the related loss
reserve and excluding the mark-to-market adjustment recorded in accumulated
other comprehensive income, was $118.1 million in 2001, $44.9 million in 2000
and $31.1 million in 1999.

   See Note 1, "Summary of Significant Accounting Policies," and Note 6, "Asset
Securitizations," to the consolidated financial statements for further
information on asset securitizations.

   Insurance revenue was $489.2 million in 2001, $394.8 million in 2000 and
$357.7 million in 1999. The increases reflect increased sales on a larger loan
portfolio and improved customer acceptance and retention rates. During 2001, we
announced that we will discontinue the sale of single premium credit insurance
on real estate secured receivables in favor of offering a fixed monthly premium
insurance product. The rollout of this insurance product began in the fourth
quarter of 2001 and was substantially completed in the first quarter of 2002.
This change is not expected to have a material impact on our results of
operations for 2002.

                                      14

<PAGE>

   Investment income includes interest income on investment securities in the
insurance business as well as realized gains and losses from the sale of
investment securities. Investment income was $153.4 million in 2001, $159.0
million in 2000 and $154.4 million in 1999. In 2001, the decrease was primarily
due to lower interest income, primarily resulting from lower yields, partially
offset by higher average investment balances. In 2000, the increase was
primarily due to higher interest income, primarily resulting from higher
average investment balances and higher yields.

   Fee income includes revenues from fee-based products such as credit cards.
Fee income was $827.7 million in 2001, $748.8 million in 2000 and $491.4
million in 1999. The increases were primarily due to higher average MasterCard
and Visa receivables, including the February 2000 Renaissance acquisition. Fee
income will also vary from year to year depending upon the amount of
securitizations in a particular period.

   See Note 17, "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 tax services business, was
$293.5 million in 2001, $183.9 million in 2000 and $209.9 million in 1999. The
increase in 2001 was primarily attributable to higher revenues from our tax
services business. The decline in 2000 was attributable to lower non-recurring
gains on sales of non-strategic assets and lower commercial income.

   Expenses Total costs and expenses increased 19 percent to $3.4 billion in
2001, compared to $2.8 billion in 2000 and $2.3 billion in 1999. Expenses on an
owned basis are the same as expenses on a managed basis. Higher expenses were
the result of higher receivable levels and increased operating, technology,
marketing, and personnel spending directly related to the receivable growth.
Acquisitions during the first half of 2000 also contributed to increased
expenses over the prior years. Our efficiency ratio was 37.1 percent in 2001,
38.9 percent in 2000 and 38.2 percent in 1999.

   Total costs and expenses included the following:

<TABLE>
<CAPTION>
                                                      Year ended December 31
                                                    --------------------------
                                                      2001     2000     1999
                                                    -------- -------- --------
                                                          (In millions)
  <S>                                               <C>      <C>      <C>
  Salaries and fringe benefits..................... $1,331.0 $1,091.8 $  833.8
  Sales incentives.................................    262.9    193.6    140.4
  Occupancy and equipment expense..................    270.5    250.3    218.8
  Other marketing expenses.........................    467.2    450.1    345.9
  Other servicing and administrative expenses......    621.5    454.7    391.6
  Amortization of acquired intangibles and goodwill    157.4    166.0    149.4
  Policyholders' benefits..........................    268.1    231.7    224.7
                                                    -------- -------- --------
  Total costs and expenses......................... $3,378.6 $2,838.2 $2,304.6
                                                    ======== ======== ========
</TABLE>

   Salaries and fringe benefits were $1.3 billion in 2001, $1.1 billion in 2000
and $.8 billion in 1999. The increases were primarily due to additional
staffing at all businesses, including the impact of acquisitions. In 2001, we
increased sales, collection, customer service and technology staffing levels at
all businesses to support our growth. In 2000, additional staffing to support
growth and collection efforts in our consumer lending business, which
contributed to increased recoveries and collections and improved the portfolio
performance of our receivables, also contributed to the increase over the prior
year. Growth in our credit card business, including the impact of acquisitions,
also contributed to the increase in 2000.

   Sales incentives were $262.9 million in 2001, $193.6 million in 2000 and
$140.4 million in 1999. The increases were primarily due to higher sales
volumes in our branches.


                                      15

<PAGE>

   Occupancy and equipment expense was $270.5 million in 2001, $250.3 million
in 2000 and $218.8 million in 1999. The increases were primarily due to growth
in our support facilities. In 2000, we opened a new call center in Tampa,
Florida and acquired other facilities in the first half of the year. These
facilities have supported our receivable growth.

   Other marketing expenses include payments for advertising, direct mail
programs and other marketing expenditures. These expenses were $467.2 million
in 2001, $450.1 million in 2000 and $345.9 million in 1999. The increases were
primarily due to increased credit card marketing initiatives in the MasterCard
and Visa portfolio.

   Other servicing and administrative expenses were $621.5 million in 2001,
$454.7 million in 2000 and $391.6 million in 1999. In 2001, the increase was
primarily due to higher collection and consulting expenses, REO and fraud
losses, and costs associated with privacy mailings to comply with new
legislation. In 2000, the increase was primarily due to servicing fees on the
Renaissance portfolio, e-commerce initiatives and increased costs resulting
from the acquisition of Renaissance and two real estate secured loan portfolios.

   Amortization of acquired intangibles and goodwill was $157.4 million in
2001, $166.0 million in 2000 and $149.4 million in 1999. In 2001, the decrease
was attributable to reductions in acquired intangibles. In 2000, the increase
was attributable to higher goodwill amortization resulting from the Renaissance
acquisition. Upon adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002, amortization
of goodwill recorded in past business combinations ceased. The adoption is
expected to increase net income by approximately $45 million annually.

   Policyholders' benefits were $268.1 million in 2001, $231.7 million in 2000
and $224.7 million in 1999. The increases are consistent with the increase in
insurance revenues resulting from increased policy sales.

   Income taxes. The effective tax rate was 35.5 percent in 2001, 35.6 percent
in 2000 and 35.3 percent in 1999.

                                CREDIT QUALITY

   Delinquency and Charge-offs Our delinquency and net charge-off ratios
reflect, among other factors, changes in the mix of loans in our portfolio, the
quality of our receivables, the average age of our loans, the success of our
collection 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 efforts for each loan. We have a process which we
believe 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 policies designed to manage
customer relationships, such as reaging delinquent accounts to current in
specific situations, are helpful in maximizing customer collections.

   We have been preparing for an economic slowdown since late 1999. Throughout
2000 and 2001, we emphasized real estate secured loans which historically have
had a lower loss rate than our other loan products, grew sensibly, tightened
underwriting policies, reduced unused credit lines, strengthened risk model
capabilities and invested heavily in collections capability by adding over
2,500 collectors. As a result, 2001 charge-off and delinquency performance has
been well within our expectations.

                                      16

<PAGE>

   Our consumer charge-off and nonaccrual policies vary by product as follows:

<TABLE>
<CAPTION>
Product                       Charge-off Policy                                  Nonaccrual Policy
-------                       -----------------                                  -----------------
<C>           <S>                                                <C>
Real estate   Carrying values in excess of net realizable value  Interest income accruals are suspended when
secured       are charged off at the time of foreclosure or      principal or interest payments are more than 3
              when settlement is reached with the borrower.      months contractually past due and resumed when
                                                                 the receivable becomes less than 3 months
                                                                 contractually past due.
Auto finance  Carrying values in excess of net realizable value  Interest income accruals are suspended when
              are charged off at the earlier of the following:   principal or interest payments are more than 2
              .  The collateral has been repossessed and sold,   months contractually past due and resumed when
              .  The collateral has been in our possession for   the receivable becomes less than 2 months
                 more than 90 days, or                           contractually past due.
              .  The loan becomes 150 days contractually
                 delinquent.
MasterCard    Charged off at 6 months contractually delinquent.  Interest accrues until charge-off.
and Visa
Private label Charged off at 9 months contractually delinquent.  Interest accrues until charge-off.
Personal non- Charged off at 9 months contractually delinquent   Interest income accruals are suspended when
credit card   and no payment received in 6 months, but in no     principal or interest payments are more than 3
              event to exceed 12 months.                         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 recorded as
                                                                 collected.
</TABLE>

Charge-offs may occur sooner for certain consumer receivables involving a
bankruptcy.

   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 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. Our MasterCard and Visa charge-off policy is
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 been consistently applied and there
have been no significant changes to any of our policies during any of the
periods reported. Our loss reserve estimates consider our charge-off policies
to ensure appropriate reserves exist for products with longer charge-off lives.
We believe our charge-off policies are appropriate and result in proper loss
recognition.

   Our account management policies and practices for consumer receivables
include collection strategies that permit us to reset the contractual
delinquency status of an account to current in certain circumstances. We are
amending our disclosures of our restructure policies to include the following
disclosures: (1) in numerous instances HFC accepts one or zero payments prior
to resetting the delinquency status, and (2) in many instances, we restructure
delinquent accounts automatically. In the case of automatic restructures, no
prior contact is required with the customer to determine if the cause of the
delinquency has been cured. These account management policies and practices
vary from product to product and are continually being tested and refined and
may change from time to time and period to period. The account management
policies and practices include, but are not limited to, restructure or reaging
of accounts, forbearance agreements, extended payment plans, modification
arrangements, consumer credit counseling accommodations, loan rewrites and
deferments.

   See "Credit Quality Statistics" on pages 31 and 32 for further information
regarding owned basis and managed basis delinquency, charge-offs and
nonperforming loans.

                                      17

<PAGE>

Consumer Two-Month-and-Over Contractual Delinquency Ratios--Owned Basis

<TABLE>
<CAPTION>
                               2001 Quarter End           2000 Quarter End
                          --------------------------  -----------------------
                            4      3      2      1      4     3     2     1
                          -----  -----  -----  -----  ----  ----  ----  -----
 <S>                      <C>    <C>    <C>    <C>    <C>   <C>   <C>   <C>
 Real estate secured.....  2.89%  3.00%  2.83%  2.78% 2.75% 2.89% 2.82%  3.06%
 Auto finance............  2.90   2.39   2.43   1.77  2.66  2.08  1.95   1.95
 MasterCard/Visa.........  6.26   6.31   5.75   6.19  6.09  6.49  5.02   4.94
 Private label...........  6.30   6.99   7.09   6.01  5.95  5.90  6.11   6.39
 Personal non-credit card 10.43  10.34  10.16  10.02  8.91  8.57  9.04  10.20
                          -----  -----  -----  -----  ----  ----  ----  -----
 Total Owned.............  4.93%  5.08%  4.93%  4.77% 4.60% 4.62% 4.52%  4.87%
                          =====  =====  =====  =====  ====  ====  ====  =====
</TABLE>

   See "Credit Quality Statistics--Managed Basis" on page 32 for additional
information regarding our managed basis credit quality.

   Despite the weakened economy, our consumer delinquency ratio at year-end
remained stable, declining slightly from the prior quarter. All increases were
within our expectations. All products were negatively affected by the weakening
economy during the fourth quarter. The increase in auto finance delinquency
also reflects historical seasonal trends. These increases were more than offset
by decreases in real estate secured delinquency due to improved collections.
The sequential quarter comparison benefited from seasonal receivable growth in
MasterCard and Visa and private label receivables as well as a private label
portfolio acquisition in the quarter.

   Compared to a year ago, the weakening economy resulted in higher delinquency
ratios in all products. In our real estate secured portfolio, these increases
were partially offset by benefits from the growing percentage of loans on which
we hold a first lien position as these loans have lower delinquency rates than
other loans. Though delinquency in our total MasterCard and Visa portfolio
increased over the prior year, delinquency in our subprime portfolio improved.
During 2001, we improved underwriting selection criteria in our subprime
MasterCard and Visa portfolio by building systems which better exclude certain
high-risk customers from solicitations.

Consumer Net Charge-off Ratios--Owned Basis

<TABLE>
<CAPTION>
                                                                   2000 Quarter
                         Full  2001 Quarter Annualized  Full        Annualized         Full
                         Year  -----------------------  Year  ----------------------   Year
                         2001    4     3      2     1   2000    4     3     2     1    1999
                         ----  ----  -----  ----  ----  ----  ----  ----  ----  ----  -----
<S>                      <C>   <C>   <C>    <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>
Real estate secured.....  .57%  .71%   .57%  .52%  .46%  .45%  .42%  .41%  .48%  .50%   .49%
Auto finance............ 4.04  4.85   3.69  3.27  4.17  3.43  4.16  3.01  3.02  3.45   3.42
MasterCard/Visa......... 9.82  9.49  10.16  9.98  9.69  8.25  9.26  7.68  7.77  8.19  10.20
Private label........... 6.11  6.63   6.55  5.77  5.46  5.74  5.42  5.59  5.91  6.07   5.91
Personal non-credit card 8.37  9.14   8.77  8.18  7.26  8.33  7.02  8.24  9.21  9.23   7.55
                         ----  ----  -----  ----  ----  ----  ----  ----  ----  ----  -----
Total Owned............. 3.72% 3.93%  3.86% 3.62% 3.44% 3.51% 3.32% 3.34% 3.60% 3.87%  3.87%
                         ====  ====  =====  ====  ====  ====  ====  ====  ====  ====  =====
</TABLE>

   See "Credit Quality Statistics--Managed Basis" on page 32 for additional
information regarding our managed basis credit quality.

   During the fourth quarter, our net charge-off ratios continued to be
impacted by the weakening economy. The decrease in the MasterCard and Visa
ratio was primarily due to improved charge-offs in our subprime portfolio.
Higher loss severities on repossessed vehicles due to a weak market for used
cars and historical seasonal trends also contributed to the increases in our
auto finance portfolio.

   Charge-off ratios for the year also reflect the weakening economy. These
increases were partially offset by improved collections in our real estate
secured, private label and personal non-credit card portfolios as a direct
result of increasing the size of our collection staff, especially in our branch
network. The increase in the auto finance ratio was due in part to higher loss
severities on repossessed vehicles. The increase in the MasterCard and Visa
ratio reflects a higher percentage of subprime receivables in the portfolio.
Though subprime charge-off

                                      18

<PAGE>

rates declined throughout 2001, these receivables continue to have higher loss
rates than other MasterCard/Visa receivables.

   Our total 2001 net charge-off ratio reflected the positive impact of the
growing percentage of real estate secured receivables, which have a lower
charge-off ratio than other products, in our portfolio. Assuming 1999 product
mix, net charge-offs would have been approximately 33 basis points higher in
2001 and 21 basis points higher in 2000.

   In 2000, all products, except personal non-credit card loans, reported
notable improved charge-off ratios compared to 1999. The increase in personal
non-credit card charge-offs was driven by higher charge-off levels on older
Beneficial vintages in the first half of the year. Our MasterCard and Visa
portfolio reported the strongest improvement in 2000 as a result of significant
decreases in charge-off dollars in our legacy undifferentiated Household Bank
and GM portfolios and in bankruptcy charge-offs. Charge-off dollars for all
products were up in 2000.

   In February 1999, the four federal banking regulatory agencies revised their
guidelines for classification of credit based on delinquency status and
mandated specified timeframes for recognizing losses in consumer loan
portfolios. These regulatory policy changes, which apply only to products
within our banking subsidiaries and became effective October 1, 2000, did not
result in a significant modification to any of our established reaging or
charge-off policies. Therefore, the application of the new rules did not have a
material impact on our financial statements or the way we manage our businesses.

   Credit Loss Reserves We maintain credit loss reserves to cover probable
losses of principal, interest and fees, including late, overlimit and annual
fees. Credit loss reserves are based on a range of estimates and intended to be
adequate but not excessive. We estimate losses for consumer receivables based
on delinquency status and past loss experience. In addition, we provide loss
reserves on consumer receivables to reflect our assessment of portfolio risk
factors which may not be fully reflected in the statistical calculation which
uses roll rates and migration analysis. These risk factors include bankruptcy
trends, recent growth, product mix, economic conditions, and current levels in
charge-off and delinquency. While our credit loss reserves are available to
absorb losses in the entire portfolio, we specifically consider the credit
quality and other risk factors for each of our products, which include real
estate secured, auto finance, Master Card and Visa and private label credit
cards and personal non-credit cards. We recognize the different inherent loss
characteristics and risk management/collection practices in each of these
products. Charge-off and customer account management policies are also
considered when establishing loss reserve requirements to ensure the
appropriate reserves exist for products with longer charge-off periods and for
customers benefiting from account management decisions. We also consider key
ratios such as reserves to nonperforming loans and reserves as a percentage of
charge-offs in developing our loss reserve estimate. Loss reserve estimates are
reviewed periodically and adjustments are reported in earnings when they become
known. These estimates are influenced by factors outside of our control, such
as economic conditions and consumer payment patterns. As a result, there is
uncertainty inherent in these estimates, making it reasonably possible that
they could change.

   At December 31, 2001, our owned loss reserve was at an all-time high,
despite a continued shift in our portfolio mix to secured loans. During 2001,
we recorded owned loss provision $377.6 million greater than charge-offs. Loss
provision in 2001 reflected our continued receivable growth, recent increases
in personal bankruptcy filings, and continued uncertainty over the impact of
the weakening economy on charge-off and delinquency trends. Additionally,
growth in our receivables and portfolio seasoning ultimately result in a higher
loss reserve requirement. Loss provisions are based on an estimate of inherent
losses in our loan portfolio.

                                      19

<PAGE>

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

<TABLE>
<CAPTION>
                                                              At December 31
                                             ------------------------------------------------
                                               2001      2000      1999      1998      1997
                                             --------  --------  --------  --------  --------
                                                (All dollar amounts are stated in millions)
<S>                                          <C>       <C>       <C>       <C>       <C>
Owned credit loss reserves.................. $2,440.6  $1,940.6  $1,549.3  $1,514.4  $1,470.0
Reserves as a percent of receivables........     3.62%     3.48%     3.64%     4.10%     4.38%
Reserves as a percent of net charge-offs....    109.5     111.4     101.3     110.5     129.2
Reserves as a percent of nonperforming loans     91.5      93.4      90.0     103.2     121.3
                                             --------  --------  --------  --------  --------
</TABLE>

   Reserves as a percentage of receivables in 2001 reflect the impact of the
weakened economy, higher levels of delinquency and charge-off and the
continuing uncertainty as to the ultimate impact the weakened economy will have
on delinquency and charge-off levels. We began to see evidence of a weakening
economy in the first half of the year as delinquencies began to rise and
bankruptcy filings increased. This resulted in higher charge-offs beginning in
the second quarter. The combination of these risk factors resulted in higher
loss provisions in 2001.

   Over the past five years, our loan portfolio has experienced a dramatic
shift in product mix to real estate secured receivables. The trend in reserves
as a percentage of receivables from 1997 through 2000 reflects the impact of a
growing percentage of secured loans which have lower loss rates than unsecured
loans. In 1999 and 2000, this trend also reflects the benefits of improving
credit quality trends and the continued run-off of our undifferentiated
Household Bank branded MasterCard and Visa portfolio. Real estate secured
receivables represented 55 percent of our receivables at December 31, 2001
compared to 38 percent at December 31, 1997. The impact of this shift to real
estate secured receivables is significant. Holding average receivable mix
constant to 1997 levels would have resulted in approximately a $1.0 billion
increase in charge-off during 2001 based on 2001 owned charge-off ratios.

   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:

<TABLE>
<CAPTION>
                                                                  At December 31
                                                 ------------------------------------------------
                                                   2001      2000      1999      1998      1997
                                                 --------  --------  --------  --------  --------
                                                    (All dollar amounts are stated in millions)
<S>                                              <C>       <C>       <C>       <C>       <C>
Managed credit loss reserves.................... $3,502.7  $2,942.0  $2,393.6  $2,277.7  $2,299.1
Reserves as a percent of managed receivables....     4.02%     3.94%     3.93%     4.09%     4.04%
Reserves as a percent of managed net charge-offs    108.6     110.5      97.0      91.5     108.5
Reserves as a percent of nonperforming loans....    105.4     109.8     102.4     112.1     119.5
                                                 --------  --------  --------  --------  --------
</TABLE>

   Geographic Concentrations The state of California accounts for 15 percent of
our managed domestic portfolio and is the only state with more than 10 percent
of this 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.

                                      20

<PAGE>

Owned Nonperforming Assets

<TABLE>
<CAPTION>
                                                                            At December 31
                                                                     ----------------------------
                                                                       2001      2000      1999
                                                                     --------  --------  --------
                                                                        (All dollar amounts are
                                                                          stated in millions)
<S>                                                                  <C>       <C>       <C>
Nonaccrual receivables.............................................. $1,853.5  $1,434.2  $1,183.7
Accruing consumer receivables 90 or more days delinquent............    814.1     632.2     525.5
Renegotiated commercial loans.......................................       --      12.3      12.3
                                                                     --------  --------  --------
Total nonperforming receivables.....................................  2,667.6   2,078.7   1,721.5
Real estate owned...................................................    392.6     332.1     266.6
                                                                     --------  --------  --------
Total nonperforming assets.......................................... $3,060.2  $2,410.8  $1,988.1
                                                                     ========  ========  ========
Owned credit loss reserves as a percent of nonperforming receivables     91.4%     93.4%     90.0%
                                                                     ========  ========  ========
</TABLE>

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

   See "Credit Quality Statistics" on pages 31 and 32 for further information
regarding nonperforming receivables.

                                      21

<PAGE>

                        LIQUIDITY AND CAPITAL RESOURCES

   Generally, we are funded independently from our parent. Cash flows,
liquidity, and capital are monitored at both HFC and Household International
levels. In managing capital, we develop targets for the ratio of tangible
equity to tangible managed assets based on discussions with rating agencies,
reviews of regulatory requirements and competitor capital positions, risks
inherent in the portfolio and projected operating environment and acquisition
objectives. We also specifically consider the level of intangibles arising from
completed acquisitions. A primary objective of our capital management is to
maintain investment grade ratings from rating agencies in order to have
acceptable funding costs as well as greater access to a variety of funding
sources. Targets include capital levels against both owned and managed assets.
Our targets may change from time to time to accommodate changes in the
operating environment or any of the other considerations listed above.

   We paid cash dividends to our parent of $650 million in 2001, $425 million
in 2000 and $803 million in 1999. HBSB also paid cash dividends of $225 million
to an affiliate in 2001. We received capital contributions from our parent of
$50 million in 2001 and $550 million in 2000.

   Our main uses of cash are originating or purchasing receivables, purchasing
investment securities, acquiring businesses or paying dividends to our parent.
At various times, we also make capital contributions to our subsidiaries to
comply with regulatory guidance, support receivable growth and, where
applicable, maintain acceptable investment grade ratings at the subsidiary
level. We fund our operations by collecting receivables, issuing commercial
paper, medium-term debt and long-term debt primarily to wholesale investors,
securitizing consumer receivables and receiving capital contributions from our
parent company.

   The following table summarizes our contractual cash obligations by period
due:

<TABLE>
<CAPTION>
                                                        At December 31, 2001
                              -----------------------------------------------------------------------
                                 2002      2003      2004      2005      2006    Thereafter   Total
                              ---------  --------  --------  --------  --------  ---------- ---------
                                                           (In millions)
<S>                           <C>        <C>       <C>       <C>       <C>       <C>        <C>
Long-term debt:
   Senior debt............... $10,172.5  $9,393.9  $4,185.1  $5,060.1  $6,180.8  $16,182.4  $51,174.8
Operating leases:
   Minimum rental payments...     133.5     111.7      95.3      79.5      70.6      261.1      751.7
   Minimum sublease
     income..................     (20.8)    (21.0)    (21.5)    (21.8)    (21.8)     (76.2)    (183.1)
                              ---------  --------  --------  --------  --------  ---------  ---------
   Total operating leases....     112.7      90.7      73.8      57.7      48.8      184.9      568.6
                              ---------  --------  --------  --------  --------  ---------  ---------
Total contractual obligations $10,285.2  $9,484.6  $4,258.9  $5,117.8  $6,229.6  $16,367.3  $51,743.4
                              =========  ========  ========  ========  ========  =========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                At
                                                            December 31
                                                               2001
                                                           -------------
                                                           (In billions)
        <S>                                                <C>
        MasterCard and Visa and private label credit cards    $ 98.8
        Other consumer lines of credit....................       2.1
                                                              ------
        Open lines of credit..............................    $100.9
                                                              ======
</TABLE>

   At December 31, 2001, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.1 billion of real estate secured
receivables, subject to availability based on underwriting

                                      22

<PAGE>

guidelines specified by our mortgage services business. These commitments have
terms of up to one year and can be renewed upon mutual agreement.

   We domestically market our commercial paper primarily through an in-house
sales force. Outstanding commercial paper totaled $8.8 billion at December 31,
2001 and $8.7 billion at December 31, 2000. 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.

   We market domestic medium-term notes through investment banks and our
in-house sales force. A total of $8.0 billion of domestic medium-term notes
were issued in 2001, including $788 million of InterNotes/SM/, a
retail-oriented medium-term note program. In 2000, $9.9 billion of domestic
medium-term notes were issued. During 2001, we also issued $7.0 billion of U.S.
dollar, global long-term debt with a weighted-average original maturity of 8.14
years. Long-term debt issuances in 2000 totaled $4.8 billion and had a
weighted-average original maturity of 6.98 years. These long-term issuances
lengthened the term of our funding, reduced reliance on commercial paper and
securitizations, and preserved liquidity.

   We issued securities backed by dedicated home equity loan receivables of
$1.6 billion in 2001 and $.5 billion in 1999. For accounting purposes, the
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. At December 31, 2001,
closed-end real estate secured receivables totaling $1.7 billion secured $1.5
billion of outstanding debt related to these transactions. At December 31,
2000, closed-end real estate secured receivables totaling $.4 billion secured
$.4 billion of outstanding debt.

   To obtain a broader investment base, we periodically issue debt in foreign
markets. During 2001, $2.0 billion in notes were issued in these foreign
markets, including Euro, Japanese yen and Australian dollar denominated
issuances, compared to $2.1 billion in 2000. In order to eliminate future
foreign exchange risk, currency swaps were used to convert the notes to U.S.
dollars at the time of issuance.

   We had committed back-up lines of credit totaling $10.1 billion at December
31, 2001, of which $400 million was also available to our parent company. None
of these back-up lines were used in 2001. In addition, none of these lines
contained a financial material adverse change clause which could restrict
availability. Our back-up lines expire on various dates through 2005. The most
restrictive financial covenant contained in the terms of our credit agreements
is the maintenance of minimum shareholder's equity of $3.6 billion.

   At December 31, 2001, we had facilities with commercial and investment banks
under which we may securitize up to $12.6 billion of receivables. The conduit
facilities are renewable on an annual basis at the banks' option. At December
31, 2001, $10.3 billion of receivables were securitized under these programs.
The amount available under the facilities will vary based on the timing and
volume of public securitization transactions. We expect to significantly
increase the amounts available under these conduit programs in 2002 to protect
our ability to operate efficiently in a cautionary capital market. Through
existing bank lines, other conduit facilities and new debt issuances, we
believe we would continue to have more than adequate sources of funds if one or
more of these facilities were unable to be renewed.

   We have been advised by the Office of Thrift Supervision ("OTS"), Office of
the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC") that in accordance with their 2001 Guidance for Subprime
Lending Programs, they will impose additional capital requirements on
institutions which hold nonprime or subprime assets which we expect will be
greater than the historical levels we have been obligated to maintain at our
banking institutions. As such, HFC will maintain the regulatory capital of its
institutions at these specified higher levels.

   Under the Regulatory Capital Maintenance/Dividend Agreement between
Household International and the OTS, Household International and HFC have
agreed to maintain the capital of Household Bank, f.s.b. (the

                                      23

<PAGE>

"Bank") at the required levels. However, HFC is only required to provide
additional capital if Household International fails to maintain the Bank's
required capital levels. We currently do not believe that direct capital
infusions by HFC into the Bank will be required.

   Investment Ratings As a financial services organization, we must have access
to funds at competitive rates, terms and conditions to be successful. At
December 31, 2001, our long-term debt had been assigned investment grade
ratings by all nationally recognized statistical rating organizations that rate
such instruments. These organizations have also rated our commercial paper in
their highest rating category. Although one nationally recognized statistical
rating organization recently downgraded our long-term debt to the corresponding
levels of the other agencies, we believe this downgrade will not have any
meaningful impact on our ability to fund our operations. With our back-up lines
of credit and securitization programs, we believe we have sufficient funding
capacity to refinance maturing debts and fund our growth.

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

                             ASSET SECURITIZATIONS

   Securitizations and secured financings of consumer receivables have been,
and will continue to be, a source of liquidity for us. In a securitization, a
designated pool of receivables, typically MasterCard or Visa, private label,
personal non-credit card or auto finance, is removed from the balance sheet and
transferred to an unaffiliated trust. This unaffiliated trust is a qualifying
special purpose entity ("QSPE") as defined by Statement of Financial Accounting
Standards No. 140 ("FAS No. 140") and, therefore, is not consolidated. The QSPE
funds its 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. Under the terms of the securitizations, we receive
annual servicing fees on the outstanding balance of the securitized receivables
and the rights to future residual cash flows on the sold receivables after the
investors receive their contractual return. The estimated present value of
these rights to future residual cash flows are recorded on our balance sheet at
the time of sale as interest-only strip receivables, net of our recourse
obligation to investors for failure of debtors to pay. Our recourse is limited
to our rights to future cash flows and any subordinated interests that we may
retain. Cash flows related to the interest-only strip receivables and servicing
the receivables are collected over the life of the underlying securitized
receivables. Securitizations represented 24 percent of the funding associated
with our managed portfolio at December 31, 2001, compared to 26 percent at
December 31, 2000 and 30 percent at December 31, 1999.

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

   The following table summarizes the composition of receivables securitized
(excluding replenishments of certificateholder interests) during the year:

<TABLE>
<CAPTION>
                                             2001 2000 1999
                                             ---- ---- ----
                                             (In billions)
                    <S>                      <C>  <C>  <C>
                    MasterCard/Visa......... $ .3 $1.9 $1.8
                    Auto finance............  2.6  1.9  1.4
                    Private label...........   .5   .5   .5
                    Personal non-credit card  1.9  2.0  1.5
                                             ---- ---- ----
                    Total................... $5.3 $6.3 $5.2
                                             ==== ==== ====
</TABLE>

                                      24

<PAGE>

   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 receivable
runoff. These replenishments totaled $24.4 billion in 2001, $20.7 billion in
2000 and $19.8 billion in 1999.

   The following table summarizes the expected amortization of our
securitizations by type:

<TABLE>
<CAPTION>
                                              At December 31, 2001
                         ---------------------------------------------------------------
                           2002     2003     2004     2005    2006  Thereafter   Total
                         -------- -------- -------- -------- ------ ---------- ---------
                                                  (In millions)
<S>                      <C>      <C>      <C>      <C>      <C>    <C>        <C>
Real estate secured..... $  295.1 $  304.8 $  217.9 $   44.0     --      --    $   861.8
Auto finance............  1,256.4  1,211.4    712.4    846.4     --      --      4,026.6
MasterCard/Visa.........  4,345.5  1,207.1  1,394.9  2,010.0 $ 90.0      --      9,047.5
Private label...........    336.5  1,001.8    811.7       --     --      --      2,150.0
Personal non-credit card  1,874.5  1,057.1    482.9    124.7   83.1   $51.1      3,673.4
                         -------- -------- -------- -------- ------   -----    ---------
Total................... $8,108.0 $4,782.2 $3,619.8 $3,025.1 $173.1   $51.1    $19,759.3
                         ======== ======== ======== ======== ======   =====    =========
</TABLE>

   At December 31, 2001, the expected weighted-average remaining life of these
transactions was 1.7 years.

   We issued securities backed by dedicated home equity loan receivables of
$1.6 billion in 2001 and $.5 billion in 1999. In order to facilitate these
transactions, the home equity loan receivables were conveyed to a wholly owned
limited purpose finance subsidiary which in turn conveyed the receivables to
Household Home Equity Loan Trusts to support the issuance of certificates for
the trusts. For accounting purposes, the transactions were structured as
secured financings, therefore, the receivables and the related debt remain on
our balance sheet. Real estate receivables included closed-end real estate
secured receivables totaling $1.7 billion at December 31, 2001 and $.4 billion
at December 31, 2000 which secured the outstanding debt related to these
transactions.

   The securities issued with our securitizations may payoff sooner than
originally scheduled if certain events occur. For MasterCard and Visa, private
label, real estate secured and personal non-credit card securitizations, early
payoff of the securities begins if the annualized portfolio yield drops below a
base rate or if certain other events occur. For certain auto securitizations,
early payoff of securities may occur if established delinquency or loss levels
are exceeded. We do not presently believe that any early payoff will take
place. If early payoff occurred, our funding requirements would increase. These
additional requirements could be met through new securitizations, issuance of
various types of debt or borrowings under existing back-up lines of credit. We
believe we would continue to have more than adequate sources of funds if an
early payoff event occurred.

   At December 31, 2001, we had facilities with commercial banks under which we
may securitize up to $12.6 billion of receivables. The facilities are renewable
on an annual basis at the banks' option. At December 31, 2001, $10.3 billion of
receivables were securitized under these programs. The amount available under
the facilities will vary based on the timing and volume of public
securitization transactions. Through existing bank lines and new debt
issuances, we believe we would continue to have more than adequate sources of
funds if one or more of these facilities were unable to be renewed.

                                RISK MANAGEMENT

   We have a comprehensive program to address potential financial risks, such
as liquidity, interest rate, currency and credit risk. The Finance Committee of
the Board of Directors of Household International annually sets acceptable
limits for each of these risks for each of Household International's
subsidiaries. The limits are reviewed semi-annually. We maintain an overall
risk management strategy that uses a variety of interest rate and currency
derivative financial instruments to mitigate our exposure to fluctuations
caused by changes in interest rates and currency exchange rates. We manage our
exposure to interest rate risk primarily through the use of

                                      25

<PAGE>

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.

   Because we are predominantly capital markets funded, our ability to ensure
continuous access to these markets and maintain a diversified funding base is
important in meeting our funding needs. We have never experienced funding
difficulties. Over the past two years, we have worked with a number of
investment banks to identify and implement the strategic initiatives required
to enhance future market access. Our ability to issue debt at competitive
prices is influenced by rating agencies' views of our credit quality,
liquidity, capital and earnings. As a result, we maintain close working
relationships with each rating agency to secure the highest possible rating on
our debt and asset backed securities. Additionally, access to capital markets
is dependent upon a well-informed investor base. We maintain a comprehensive,
direct marketing program to ensure our investors receive consistent and timely
information regarding our financial performance. The ability to fund our
operations, however, can be influenced by factors outside of our control such
as the events of September 11, 2001 and the Russian financial crisis that
occurred in the fall of 1998. In both of these situations, we adjusted our debt
issuance plans as the debt markets changed and readily achieved our funding
goals. Our contingency funding plans contemplate short and long-term market
interruptions resulting from both general market events and events specific to
us or to our parent. Any shortfalls created by these interruptions could be
mitigated through access to alternative sources of secured funding, asset sales
and/or reductions in receivable growth rates. We currently are not aware of any
trends or events that will result in or that are reasonably likely to result in
a material change in our liquidity.

   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. We validate the
accuracy of our models by comparing actual results to those previously
predicted by the model. At December 31, 2001, our interest rate risk levels
were substantially below those allowed by our existing policy.

   We estimate that our after-tax earnings would decline by about $82 million
at December 31, 2001 and $69 million at December 31, 2000 following a gradual
200 basis point increase in interest rates over a twelve month period and would
increase by about $61 million at December 31, 2001 and $77 million at December
31, 2000 following a gradual 200 basis point decrease in interest rates. These
estimates include the impact of the derivative positions we have entered into.
As a result, the decline in our earnings following a gradual 200 basis point
increase would be higher had those derivative positions not been entered into.
These estimates also assume we would not take any corrective action to lessen
the impact and, therefore, exceed what most likely would occur if rates were to
change.

   We generally fund our assets with liabilities that have similar interest
rate features. This initially reduces interest rate risk. Over time, however,
customer demand for our receivable products shifts between fixed rate and
floating rate products, based on market conditions and preferences. These
shifts result in different funding strategies and produce different interest
rate risk exposures. We use derivative financial instruments, principally
swaps, to manage these exposures, as well as our liquidity position. Generally,
we use derivatives that are either effective hedges, of which 94 percent
qualify for the short-cut method of accounting under FAS No. 133, or are
short-term (less than one year) economic hedges which offset the economic risk
inherent in our balance sheet. As a result, we do not believe that using these
derivatives will result in a material mark-to-market income adjustment in any
period.

   The primary exposure on our interest rate swap portfolio is credit risk.
Credit risk is the risk that the counterparty to a transaction fails to perform
according to the terms of the contract. We control the credit (or repayment)
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

                                      26

<PAGE>

management process. These limits ensure that we do not have significant
exposure to any individual counterparty. Based on peak exposure at December 31,
2001, substantially all of our derivative counterparties were rated AA- or
better. Certain swap agreements require that payments be made to, or received
from, the counterparty when the fair value of the agreement reaches a certain
level. We have never suffered a loss due to counterparty failure.

   We also use interest rate futures, interest rate forwards and purchased
options to reduce interest rate risk. We use these instruments to hedge
interest rate changes on our variable rate assets and 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
on the assets our borrowings are funding. 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 variable rate asset or liability changes.
We then terminate, or close out, the derivative financial instrument. These
terminations are necessary because the date the interest rate changes is
usually not the same as the expiration date of the derivative contracts.

   Foreign currency exchange risk refers to the potential changes in current
and future earnings or capital arising from movements in foreign exchange
rates. We enter into currency swaps to minimize currency risk associated with
changes in the value of foreign-denominated assets or liabilities. These swaps
convert principal and interest payments on debt issued from one currency to
another. For example, we may issue Euro-denominated debt and then execute a
currency swap to convert the obligation to U.S. dollars.

   See Note 10 to the accompanying consolidated financial statements,
"Derivative Financial Instruments and Concentrations of Credit Risk," for
additional information related to interest rate risk management and Note 11,
"Fair Value of Financial Instruments," for information regarding the fair value
of certain financial instruments.

                                      27

<PAGE>

                               GLOSSARY OF TERMS

   Acquired Intangibles and Goodwill--Intangible assets represent the market
value premium attributable to our credit card accounts in excess of the
aggregate outstanding managed credit card loans acquired. Goodwill represents
the purchase price over the fair value of identifiable assets acquired less
liabilities assumed from business combinations.

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

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

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

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

   Contractual Delinquency--A method of determining aging of past due accounts
based on the status of payments under the loan.

   Efficiency Ratio--Ratio of operating expenses 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.

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

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

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

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

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

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

                                      28

<PAGE>

   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.

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

   Nonprime Accounts--Accounts held by individuals who have limited credit
histories, modest income, high debt-to-income ratios or have experienced credit
problems caused by occasional delinquencies, prior charge-offs or other credit
related actions. These customers generally have higher delinquency and credit
loss probabilities and are charged a higher interest rate to compensate us for
the additional risk.

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

   Owned Receivables--Receivables held on our balance sheet.

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

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

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

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

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

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

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

   Return on Average Common Shareholder's Equity--Net income divided by average
common shareholder's equity.

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

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

   Secured Financing--The process where interests in a dedicated pool of
financial assets, such as real estate secured receivables, are sold to
investors. Typically, the receivables are transferred to a trust that issues
interests that are sold to investors. The receivables and related debt remain
on our balance sheet.

                                      29

<PAGE>

   Securitization--The process where interests in a dedicated pool of financial
assets, such as credit card, auto or personal non-credit card receivables, are
sold to investors. Typically, the receivables are sold to a trust that issues
interests that are sold to investors. The receivables are then removed from our
owned basis balance sheet.

   Securitization Revenue--Includes income associated with the current and
prior period securitizations and 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 Equity to Tangible Managed Assets (TETMA--Tangible shareholder's
equity includes common shareholder's equity, excluding unrealized gains and
losses on investments and cash flow hedging instruments, less acquired
intangibles and goodwill. Tangible managed assets represents total managed
assets less acquired intangibles, goodwill and derivative assets. The ratio of
tangible equity to tangible managed assets is a non-GAAP ratio that is used by
rating agencies as a measure to evaluate capital adequacy. This ratio may
differ from similarly named measures presented by other companies.

                                      30

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                    CREDIT QUALITY STATISTICS--OWNED BASIS

<TABLE>
<CAPTION>
                                                                       At December 31,
                                                                 unless otherwise indicated.
                                                                ------------------------------------------
                                                                  2001           2000           1999
                                                                  --------       --------       --------
                                                                (All dollar amounts are stated in millions)
<S>                                                             <C>            <C>            <C>
Owned Two-Month-and-Over Contractual Delinquency Ratios
Real estate secured............................................     2.89%          2.75%          3.16%
Auto finance...................................................     2.90           2.66           2.03
MasterCard/Visa................................................     6.26           6.09           4.19
Private label..................................................     6.30           5.95           6.41
Personal non-credit card.......................................    10.43           8.91          10.51
                                                                  --------       --------       --------
Total consumer.................................................     4.93%          4.60%          5.05%
                                                                  ========       ========       ========
Ratio of Owned Net Charge-offs to Average Owned Receivables for
  the Year
Real estate secured............................................      .57%           .45%           .49%
Auto finance...................................................     4.04           3.43           3.42
MasterCard/Visa................................................     9.82           8.25          10.20
Private label..................................................     6.11           5.74           5.91
Personal non-credit card.......................................     8.37           8.33           7.55
                                                                  --------       --------       --------
Total consumer.................................................     3.72           3.51           3.87
Commercial.....................................................     2.11           2.67            .75
                                                                  --------       --------       --------
Total..........................................................     3.71%          3.50%          3.82%
                                                                  ========       ========       ========
Nonaccrual Owned Receivables
Real estate secured............................................ $  905.7       $  689.2       $  531.0
Auto finance...................................................     67.6           43.6           24.9
Private label..................................................     38.6           47.6           58.1
Personal non-credit card.......................................    832.4          623.1          538.3
                                                                  --------       --------       --------
Total consumer.................................................  1,844.3        1,403.5        1,152.3
Commercial.....................................................      9.2           30.7           31.4
                                                                  --------       --------       --------
Total.......................................................... $1,853.5       $1,434.2       $1,183.7
                                                                  ========       ========       ========
Accruing Owned Receivables 90 or More Days Delinquent
MasterCard/Visa................................................ $  352.1       $  264.6       $  147.8
Private label..................................................    462.0          367.6          377.7
                                                                  --------       --------       --------
Total.......................................................... $  814.1       $  632.2       $  525.5
                                                                  ========       ========       ========
Real Estate Owned.............................................. $  392.6       $  332.1       $  266.6
                                                                  ========       ========       ========
Renegotiated Commercial Loans.................................. $     --       $   12.3       $   12.3
                                                                  ========       ========       ========
</TABLE>

                                      31

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                   CREDIT QUALITY STATISTICS--MANAGED BASIS

<TABLE>
<CAPTION>
                                                                       At December 31,
                                                                 unless otherwise indicated
                                                                ------------------------------------------
                                                                  2001           2000           1999
                                                                  --------       --------       --------
                                                                (All dollar amounts are stated in millions)
<S>                                                             <C>            <C>            <C>
Managed Two-Month-and-Over Contractual Delinquency Ratios
Real estate secured............................................     2.94%          2.82%          3.34%
Auto finance...................................................     3.15           2.63           2.44
MasterCard/Visa................................................     4.30           3.79           2.89
Private label..................................................     5.65           5.75           6.23
Personal non-credit card.......................................    10.07           8.89           9.83
                                                                  --------       --------       --------
Total consumer.................................................     4.75%          4.45%          4.81%
                                                                  ========       ========       ========
Ratio of Managed Net Charge-offs to Average Managed Receivables
  for the Year
Real estate secured............................................      .58%           .48%           .56%
Auto finance...................................................     5.36           4.90           4.96
MasterCard/Visa................................................     7.12           6.05           7.16
Private label..................................................     5.55           5.70           5.94
Personal non-credit card.......................................     8.25           8.21           7.51
                                                                  --------       --------       --------
Total consumer.................................................     4.12           3.97           4.32
Commercial.....................................................     2.11           2.67            .75
                                                                  --------       --------       --------
Total..........................................................     4.11%          3.96%          4.28%
                                                                  ========       ========       ========
Nonaccrual Managed Receivables
Real estate secured............................................ $  939.7       $  732.7       $  625.4
Auto finance...................................................    200.2          114.3           73.9
Private label..................................................     38.6           47.6           58.1
Personal non-credit card.......................................  1,104.3          898.1          821.3
                                                                  --------       --------       --------
Total consumer.................................................  2,282.8        1,792.7        1,578.7
Commercial.....................................................      9.2           30.7           31.4
                                                                  --------       --------       --------
Total.......................................................... $2,292.0       $1,823.4       $1,610.1
                                                                  ========       ========       ========
Accruing Managed Receivables 90 or More Days Delinquent
MasterCard/Visa................................................ $  527.2       $  415.5       $  293.8
Private label..................................................    502.9          427.0          421.2
                                                                  --------       --------       --------
Total.......................................................... $1,030.1       $  842.5       $  715.0
                                                                  ========       ========       ========
</TABLE>

                                      32

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                       SELECTED QUARTERLY FINANCIAL DATA
                           (RESTATED and (UNAUDITED)

<TABLE>
<CAPTION>
                                 2001--Three Months Ended            2000--Three Months Ended
                            ----------------------------------- -----------------------------------
                              Dec.    Sept.     June    March     Dec.    Sept.     June    March
                            -------- -------- -------- -------- -------- -------- -------- --------
                                          (All dollar amounts are stated in millions)
<S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Finance and other interest
 income.................... $2,230.7 $2,141.0 $2,070.7 $2,076.6 $2,076.6 $1,925.3 $1,754.8 $1,610.5
Interest expense...........    748.9    809.6    826.2    887.8    915.1    848.3    752.1    652.4
                            -------- -------- -------- -------- -------- -------- -------- --------
Net interest margin........  1,481.8  1,331.4  1,244.5  1,188.8  1,161.5  1,077.0  1,002.7    958.1
Provision for credit losses
 on owned receivables......    734.6    649.2    594.9    627.7    543.2    486.2    439.3    461.1
                            -------- -------- -------- -------- -------- -------- -------- --------
Net interest margin after
 provision for credit
 losses....................    747.2    682.2    649.6    561.1    618.3    590.8    563.4    497.0
                            -------- -------- -------- -------- -------- -------- -------- --------
Securitization revenue.....    483.4    422.3    373.9    372.8    346.5    319.8    303.1    282.0
Insurance revenue..........    129.0    125.7    118.6    115.9    106.9    104.6     91.6     91.7
Investment income..........     42.2     38.7     34.2     38.3     43.6     40.8     38.1     36.5
Fee income.................    217.9    222.6    189.4    197.8    220.5    218.8    166.8    142.7
Other income...............     39.7     62.1     64.0    127.7     34.4     34.4     38.4     76.7
                            -------- -------- -------- -------- -------- -------- -------- --------
Total other revenues.......    912.2    871.4    780.1    852.5    751.9    718.4    638.0    629.6
                            -------- -------- -------- -------- -------- -------- -------- --------
Salaries and fringe
 benefits..................    356.5    334.2    327.8    312.5    300.4    278.4    267.3    245.7
Sales incentives...........     67.8     71.5     71.2     52.4     47.7     50.7     54.3     40.9
Occupancy and equipment
 expense...................     68.1     67.3     67.1     68.0     62.4     64.0     62.5     61.4
Other marketing
 expenses..................    117.2    120.6    109.4    120.0    101.4    113.5    119.3    115.9
Other servicing and
 administrative
 expenses..................    144.5    152.6    146.4    178.0    117.1     96.4    111.1    130.1
Amortization of acquired
 intangibles and
 goodwill..................     38.9     39.0     39.0     40.5     40.3     40.5     40.5     44.7
Policyholders' benefits....     72.5     66.4     62.6     66.6     59.1     60.5     55.5     56.6
                            -------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses...    865.5    851.6    823.5    838.0    728.4    704.0    710.5    695.3
                            -------- -------- -------- -------- -------- -------- -------- --------
Income before income
 taxes.....................    793.9    702.0    606.2    575.6    641.8    605.2    490.9    431.3
Income taxes...............    282.7    247.7    214.4    205.0    232.2    217.4    174.8    148.7
                            -------- -------- -------- -------- -------- -------- -------- --------
Net income................. $  511.2 $  454.3 $  391.8 $  370.6 $  409.6 $  387.8 $  316.1 $  282.6
                            ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

   Reference is made to the information contained under the caption "Risk
Management" of Item 7 of this Form 10-K/A for the information required by this
Item.

Item 8. Financial Statements and Supplementary Data.

   Reference is made to the list of financial statements under Item 14(a)
herein for the financial statements required by this Item.

                                      33

<PAGE>

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

   The Board of Directors of Household Finance Corporation on March 21, 2002
decided to no longer engage Arthur Andersen LLP ("Andersen") as independent
public accountants for Household Finance Corporation and its subsidiaries and
authorized the engagement of KPMG LLP to serve as independent public
accountants for 2002.

   Andersen's reports on HFC's consolidated financial statements for the two
most recent fiscal years ended December 31, 2001 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.

   During HFC's two most recent fiscal years and through the date of this Form
10-K/A, there were no disagreements with Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would have caused
them to make reference to the subject matter in connection with their report on
HFC's consolidated financial statements for such years; and there were no
reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K.

   HFC has provided Andersen with a copy of this disclosure. Andersen's letter,
dated March 21, 2002, stating its agreement with such statements is
incorporated by reference to Exhibit 16 of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.

   During HFC's two most recent fiscal years and through the date of this Form
10-K/A, HFC did not consult KPMG LLP regarding any of the matters or reportable
events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.

                                   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.

   Omitted.

Item 13. Certain Relationships and Related Transactions.

   Omitted.

                                      34

<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)  Restated Financial Statements.

       Independent Auditors' Report.

       Consolidated Statements of Income for the Three Years Ended December 31,
       2001.

       Consolidated Balance Sheets, December 31, 2001 and 2000.

       Consolidated Statements of Cash Flows for the Three Years Ended December
       31, 2001.

       Consolidated Statements of Changes in Common Shareholder's Equity for
       the Three Years Ended   December 31, 2001.

       Notes to Consolidated Financial Statements.

       Selected Quarterly Financial Data.

(b)  Reports on Form 8-K.

   HFC did not file any current reports on Form 8-K during the three months
   ended December 31, 2001.

(c)  Exhibits.

<TABLE>
<C>    <S>
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 Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and
       Preferred Stock Dividends.
16     Letter re change in certifying accountant (incorporated by reference to Exhibit 16 of our Annual Report
       on Form 10-K for the fiscal year ended December 31, 2001).
23     Consent of KPMG LLP, Certified Public Accountants.
99.1   Ratings of Household Finance Corporation and its significant subsidiaries (incorporated by reference to
       Exhibit 99.1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
99.2   Certification of Chief Executive Officer.
99.3.. Certification of Principal Financial Officer.
</TABLE>

                                      35

<PAGE>

                                  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 19th day of March, 2003.

                                          HOUSEHOLD FINANCE CORPORATION


                                 By:               /S/  S.L. MCDONALD
                                     -----------------------------------
                                            S.L. McDonald Executive Vice
                                                     President,
                                     Chief Accounting Officer and Controller (as
                                            principal financial officer)

   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 on the 19th day of March, 2003.

          Signature                        Title
          ---------                        -----

     /S/  W. F. ALDINGER       Director
-----------------------------
       W. F. Aldinger

   /S/  D. A. SCHOENHOLZ       Chairman and Chief Executive
-----------------------------    Officer, Director
      D. A. Schoenholz

      /S/  J. A. VOZAR         Director
-----------------------------
         J. A. Vozar

     /S/  T.M. DETELICH        Director
-----------------------------
        T.M. Detelich

     /S/  S.L. MCDONALD        Executive Vice President,
-----------------------------    Chief Accounting Officer
        S.L. McDonald            and Controller
                                 (as principal financial
                                 officer)

                                      36

<PAGE>

                                CERTIFICATIONS

I, David A. Schoenholz, certify that:

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

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

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

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

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

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

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

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

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

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

   6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                          /S/  D. A. SCHOENHOLZ
                                         --------------------------------------
                                                            David A. Schoenholz
                                           Chairman and Chief Executive Officer

Date: March 19, 2003

                                      37

<PAGE>

                                CERTIFICATIONS

I, Steven L. McDonald, certify that:

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

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

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

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

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

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

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

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

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

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

   6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                               /s/  Steven L. McDonald
                                         --------------------------------------
                                                   Steven L. McDonald
                                                Executive Vice President,
                                              Chief Accounting Officer and
                                                        Controller
                                            (as principal financial officer)

Date: March 19, 2003

                                      38

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Household Finance Corporation:

   We have audited the accompanying consolidated balance sheets of Household
Finance Corporation (a Delaware corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of income, changes
in common shareholder's equity and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of Household Finance Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Household
Finance Corporation and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.

                                          /S/  KPMG LLP

Chicago, Illinois
August 27, 2002


                                      F-1

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                                  (RESTATED)

<TABLE>
<CAPTION>
                                                        Year ended December 31
                                                      --------------------------
                                                        2001     2000     1999
                                                      -------- -------- --------
                                                            (In millions)
<S>                                                   <C>      <C>      <C>
Finance and other interest income.................... $8,519.0 $7,367.2 $5,582.5
Interest expense.....................................  3,272.5  3,167.9  2,299.6
                                                      -------- -------- --------
Net interest margin..................................  5,246.5  4,199.3  3,282.9
Provision for credit losses on owned receivables.....  2,606.4  1,929.8  1,498.3
                                                      -------- -------- --------
Net interest margin after provision for credit losses  2,640.1  2,269.5  1,784.6
                                                      -------- -------- --------
Securitization revenue...............................  1,652.4  1,251.4  1,170.7
Insurance revenue....................................    489.2    394.8    357.7
Investment income....................................    153.4    159.0    154.4
Fee income...........................................    827.7    748.8    491.4
Other income.........................................    293.5    183.9    209.9
                                                      -------- -------- --------
   Total other revenues..............................  3,416.2  2,737.9  2,384.1
                                                      -------- -------- --------
Salaries and fringe benefits.........................  1,331.0  1,091.8    833.8
Sales incentives.....................................    262.9    193.6    140.4
Occupancy and equipment expense......................    270.5    250.3    218.8
Other marketing expenses.............................    467.2    450.1    345.9
Other servicing and administrative expenses..........    621.5    454.7    391.6
Amortization of acquired intangibles and goodwill....    157.4    166.0    149.4
Policyholders' benefits..............................    268.1    231.7    224.7
                                                      -------- -------- --------
   Total costs and expenses..........................  3,378.6  2,838.2  2,304.6
                                                      -------- -------- --------
Income before income taxes...........................  2,677.7  2,169.2  1,864.1
Income taxes.........................................    949.8    773.1    658.6
                                                      -------- -------- --------
   Net income........................................ $1,727.9 $1,396.1 $1,205.5
                                                      ======== ======== ========
</TABLE>


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

                                      F-2

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                  (RESTATED)

<TABLE>
<CAPTION>
                                                                                         At December 31
                                                                                      --------------------
                                                                                         2001      2000
                                                                                      ---------  ---------
                                                                                      (In millions, except
                                                                                          share data)
<S>                                                                                   <C>        <C>
                                       Assets
Cash................................................................................. $   553.1  $   294.4
Investment securities................................................................   2,885.4    3,223.6
Receivables, net.....................................................................  66,889.5   55,573.9
Acquired intangibles, net............................................................     444.3      543.2
Goodwill.............................................................................   1,103.0    1,159.4
Properties and equipment, net........................................................     416.1      393.3
Real estate owned....................................................................     392.6      332.1
Other assets.........................................................................   1,845.5    1,833.9
                                                                                      ---------  ---------
       Total assets.................................................................. $74,529.5  $63,353.8
                                                                                      =========  =========

                        Liabilities and Shareholder's Equity
Debt:
   Advances from parent company and affiliates....................................... $ 2,685.2  $ 3,845.9
   Commercial paper, bank and other borrowings.......................................   9,074.6    8,826.4
   Senior and senior subordinated debt (with original maturities over one year)......  51,174.8   40,575.9
                                                                                      ---------  ---------
Total debt...........................................................................  62,934.6   53,248.2
Insurance policy and claim reserves..................................................     887.3      891.8
Other liabilities....................................................................   2,073.7      987.9
                                                                                      ---------  ---------
Total liabilities....................................................................  65,895.6   55,127.9
Common shareholder's equity:
   Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding at
     December 31, 2001 and 2000, and additional paid-in capital......................   3,790.8    3,740.8
   Retained earnings.................................................................   5,305.9    4,453.0
   Accumulated other comprehensive income (loss).....................................    (462.8)      32.1
                                                                                      ---------  ---------
Total common shareholder's equity....................................................   8,633.9    8,225.9
                                                                                      ---------  ---------
       Total liabilities and shareholder's equity.................................... $74,529.5  $63,353.8
                                                                                      =========  =========
</TABLE>

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

                                      F-3

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (RESTATED)

<TABLE>
<CAPTION>
                                                                              Year ended December 31
                                                                        ----------------------------------
                                                                           2001        2000        1999
                                                                        ----------  ----------  ----------
                                                                                   (In millions)
<S>                                                                     <C>         <C>         <C>
Cash Provided by Operations:
Net income............................................................. $  1,727.9  $  1,396.1  $  1,205.5
Adjustments to reconcile net income to net cash provided by operations:
   Provision for credit losses on owned receivables....................    2,606.4     1,929.8     1,498.3
   Insurance policy and claim reserves.................................      221.5        68.6       161.7
   Depreciation and amortization.......................................      288.1       285.1       277.9
   Deferred income tax provision (benefit).............................       19.7        41.2        (1.4)
   Interest-only strip receivables, net change.........................     (118.1)      (44.9)      (31.1)
   Other, net..........................................................      563.8        65.8      (401.0)
                                                                        ----------  ----------  ----------
Cash provided by operations............................................    5,309.3     3,741.7     2,709.9
                                                                        ----------  ----------  ----------
Investments in Operations:
Investment securities:
   Purchased...........................................................   (1,520.5)     (595.8)   (1,279.5)
   Matured.............................................................      316.5       271.8       675.2
   Sold................................................................      684.1       229.5       732.2
Short-term investment securities, net change...........................      893.8      (828.1)      485.9
Receivables:
   Originations, net...................................................  (40,385.0)  (36,475.4)  (29,620.3)
   Purchases and related premiums......................................   (4,872.2)   (5,155.0)   (2,644.8)
   Sold................................................................   31,004.7    27,138.1    24,790.7
Acquisition of business operations.....................................         --          --       (58.4)
Properties and equipment purchased.....................................     (135.7)     (135.5)      (93.8)
Properties and equipment sold..........................................        2.1        13.6        27.5
Advances from parent company and affiliates, net change................   (1,160.7)      366.1     1,446.4
                                                                        ----------  ----------  ----------
Cash decrease from investments in operations...........................  (15,172.9)  (15,170.7)   (5,538.9)
                                                                        ----------  ----------  ----------
Financing and Capital Transactions:
Short-term debt, net change............................................      248.2        46.2     1,637.1
Senior and senior subordinated debt issued.............................   19,179.6    20,501.3     9,232.3
Senior and senior subordinated debt retired............................   (8,382.6)  (10,232.9)   (6,102.2)
Policyholders' benefits paid...........................................      (97.9)     (111.3)     (113.9)
Cash received from policyholders.......................................         --         0.1        22.0
Capital contributions from parent company..............................       50.0       550.0          --
Dividends paid to parent company.......................................     (650.0)     (425.0)     (803.0)
Dividends--pooled affiliates...........................................     (225.0)         --          --
                                                                        ----------  ----------  ----------
Cash increase from financing and capital transactions..................   10,122.3    10,328.4    3,872.30
                                                                        ----------  ----------  ----------
Increase (decrease) in cash............................................      258.7    (1,100.6)    1,043.3
Cash at January 1......................................................      294.4     1,395.0      351.70
                                                                        ----------  ----------  ----------
Cash at December 31.................................................... $    553.1  $    294.4  $  1,395.0
                                                                        ==========  ==========  ==========
Supplemental Cash Flow Information:
Interest paid.......................................................... $  3,620.1  $  3,213.7  $  2,345.2
Income taxes paid......................................................      917.8       692.6       451.3
</TABLE>

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

                                      F-4

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CHANGES IN
                          COMMON SHAREHOLDER'S EQUITY
                                  (RESTATED)

<TABLE>
<CAPTION>
                                                                 Common
                                                               Stock and             Accumulated      Total
                                                               Additional               Other        Common
                                                                Paid-in   Retained  Comprehensive Shareholder's
                                                                Capital   Earnings   Income (1)      Equity
                                                               ---------- --------  ------------- -------------
                                                                 (All dollar amounts are stated in millions)
<S>                                                            <C>        <C>       <C>           <C>
Balance at December 31, 1998                                    $3,190.8  $3,149.6     $  13.7      $6,354.1
Cumulative adjustment related to MasterCard and Visa
  restatement.................................................               (70.2)                    (70.2)
                                                                --------  --------     -------      --------
Balance at December 31, 1998, as restated.....................   3,190.8   3,079.4        13.7       6,283.9
Net income....................................................             1,205.5                   1,205.5
Other comprehensive income, net of tax:
   Unrealized losses on investments and interest-only strip
     receivables, net of reclassification adjustment..........                           (92.5)        (92.5)
   Foreign currency translation adjustments...................                             1.2           1.2
                                                                                                    --------
Total comprehensive income....................................                                       1,114.2
Dividends paid to parent company..............................              (803.0)                   (803.0)
                                                                --------  --------     -------      --------
Balance at December 31, 1999                                     3,190.8   3,481.9       (77.6)      6,595.1
Net income....................................................             1,396.1                   1,396.1
Other comprehensive income, net of tax:
   Unrealized gains on investments and interest-only strip
     receivables, net of reclassification adjustment..........                            95.1          95.1
   Foreign currency translation adjustments...................                            14.6          14.6
                                                                                                    --------
Total comprehensive income....................................                                       1,505.8
Dividends paid to parent company..............................              (425.0)                   (425.0)
Contribution of capital from parent company...................     550.0                               550.0
                                                                --------  --------     -------      --------
Balance at December 31, 2000                                     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 (FAS
     No. 133).................................................                          (230.0)       (230.0)
   Unrealized losses on cash flow hedging instruments, net of
     reclassification adjustment..............................                          (415.6)       (415.6)
   Unrealized gains on investments and interest-only strip
     receivables, net of reclassification adjustment..........                           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 (2)..............................              (225.0)                   (225.0)
Contribution of capital from parent company...................      50.0                                50.0
                                                                --------  --------     -------      --------
Balance at December 31, 2001                                    $3,790.8  $5,305.9     $(462.8)     $8,633.9
                                                                ========  ========     =======      ========
</TABLE>
--------
(1) Accumulated other comprehensive income includes the following:
<TABLE>
<CAPTION>
                                                                            At December 31
                                                                    -----------------------------
                                                                      2001   2000    1999    1998
                                                                    -------  ----- -------  -----
                                                                            (In millions)
<S>                                                                 <C>      <C>   <C>      <C>
Unrealized losses on cash flow hedging instruments................. $(645.6)    --      --     --
Unrealized gains (losses) on investments and.......................
interest-only strip receivables:
   Gross unrealized gains (losses).................................   288.5  $41.8 $(109.6) $33.7
   Income tax expense (benefit)....................................   109.3   17.2   (39.1)  11.7
                                                                    -------  ----- -------  -----
   Net unrealized gains (losses)...................................   179.2   24.6   (70.5)  22.0
Cumulative adjustments for foreign currency translation adjustments     3.6    7.5    (7.1)  (8.3)
                                                                    -------  ----- -------  -----
                                                                    $(462.8) $32.1 $ (77.6) $13.7
                                                                    =======  ===== =======  =====
</TABLE>
(2) Relates to previous equity transactions of Household Bank (SB), N.A.
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CHANGES IN
                    COMMON SHAREHOLDER'S EQUITY (Continued)
                                  (RESTATED)

Comprehensive Income

   We adopted FAS 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 the adoption of FAS
No. 133 and unrealized gains (losses) on cash flow hedging instruments in 2001,
unrealized gains (losses) on investments and interest-only strip receivables
and foreign currency translation adjustments.

<TABLE>
<CAPTION>
                                                                                Year ended December 31
                                                                            ------------------------------
                                                                                          Tax
                                                                                       (Expense)
                                                                            Before-Tax  Benefit  Net-of-Tax
                                                                            ---------- --------- ----------
                                                                                     (In millions)
<S>                                                                         <C>        <C>       <C>
1999
Unrealized losses on investments and interest-only strip receivables:
   Unrealized holding losses arising during the period..................... $  (133.9)  $  47.5   $ (86.4)
   Less: Reclassification adjustment for gains realized in net income......      (9.4)      3.3      (6.1)
                                                                            ---------   -------   -------
   Net unrealized losses on investments and interest-only strip
     receivables...........................................................    (143.3)     50.8     (92.5)
Foreign currency translation adjustments...................................       1.7      (0.5)      1.2
                                                                            ---------   -------   -------
Other comprehensive expense................................................ $  (141.6)  $  50.3   $ (91.3)
                                                                            =========   =======   =======
2000
Unrealized gains on investments and interest-only strip receivables:
   Unrealized holding gains arising during the period...................... $   152.2   $ (56.6)  $  95.6
   Less: Reclassification adjustment for gains realized in net income......       (.8)       .3       (.5)
                                                                            ---------   -------   -------
   Net unrealized gains on investments and interest-only strip receivables.     151.4     (56.3)     95.1
Foreign currency translation adjustments...................................      23.5      (8.9)     14.6
                                                                            ---------   -------   -------
Other comprehensive income................................................. $   174.9   $ (65.2)  $ 109.7
                                                                            =========   =======   =======
2001
Unrealized gains (losses) on cash flow hedging instruments:
   Cumulative effect of change in accounting principle (FAS 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 on investments and interest-only strip receivables:
   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...................................      (6.1)      2.2      (3.9)
                                                                            ---------   -------   -------
Other comprehensive expense................................................ $  (765.7)  $ 270.8   $(494.9)
                                                                            =========   =======   =======
</TABLE>

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

                                      F-6

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (RESTATED)

   Household Finance Corporation ("HFC" or "the company") is a wholly-owned
subsidiary of Household International, Inc. ("Household International" or the
"parent company"). HFC is a leading provider of consumer lending products to
middle-market consumers in the United States. HFC may also be referred to in
these notes to the consolidated financial statements as "we," "us" or "our."
Our lending products include real estate secured loans, auto finance loans,
MasterCard* and Visa* credit cards, private label credit cards, and personal
non-credit card loans. We also offer tax refund anticipation loans in the
United Sates and credit and specialty insurance in the United States and
Canada. We have one reportable segment: Consumer, which includes our
branch-based consumer lending, mortgage services, retail services, credit card
services and auto finance businesses.

1. Summary of Significant Accounting Policies

   Principles of Consolidation. The consolidated financial statements include
the accounts of Household Finance Corporation and its wholly owned
subsidiaries. Unaffiliated trusts to which we have transferred securitized
receivables which are qualifying special purpose entities ("QSPE") as defined
by Statement of Financial Accounting Standards No. 140 are not consolidated.
All significant intercompany accounts and transactions are eliminated.

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates. Certain prior year amounts have been reclassified to
conform to the current year's presentation.

   Investment Securities. We maintain investment portfolios (comprised
primarily of debt securities) in both our noninsurance and insurance
operations. Our entire investment securities portfolio was classified as
available-for-sale at December 31, 2001 and 2000. 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.

   Receivables. Receivables are carried at amortized cost. Finance income is
recognized using the effective yield method. Premiums and discounts on
purchased receivables are recognized as adjustments to the yield of the related
receivables. Origination fees are deferred and amortized to finance income over
the estimated life of the related receivables, except to the extent they offset
directly related lending costs. MasterCard and Visa annual fees are netted with
direct lending costs, deferred, and amortized on a straight-line basis over one
year. Net deferred annual fees related to these receivables totaled $83.5
million at December 31, 2001 and $68.9 million at December 31, 2000.

   Insurance reserves and unearned premiums applicable to credit risks on
consumer receivables are treated as a reduction of receivables in the balance
sheets, since payments on such policies generally are used to reduce
outstanding receivables.
--------
*  MasterCard is a registered trademark of MasterCard International,
   Incorporated and Visa is a registered trademark of VISA USA, Inc.


                                      F-7

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Provision and Credit Loss Reserves. Provision for credit losses on owned
receivables is made in an amount sufficient to maintain credit loss reserves at
a level considered adequate to cover probable losses of principal, interest and
fees, including late, overlimit and annual fees, in the existing owned
portfolio. Probable losses are estimated for consumer receivables based on
contractual delinquency status and historical loss experience. For commercial
loans, probable losses are calculated using estimates of amounts and timing of
future cash flows expected to be received on loans. In addition, loss reserves
on consumer receivables are maintained to reflect our judgment of portfolio
risk factors which may not be fully reflected in the statistical calculation
which uses roll rates and migration analysis. These risk factors include
economic conditions, bankruptcy trends, product mix, geographic concentrations
and other similar items. Charge-off and customer account management policies
are also considered when establishing loss reserve requirements to ensure
appropriate allowances exist for products with longer charge-off periods and
for customers benefiting from account management decisions. Loss reserve
estimates are reviewed periodically and adjustments are reported in earnings
when they become known. As these estimates are influenced by factors outside
our control, such as consumer payment patterns and economic conditions, there
is uncertainty inherent in these estimates, making it reasonably possible that
they could change.

   Our charge-off policy for consumer receivables varies by product. Unsecured
receivables are written off at the following stages of contractual delinquency:
MasterCard and Visa-6 months; private label-9 months; and personal non-credit
card-9 months and no payment received in 6 months, but in no event to exceed 12
months. For real estate secured receivables, carrying values in excess of net
realizable value are charged off at the time of foreclosure or when settlement
is reached with the borrower. For loans secured by automobiles, carrying values
in excess of net realizable value are charged off at the earlier of
repossession and sale of the collateral, the collateral being in our possession
for more than 90 days, or the loan becoming 150 days contractually delinquent.
Charge-offs may occur sooner for certain consumer receivables involving a
bankruptcy. Our account management policies and practices for consumer
receivables include collection strategies that permit us to reset the
contractual delinquency status of an account to current in certain
circumstances. Our restructure policies include the following: (1) in numerous
instances HFC accepts one or zero payments prior to resetting the delinquency
status, and (2) in many instances, we restructure delinquent accounts
automatically. In the case of automatic restructures, no prior contact is
required with the customer to determine if the cause of the delinquency has
been cured. These account management policies and practices vary from product
to product and are continually being tested and refined and may change from
time to time and period to period. The account management policies and
practices include, but are not limited to, restructure or reaging of accounts,
forbearance agreements, extended payment plans, modification arrangements,
consumer credit counseling accommodations, loan rewrites and deferments.
Commercial receivables are written off when it becomes apparent that an account
is uncollectible.

   Nonaccrual Loans. Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest income is suspended on real estate secured,
personal non-credit card and commercial loans when principal or interest
payments are more than three months contractually past due. For MasterCard and
Visa and private label credit card receivables, interest continues to accrue
until the receivable is charged off. For auto finance receivables, accrual of
interest income is discontinued when payments are more than two months
contractually past due. Accrual of income on nonaccrual real estate secured and
personal homeowner loans ("PHLs") is resumed if the receivable becomes less
than three months contractually delinquent and on auto finance loans when the
loan becomes less than two months contractually delinquent. Interest on
nonaccrual personal non-credit card receivables other than PHLs is recorded as
collected. Accrual of income on nonaccrual commercial loans is resumed if the
loan becomes contractually current. Cash payments received on nonaccrual
commercial loans are either applied against principal or reported as interest
income, according to our judgment as to the collectibility of principal.

                                      F-8

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   In connection with these transactions, we also retain rights to future
interest and other cash flows arising from the receivables after the investors
receive their contractual return. These rights are reported as interest-only
strip receivables, net of estimated probable losses under the recourse
provisions, as a separate component of receivables. Interest-only strip
receivables are reported at 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
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.

   In September 2000, the Financial Accounting Standards Board ("FASB") issued
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" ("FAS No. 140"). FAS No. 140 revised the
standards for accounting for securitizations and requires certain disclosures.
We adopted the nondisclosure related provisions of FAS No. 140 as required on
April 1, 2001. The adoption did not have a significant effect on our operations.

   Properties and Equipment. Properties and equipment are recorded at cost, net
of accumulated depreciation and amortization. For financial reporting purposes,
depreciation is provided on a straight-line basis over the estimated useful
lives of the assets which generally range from 3 to 40 years. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease. Maintenance and repairs are expensed as
incurred.

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

   Insurance. Insurance revenues on revolving credit insurance policies are
recognized when billed. Insurance revenues on the remaining insurance contracts
are recorded as unearned premiums and recognized into income based on the
nature and terms of the underlying contracts. Liabilities for credit insurance
policies are based upon

                                      F-9

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 and Goodwill. Acquired intangibles consist of acquired
credit card relationships which are amortized on a straight-line basis over
their estimated useful lives. These lives vary by portfolio and initially
ranged from 4 to 15 years. Goodwill represents the purchase price over the fair
value of identifiable assets acquired less liabilities assumed from business
combinations and was amortized on a straight-line basis over periods not
exceeding 25 years through December 31, 2001. Acquired intangibles are reviewed
for impairment using discounted cash flows and goodwill using undiscounted 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.

   In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS No. 141") and No. 142, "Goodwill and
Other Intangible Assets" ("FAS No. 142"). FAS No. 141 eliminated the pooling of
interests method of accounting and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
We had no acquisitions during 2001 which were affected by FAS No. 141. FAS No.
142 changed the accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill recorded in past business
combinations ceased upon adoption of the statement on January 1, 2002.
Amortization of goodwill reduced net income by $46.1 million in 2001, $44.9
million in 2000 and $30.7 million in 1999.

   Derivative Financial Instruments. Effective January 1, 2001, we adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"), as amended. Under FAS No.
133, all derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, we designate the
derivative as a fair value hedge, a cash flow hedge or a non-hedging
derivative. Fair value hedges include hedges of the fair value of a recognized
asset or liability and certain foreign currency hedges. Cash flow hedges
include hedges of the variability of cash flows to be received or paid related
to a recognized asset or liability and certain foreign currency hedges. Changes
in the fair value of derivatives designated as fair value hedges, along with
the change in fair value on the hedged asset or liability that is attributable
to the hedged risk, are recorded in current period earnings. Changes in the
fair value of derivatives designated as cash flow hedges, to the extent
effective as a hedge, are recorded in accumulated other comprehensive income,
and reclassified into earnings in the period during which the hedged item
affects earnings. Changes in the fair value of derivative instruments not
designated as hedging instruments and ineffective portions of changes in the
fair value of hedging instruments are recognized in other income in the current
period.

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

   When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective hedge, the derivative will
continue to be carried on the balance sheet at its fair value, with changes in
its fair value recognized in current period earnings. For fair value hedges,
the formerly hedged asset or liability will

                                     F-10

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

   The adoption of FAS No. 133 on January 1, 2001 was accounted for as a
cumulative effect of a change in accounting principle. The impact of the
adoption was not material to earnings and reduced common shareholder's equity
by $230 million. The adjustment to common shareholder's equity was recorded as
a component of accumulated other comprehensive income and was made to recognize
at fair value all derivatives that were designated as cash flow hedging
instruments. During 2001, approximately $109 million in derivative losses
associated with the transition adjustment were reclassified into earnings.
These losses were offset by decreased interest expense associated with the
variable cash flows of the hedged items and resulted in no economic impact to
our earnings. Derivative gains associated with the transition adjustment
reclassified into earnings during 2001 were not material.

   Foreign Currency Translation. We have credit and specialty insurance
operations in Canada. The functional currency for our Canadian insurance
operations is the Canadian dollar. Assets and liabilities of this business are
translated at the rate of exchange in effect on the balance sheet date; income
and expenses are translated at the average rate of exchange prevailing during
the year. Resulting translation adjustments are accumulated in common
shareholder's equity as a component of accumulated other comprehensive income.
Foreign currency transaction gains and losses are included in income as they
occur.

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

   Income Taxes. HFC and its non-insurance subsidiaries are included in
Household International's consolidated federal income tax return and in various
consolidated state income tax returns. In addition, HFC files some
unconsolidated state and federal tax returns. Federal income taxes are
accounted for utilizing the liability method. Deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Investment tax credits generated by leveraged leases are accounted for
using the deferral method.

2. Restatement

   Bank Merger Restatement. On July 1, 2002, Household International, Inc.
contributed all of the capital stock of Household Bank (SB), N.A. ("HBSB"), a
wholly owned subsidiary of Household Bank, f.s.b., to HFC. HBSB, in turn,
purchased all of the assets of Beneficial Bank USA, a wholly-owned credit card
banking subsidiary of HFC. Subsequently, we merged our wholly-owned banking
subsidiary, Household Bank (Nevada), N.A. with and into HBSB with HBSB being
the surviving entity. The merger completed the consolidation of all of
Household International, Inc.'s credit card banks into one credit card banking
subsidiary of HFC. We believe the

                                     F-11

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

combination of the banks will streamline and simplify our regulatory reporting
process as well as optimize capital and liquidity management. In accordance
with the guidance established for mergers involving affiliates under common
control, the financial statements of HFC include the results of HBSB for all
periods presented similar to a pooling of interests. HFC has previously
published selected financial information of the combined company as of and for
the month ended July 31, 2002 in a Form 8-K dated August 26, 2002.

   The separate results for HFC and HBSB were as follows:

<TABLE>
<CAPTION>
                                                   Year ended December 31
                                                ----------------------------
                                                  2001      2000      1999
                                                --------  --------  --------
                                                       (In millions)
    <S>                                         <C>       <C>       <C>
    Net Interest Margin and Other Revenues (1):
       HFC..................................... $7,202.6  $5,538.8  $4,672.6
       HBSB....................................  1,528.8   1,444.8     768.3
       Intercompany Adjustments................   (336.8)   (278.1)      1.4
                                                --------  --------  --------
           Total............................... $8,394.6  $6,705.5  $5,442.3
                                                ========  ========  ========
    Net Income:
       HFC..................................... $1,410.8  $1,148.9  $  966.3
       HBSB....................................    437.4     257.7     239.2
       Intercompany Adjustments................   (120.3)    (10.5)       --
                                                --------  --------  --------
           Total............................... $1,727.9  $1,396.1  $1,205.5
                                                ========  ========  ========
</TABLE>
--------
/(1)/ Policyholder's benefits have been netted against other revenues.

   MasterCard and Visa Restatement. The MasterCard and Visa restatement relates
to a MasterCard and Visa affinity credit card relationship and a marketing
agreement with a third party credit card marketing company. All were part of
our Consumer segment. In consultation with our prior auditors, Arthur Andersen
LLP, we treated payments made in connection with these agreements that were
entered into between 1992 and 1999 as prepaid assets and amortized them in
accordance with the underlying economics of the agreements. Our current
auditors, KPMG LLP, have advised us that, in their view, these payments should
have either been charged against earnings at the time they were made or
amortized over a shorter period of time. The balance of retained earnings at
December 31, 1998 has been restated from amounts previously reported to reflect
a retroactive charge of $70.2 million, after tax, for these items.

   The cumulative restatement is as follows for the periods presented below:

<TABLE>
<CAPTION>
                                                        % Change from
                                                      Prior Period Net
                    Restatements to Reported Income        Income
                  ---------------------------------   ----------------
                            Tax    After   % Change      As       As
                  Pre-Tax  Effect   Tax   to Reported Reported Restated
                  -------  ------ ------  ----------- -------- --------
                       (All dollar amounts are stated in millions)
        <S>       <C>      <C>    <C>     <C>         <C>      <C>
        2001..... $ (89.8) $33.1  $(56.7)    (3.2)%     22.6%    23.8%
        2000.....   (94.6)  34.8   (59.8)    (4.1)      15.6     15.8
        1999.....   (85.8)  31.5   (54.3)    (4.3)      23.7     20.9
        1994-1998  (111.1)  40.9   (70.2)
</TABLE>

3. Business Combinations, Acquisitions and Divestitures

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

                                     F-12

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

   In August 1999, we acquired all of the outstanding capital stock of Decision
One Mortgage Company LLC ("Decision One") for approximately $60 million in
common stock and cash. Decision One originates loans through a 30-state broker
network and packages them for sale to investors. The acquisition was accounted
for as a purchase and, accordingly, earnings from Decision One have been
included in our results of operations subsequent to the acquisition date.

4. Investment Securities

<TABLE>
<CAPTION>
                                                            At December 31
                                                           -----------------
                                                             2001     2000
                                                           -------- --------
                                                             (In millions)
    <S>                                                    <C>      <C>
    Available-For-Sale Investments
       Marketable equity securities....................... $   21.2 $   24.9
       Corporate debt securities..........................  2,051.8  1,867.6
       U.S. government and federal agency debt securities.    273.3    879.3
       Certificates of deposit............................     83.1     75.3
       Money market funds.................................     79.7    187.5
       Other..............................................    336.4    154.7
                                                           -------- --------
    Subtotal..............................................  2,845.5  3,189.3
    Accrued investment income.............................     39.9     34.3
                                                           -------- --------
           Total investment securities.................... $2,885.4 $3,223.6
                                                           ======== ========
</TABLE>

   Proceeds from the sale of available-for-sale investments totaled
approximately $.7 billion in 2001, $.2 billion in 2000 and $.7 billion in 1999.
Gross gains of $12.9 million in 2001, $2.2 million in 2000 and $12.1 million in
1999 and gross losses of $1.7 million in 2001, $1.4 million in 2000 and $2.7
million in 1999 were realized on those sales.

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

<TABLE>
<CAPTION>
                                                                      At December 31
                                     ---------------------------------------------------------------------------------
                                                       2001                                     2000
                                     ---------------------------------------- ----------------------------------------
                                                 Gross      Gross                         Gross      Gross
                                     Amortized Unrealized Unrealized  Fair    Amortized Unrealized Unrealized  Fair
                                       Cost      Gains      Losses    Value     Cost      Gains      Losses    Value
                                     --------- ---------- ---------- -------- --------- ---------- ---------- --------
                                                                       (In millions)
<S>                                  <C>       <C>        <C>        <C>      <C>       <C>        <C>        <C>
Marketable equity securities........ $   24.3       --      $ (3.1)  $   21.2 $   25.8       --      $  (.9)  $   24.9
Corporate debt securities...........  2,087.3    $31.3       (66.8)   2,051.8  1,942.6    $17.4       (92.4)   1,867.6
U.S. government and federal Agency
 debt securities....................    272.5      2.0        (1.2)     273.3    879.5      1.6        (1.8)     879.3
Certificates of deposit.............     83.1       --          --       83.1     75.3       --          --       75.3
Money market funds..................     79.7       --          --       79.7    187.5       --          --      187.5
Other...............................    331.5      6.2        (1.3)     336.4    154.5       .6         (.4)     154.7
                                     --------    -----      ------   -------- --------    -----      ------   --------
Total available-for-sale investments $2,878.4    $39.5      $(72.4)  $2,845.5 $3,265.2    $19.6      $(95.5)  $3,189.3
                                     ========    =====      ======   ======== ========    =====      ======   ========
</TABLE>

   See Note 11, "Fair Value of Financial Instruments," for further discussion
of the relationship between the fair value of our assets, liabilities and
off-balance sheet financial instruments.

                                     F-13

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                             At December 31, 2001
                            ------------------------------------------------------
                                                         U.S. Government and Federal
                             Corporate Debt Securities     Agency Debt Securities
                            ---------------------------  -------------------------
                            Amortized  Fair              Amortized  Fair
                              Cost     Value   Yield (1)   Cost     Value  Yield (1)
                            --------- -------- --------- ---------  ------ ---------
                                  (All dollar amounts are stated in millions)
<S>                         <C>       <C>      <C>       <C>        <C>    <C>
Due within 1 year.......... $   49.8  $   50.5   5.10%    $101.0    $101.1   4.16%
After 1 but within 5 years.    804.5     815.2   5.74       84.4      85.3   5.65
After 5 but within 10 years    392.6     394.2   6.51       64.7      64.7   5.07
After 10 years.............    840.4     791.9   6.97       22.4      22.2   6.00
                            --------  --------   ----     ------    ------   ----
Total...................... $2,087.3  $2,051.8   6.36%    $272.5    $273.3   4.99%
                            ========  ========   ====     ======    ======   ====
</TABLE>
--------
(1) Computed by dividing annualized interest by the amortized cost of the
    respective investment securities.

5. Receivables

<TABLE>
<CAPTION>
                                                            At December 31
                                                         --------------------
                                                            2001       2000
                                                         ---------  ---------
                                                             (In millions)
  <S>                                                    <C>        <C>
  Real estate secured................................... $37,198.4  $30,147.9
  Auto finance..........................................   2,332.2    1,643.0
  MasterCard/Visa.......................................   6,962.0    5,830.7
  Private label.........................................   9,847.9    8,668.7
  Personal non-credit card..............................  10,558.6    8,887.2
  Commercial............................................     442.5      508.1
                                                         ---------  ---------
  Total owned receivables...............................  67,341.6   55,685.6
  Accrued finance charges...............................   1,411.3    1,133.4
  Credit loss reserves for owned receivables............  (2,440.6)  (1,940.6)
  Unearned credit insurance premiums and claims reserves    (750.3)    (622.3)
  Interest-only strip receivables.......................     924.0      602.3
  Amounts due and deferred from receivable sales........     403.5      715.5
                                                         ---------  ---------
  Total owned receivables, net..........................  66,889.5   55,573.9
  Receivables serviced with limited recourse............  19,759.3   18,923.3
                                                         ---------  ---------
     Total managed receivables, net..................... $86,648.8  $74,497.2
                                                         =========  =========
</TABLE>

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

<TABLE>
<CAPTION>
                                             At December 31
                                           -------------------
                                             2001      2000
                                           --------- ---------
                                              (In millions)
                  <S>                      <C>       <C>
                  Real estate secured..... $   861.8 $ 1,457.8
                  Auto finance............   4,026.6   2,712.7
                  MasterCard/Visa.........   9,047.5   9,311.7
                  Private label...........   2,150.0   1,650.0
                  Personal non-credit card   3,673.4   3,791.1
                                           --------- ---------
                     Total................ $19,759.3 $18,923.3
                                           ========= =========
</TABLE>

                                     F-14

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                             At December 31
                                           -------------------
                                             2001      2000
                                           --------- ---------
                                              (In millions)
                  <S>                      <C>       <C>
                  Real estate secured..... $38,060.2 $31,605.7
                  Auto finance............   6,358.8   4,355.7
                  MasterCard/Visa.........  16,009.5  15,142.4
                  Private label...........  11,997.9  10,318.7
                  Personal non-credit card  14,232.0  12,678.3
                  Commercial..............     442.5     508.1
                                           --------- ---------
                  Managed receivables..... $87,100.9 $74,608.9
                                           ========= =========
</TABLE>

   We maintain facilities with third parties which provide for the
securitization of receivables on a revolving basis totaling $12.6 billion, of
which $10.3 billion were utilized at December 31, 2001. The amount available
under these facilities will vary based on the timing and volume of public
securitization transactions.

   Contractual maturities of owned receivables were as follows:

<TABLE>
<CAPTION>
                                                At December 31, 2001
                         -------------------------------------------------------------------
                           2002      2003      2004     2005     2006   Thereafter   Total
                         --------- --------- -------- -------- -------- ---------- ---------
                                                    (In millions)
<S>                      <C>       <C>       <C>      <C>      <C>      <C>        <C>
Real estate secured..... $10,330.7 $ 7,443.6 $5,366.2 $3,870.5 $2,794.4 $ 7,393.0  $37,198.4
Auto finance............      43.3      74.0    230.8    551.2  1,019.5     413.4    2,332.2
MasterCard/Visa.........     740.9     660.4    588.5    524.6    467.7   3,979.9    6,962.0
Private label...........   4,715.5   1,773.5    508.0    374.6    269.6   2,206.7    9,847.9
Personal non-credit card   2,690.3   2,020.8  1,500.3  1,110.2    822.0   2,415.0   10,558.6
Commercial..............      35.1      38.5     53.6     36.1     32.6     246.6      442.5
                         --------- --------- -------- -------- -------- ---------  ---------
   Total................ $18,555.8 $12,010.8 $8,247.4 $6,467.2 $5,405.8 $16,654.6  $67,341.6
                         ========= ========= ======== ======== ======== =========  =========
</TABLE>

   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 to average principal balances, excluding
credit card receivables, approximated 53 percent in 2001 and 55 percent in 2000.

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

<TABLE>
<CAPTION>
                                                    At December 31, 2001
                                                    --------------------
                                                      Over 1
                                                    But Within   Over
                                                     5 years    5 years
                                                    ---------- ---------
                                                       (In millions)
        <S>                                         <C>        <C>
        Receivables at predetermined interest rates $24,511.5  $ 8,997.6
        Receivables at floating or adjustable rates   7,619.7    7,657.0
                                                    ---------  ---------
           Total................................... $32,131.2  $16,654.6
                                                    =========  =========
</TABLE>

                                     F-15

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Nonaccrual owned consumer receivables totaled $1,844.3 million at December
31, 2001 and $1,403.5 million at December 31, 2000. Interest income that would
have been recorded if such nonaccrual receivables had been current and in
accordance with contractual terms was approximately $278.0 million in 2001 and
$219.9 million in 2000. Interest income that was included in net income, prior
to these loans being placed on nonaccrual status, was approximately $153.6
million in 2001 and $122.6 million in 2000.

   Interest-only strip receivables are reported net of our estimate of probable
losses under the recourse provisions for receivables serviced with limited
recourse. Our estimate of the recourse obligation totaled $1,062.1 million at
December 31, 2001 and $1,001.4 million at December 31, 2000. Interest-only
strip receivables also included fair value mark-to-market adjustments of $321.4
million at year-end 2001 and $117.5 million at year-end 2000.

   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, offset by net customer payments
owed to the securitization trustee. Net customer payments owed to the
securitization trustee totaled $47.2 million at December 31, 2001 and $61.2
million at December 31, 2000.

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

<TABLE>
<CAPTION>
                                                                                  Year ended December 31
                                                                             -------------------------------
                                                                                2001       2000       1999
                                                                             ---------  ---------  ---------
                                                                                      (In millions)
<S>                                                                          <C>        <C>        <C>
Owned Receivables:
Credit loss reserves at January 1........................................... $ 1,940.6  $ 1,549.3  $ 1,514.4
Provision for credit losses.................................................   2,606.4    1,929.8    1,498.3
Charge-offs.................................................................  (2,418.6)  (1,883.8)  (1,686.9)
Recoveries..................................................................     189.8      141.6      157.4
Other, net..................................................................     122.4      203.7       66.1
                                                                             ---------  ---------  ---------
Total credit loss reserves for owned receivables at December 31.............   2,440.6    1,940.6    1,549.3
                                                                             ---------  ---------  ---------
Receivables Serviced with Limited Recourse:
Credit loss reserves at January 1...........................................   1,001.4      844.3      763.3
Provision for credit losses.................................................   1,063.1    1,083.7    1,009.1
Charge-offs.................................................................  (1,055.5)    (968.1)    (991.8)
Recoveries..................................................................      58.6       47.2       53.8
Other, net..................................................................      (5.5)      (5.7)       9.9
                                                                             ---------  ---------  ---------
Total credit loss reserves for receivables serviced with limited recourse at
  December 31...............................................................   1,062.1    1,001.4      844.3
                                                                             ---------  ---------  ---------
Total credit loss reserves for managed receivables at
  December 31............................................................... $ 3,502.7  $ 2,942.0  $ 2,393.6
                                                                             =========  =========  =========
</TABLE>

6. 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 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 typically result in the recording of an
interest-only strip receivable which

                                     F-16

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 and sale 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.

   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
completed during the years ended December 31, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>
                                                      Personal
                                         MasterCard/ Non-Credit Private  Auto
                                            Visa        Card     Label  Finance Total
                                         ----------- ---------- ------- ------- ------
<S>                                      <C>         <C>        <C>     <C>     <C>
2001
Net initial gains (in millions).........   $  7.3      $ 33.5   $ 13.1  $100.3  $154.2
Key economic assumptions: (1)
   Weighted-average life (in years).....      .38        1.24      .85    2.20
   Payment speed........................    93.59%      51.75%   67.06%  34.20%
   Expected credit losses (annual rate).     5.08        7.63     5.49    4.79
   Discount rate on cash flows..........     9.00       11.00    10.00   10.00
   Cost of funds........................     6.15        4.07     5.73    4.54
2000
Net initial gains (in millions).........   $ 43.7      $  8.9   $  8.5  $ 80.4  $141.5
Key economic assumptions: (1)
   Weighted-average life (in years).....      .41        1.18      .93    2.06
   Payment speed........................    92.62%      54.18%   63.97%  33.31%
   Expected credit losses (annual rate).     5.48        7.89     6.60    5.38
   Discount rate on cash flows..........     9.00       11.00    10.00   10.00
   Cost of funds........................     5.88        6.71     6.36    7.12
</TABLE>
--------
(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 $24.4 billion in 2001
and $20.7 billion in 2000. Net gains (gross gains less estimated credit losses
under the recourse provisions) related to these replenishments were calculated
using weighted-average assumptions consistent with those used for calculating
gains on initial securitizations and totaled $521.7 million in 2001 and $317.1
million in 2000.

                                     F-17

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Cash flows received from securitization trusts were as follows:

<TABLE>
<CAPTION>
                                                         Year ended December 31
                                      ------------------------------------------------------------
                                                   Personal
                                      MasterCard/ Non-Credit Private  Auto    Real Estate
                                         Visa        Card     Label  Finance    Secured    Total
                                      ----------- ---------- ------- -------- ----------- --------
                                                             (In millions)
<S>                                   <C>         <C>        <C>     <C>      <C>         <C>
2001
Proceeds from initial securitizations  $  261.1    $1,975.0  $500.0  $2,573.9       --    $5,310.0
Servicing fees received..............     179.1        69.8    34.9      84.9    $12.0       380.7
Other cash flow received on retained
  interests (1)......................     506.1       106.6   157.9     111.9     67.5       950.0
2000
Proceeds from initial securitizations  $1,925.0    $2,025.0  $500.0  $1,912.6       --    $6,362.6
Servicing fees received..............     176.3        73.0    24.2      60.7    $18.5       352.7
Other cash flow received on retained
  interests (1)......................     657.5       102.2    57.4      80.4     81.5       979.0
                                       --------    --------  ------  --------    -----    --------
</TABLE>
(1) Other cash flows include all cash flows from interest-only strip
    receivables, excluding servicing fees.

   At December 31, 2001, 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, 2001.

<TABLE>
<CAPTION>
                                                                Personal                   Real
                                                   MasterCard/ Non-Credit Private  Auto   Estate
                                                      Visa        Card     Label  Finance Secured
                                                   ----------- ---------- ------- ------- -------
                                                      (Dollar amounts are stated in millions)
<S>                                                <C>         <C>        <C>     <C>     <C>
Carrying value (fair value) of interest-only strip
  receivables.....................................   $267.2      $291.2   $ 55.1  $285.7  $ 24.8
Weighted-average life (in years)..................      .57        1.18      .79    1.87    1.53
Payment speed assumption (annual rate)............    84.18%      44.42%   69.66%  38.90%  25.95%
   Impact on fair value of 10% adverse change.....   $(22.0)     $(18.0)  $ (5.4) $(26.2) $ (1.4)
   Impact on fair value of 20% adverse change.....    (41.1)      (35.6)    (9.2)  (59.9)   (2.8)

Expected credit losses (annual rate)..............     5.23%       8.06%    5.49%   6.83%   1.55%
   Impact on fair value of 10% adverse change.....   $(22.5)     $(32.1)  $ (8.4) $(25.1) $ (1.4)
   Impact on fair value of 20% adverse change.....    (44.9)      (64.2)   (16.9)  (50.1)   (2.7)

Discount rate on residual cash flows (annual rate)     9.00%      11.00%   10.00%  10.00%  13.00%
   Impact on fair value of 10% adverse change.....   $ (3.0)     $ (2.5)  $  (.3) $ (6.9) $  (.5)
   Impact on fair value of 20% adverse change.....     (6.0)       (5.0)     (.7)  (13.6)   (1.0)

Variable returns to investors (annual rate).......     5.09%       3.22%    4.62%   5.42%   3.58%
   Impact on fair value of 10% adverse change.....   $(22.4)     $(13.1)  $ (7.5) $  (.2) $ (3.3)
   Impact on fair value of 20% adverse change.....    (44.7)      (26.2)   (14.9)    (.3)   (6.5)
                                                     ------      ------   ------  ------  ------
</TABLE>

   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

                                     F-18

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

to changes in another (for example, increases in market interest rates may
result in lower prepayments) which might magnify or counteract the
sensitivities. Furthermore, the estimated fair values as disclosed should not
be considered indicative of future earnings on these assets.

   Static pool credit losses are calculated by summing actual and projected
future credit losses and dividing them by the original balance of each pool of
asset. Due to the short term revolving nature of MasterCard and Visa, personal
non-credit card and private label receivables, the weighted-average percentage
of static pool credit losses is not considered to be materially different from
the weighted-average charge-off assumptions used in determining the fair value
of our interest-only strip receivables in the table above. At December 31,
2001, static pool credit losses for auto finance loans securitized in 2001 were
estimated to be 10.0 percent and for auto finance loans securitized in 2000
were estimated to be 11.0 percent.

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

<TABLE>
<CAPTION>
                                                                             At December 31
                                                             ----------------------------------------------
                                                                      2001                    2000
                                                             ----------------------  ----------------------
                                                             Receivables Delinquent  Receivables Delinquent
                                                             Outstanding Receivables Outstanding Receivables
                                                             ----------- ----------- ----------- -----------
                                                                              (In millions)
<S>                                                          <C>         <C>         <C>         <C>
Managed receivables:
   Real estate secured...................................... $ 38,060.2      2.94%   $ 31,605.7     2.82%
   Auto finance.............................................    6,358.8      3.15       4,355.7     2.63
   MasterCard/Visa..........................................   16,009.5      4.30      15,142.4     3.79
   Private label............................................   11,997.9      5.65      10,318.7     5.75
   Personal non-credit card.................................   14,232.0     10.07      12,678.3     8.89
                                                             ----------     -----    ----------     ----
   Total consumer...........................................   86,658.4      4.75      74,100.8     4.45
   Commercial...............................................      442.5        --         508.1       --
                                                             ----------     -----    ----------     ----
       Total managed receivables............................ $ 87,100.9      4.73%   $ 74,608.9     4.42%
                                                             ----------     -----    ----------     ----
Receivables serviced with limited recourse:
   Real estate secured...................................... $   (861.8)     5.00%   $ (1,457.8)    4.01%
   Auto finance.............................................   (4,026.6)     3.29      (2,712.7)    2.61
   MasterCard/Visa..........................................   (9,047.5)     2.79      (9,311.7)    2.35
   Private label............................................   (2,150.0)     2.69      (1,650.0)    4.72
   Personal non-credit card.................................   (3,673.4)     9.03      (3,791.1)    8.82
                                                             ----------     -----    ----------     ----
       Total receivables serviced with limited recourse.....  (19,759.3)     4.14     (18,923.3)    4.02
                                                             ----------     -----    ----------     ----
   Owned consumer receivables............................... $ 67,341.6      4.93%   $ 55,685.7     4.60%
                                                             ==========     =====    ==========     ====
</TABLE>

                                     F-19

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                                     At December 31
                                                     ----------------------------------------------
                                                              2001                    2000
                                                     ----------------------  ----------------------
                                                       Average       Net       Average       Net
                                                     Receivables Charge-offs Receivables Charge-offs
                                                     ----------- ----------- ----------- -----------
                                                                      (In millions)
<S>                                                  <C>         <C>         <C>         <C>
Managed receivables:
   Real estate secured.............................. $ 34,104.0      .58%    $ 28,016.0      .48%
   Auto finance.....................................    5,191.6     5.36        3,744.3     4.90
   MasterCard/Visa..................................   15,008.0     7.12       13,776.4     6.05
   Private label....................................   10,421.0     5.55        9,620.5     5.70
   Personal non-credit card.........................   13,256.0     8.25       11,539.0     8.21
                                                     ----------     ----     ----------     ----
   Total consumer...................................   77,980.6     4.12       66,696.2     3.97
   Commercial.......................................      478.6     2.11          580.6     2.67
                                                     ----------     ----     ----------     ----
   Total managed receivables........................ $ 78,459.2     4.11%    $ 67,276.8     3.96%
                                                     ----------     ----     ----------     ----
Receivables serviced with limited recourse:
   Real estate secured.............................. $ (1,199.2)     .70%    $ (1,847.6)     .90%
   Auto finance.....................................   (3,004.4)    6.32       (2,023.5)    6.16
   MasterCard/Visa..................................   (8,953.6)    5.30       (8,812.5)    4.81
   Private label....................................   (1,744.2)    2.72       (1,212.5)    5.41
   Personal non-credit card.........................   (3,496.1)    7.94       (3,651.2)    7.95
                                                     ----------     ----     ----------     ----
   Total receivables serviced with limited recourse.  (18,397.5)    5.42      (17,547.3)    5.24
                                                     ----------     ----     ----------     ----
Owned consumer receivables.......................... $ 60,061.7     3.71%    $ 49,729.5     3.50%
                                                     ==========     ====     ==========     ====
</TABLE>

   We issued securities backed by dedicated home equity loan receivables of
$1.6 billion in 2001 and $.5 billion in 1999. For accounting purposes, the
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. Real estate receivables
included closed-end real estate secured receivables totaling $1.7 billion at
December 31, 2001 and $.4 billion at December 31, 2000 which secured the
outstanding debt related to these transactions.

7. Properties and Equipment, Net

<TABLE>
<CAPTION>
                                                     At December 31
                                             -------------------------------
                                                                Depreciable
                                               2001     2000   Life in Years
                                             -------- -------- -------------
                                                      (In millions)
   <S>                                       <C>      <C>      <C>
   Land..................................... $    7.6 $    7.6        --
   Buildings and improvements...............    493.1    450.0     10-40
   Furniture and equipment..................    787.8    730.5      3-10
                                             -------- --------
   Total....................................  1,288.5  1,188.1
   Accumulated depreciation and amortization    872.4    794.8
                                             -------- --------
   Properties and equipment, net............ $  416.1 $  393.3
                                             ======== ========
</TABLE>

   Depreciation and amortization expense totaled $113.3 million in 2001, $113.2
million in 2000 and $110.7 million in 1999.

                                     F-20

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. Commercial Paper, Bank and Other Borrowings

<TABLE>
<CAPTION>
                                                   At December 31
                                          ------------------------------------------
                                                          Bank and
                                          Commercial       Other
                                            Paper        Borrowings       Total
                                          ----------     ----------      ---------
                                          (All dollar amounts are stated in millions)
      <S>                                 <C>            <C>            <C>
      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
                                           --------        ------        ---------
      2000
      Balance............................  $8,718.3        $108.1       $ 8,826.4
      Highest aggregate month-end balance                                11,177.8
      Average borrowings.................   9,298.0         106.8         9,404.8
      Weighted-average interest rate:
         At year-end.....................      6.6 %         6.7 %           6.6 %
         Paid during year................       6.4           6.4             6.4
                                           --------        ------        ---------
      1999
      Balance............................  $8,065.0        $715.2       $ 8,780.2
      Highest aggregate month-end balance                                 9,280.9
      Average borrowings.................   8,132.1         100.0         8,232.1
      Weighted-average interest rate:
         At year-end.....................      5.6 %         5.4 %           5.6 %
         Paid during year................       5.3           5.3             5.3
                                           --------        ------        ---------
</TABLE>

   Interest expense for commercial paper, bank and other borrowings totaled
$363.9 million in 2001, $602.6 million in 2000 and $433.7 million in 1999.

   We maintain various bank credit agreements primarily to support commercial
paper borrowings. We had committed back-up lines and other bank lines of $9.7
billion at December 31, 2001 and $9.1 billion at December 31, 2000. None of
these back-up lines were used in 2001 or 2000. Formal credit lines are reviewed
annually and expire at various dates through 2005. Borrowings under these lines
generally are available at a surcharge over LIBOR. None of these lines contain
material adverse change clauses which could restrict availability. Annual
commitment fee requirements to support availability of these lines at December
31, 2001 totaled $7.3 million.

                                     F-21

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Senior and Senior Subordinated Debt (With Original Maturities Over One Year)

<TABLE>
<CAPTION>
                                                       At December 31
                                                    ----------------------
                                                       2001        2000
                                                    ---------   ---------
                                                    (All dollar amounts are
                                                     stated in millions)
       <S>                                          <C>         <C>
       Senior Debt:
       3.50% to 6.49%; due 2002 to 2013............ $11,469.5   $ 7,570.8
       6.50% to 6.99%; due 2002 to 2013............   8,124.9     4,011.8
       7.00% to 7.49%; due 2002 to 2023............   3,944.1     4,119.3
       7.50% to 7.99%; due 2002 to 2019............   4,713.8     4,173.5
       8.00% to 8.99%; due 2002 to 2010............   3,820.6     3,892.5
       9.00% and greater; due 2001.................        --       208.8
       Variable interest rate debt; 1.86% to 3.53%;
          Due 2002 to 2008.........................  19,201.1    16,629.8
       Senior Subordinated Debt:
       9.00%; due 2001.............................        --        80.6
       Unamortized discount........................     (99.2)     (111.2)
                                                    ---------   ---------
       Total senior and senior subordinated debt... $51,174.8   $40,575.9
                                                    =========   =========
</TABLE>

   Senior debt included $1.5 billion of debt secured by $1.7 billion of real
estate secured receivables at December 31, 2001. At December 31, 2000, senior
and senior subordinated debt included $.4 billion of debt secured by $.4
billion of real estate secured receivables.

   At December 31, 2001, senior debt also included carrying value adjustments
totaling $313.0 million relating to derivative financial instruments and a
foreign currency translation adjustment of $(282.9) million relating to our
foreign denominated debt.

   Weighted-average interest rates were 5.1 percent at December 31, 2001 and
6.9 percent at December 31, 2000. Interest expense for senior and senior
subordinated debt was $2,751.4 million in 2001, $2,358.5 million in 2000 and
$1,780.8 million in 1999. The most restrictive financial covenant contained in
the terms of our debt agreements is the maintenance of a minimum shareholder's
equity of $3.6 billion. Debt denominated in a foreign currency is included in
the applicable rate category based on the effective U.S. dollar equivalent rate
as summarized in Note 10.

   Maturities of senior debt were:

<TABLE>
<CAPTION>
                                       At December 31, 2001
                                       --------------------
                                          (In millions)
                     <S>               <C>
                     2002.............      $10,172.5
                     2003.............        9,393.9
                     2004.............        4,185.1
                     2005.............        5,060.1
                     2006.............        6,180.8
                     Thereafter.......       16,182.4
                                            ---------
                            Total.....      $51,174.8
                                            =========
</TABLE>

                                     F-22

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Derivative Financial Instruments and Concentrations of Credit Risk

   In the normal course of business and in connection with our asset/liability
management program, we enter into various transactions involving derivative
financial instruments. These instruments primarily are used to manage our
exposure to fluctuations in interest rates and currency exchange rates. We do
not serve as a financial intermediary to make markets in any derivative
financial instruments. We have a comprehensive program to address potential
financial risks such as liquidity, interest rate, currency and credit risk. The
Finance Committee of the Board of Directors sets acceptable limits for each of
these risks annually and reviews the limits semiannually. For further
information on our strategies for managing interest rate and foreign exchange
rate risk, see the "Risk Management" section within our Management's Discussion
and Analysis of Financial Condition and Results of Operations.

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

   Interest rate swaps are contractual agreements between two counterparties
for the exchange of periodic interest payments generally based on a notional
principal amount and agreed-upon fixed or floating rates. The majority of our
interest rate swaps are used to manage our exposure to changes in interest
rates by converting floating rate assets or debt to fixed rate or by converting
fixed rate assets or debt to floating rate. We have also entered into currency
swaps to convert both principal and interest payments on debt issued 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 have both
interest rate and foreign exchange rate forward contracts and interest rate
futures contracts. We use foreign exchange rate forward contracts to reduce our
exposure to foreign currency exchange risk. Interest rate forward and futures
contracts are used to hedge resets of interest rates on our floating rate
assets and liabilities. Cash requirements for forward contracts include the
receipt or payment of cash upon the sale or purchase of the instrument.

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

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

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

                                     F-23

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 credit (or repayment) risk in derivative instruments
through established credit approvals, risk control limits and ongoing
monitoring procedures. Our exposure to credit risk for futures is limited, as
these contracts are traded on organized exchanges. Each day, changes in futures
contract values are settled in cash. In contrast, swap agreements and forward
contracts have credit risk relating to the performance of the counterparty.
Additionally, certain swap agreements require that payments be made to, or
received from, the counterparty when the fair value of the agreement reaches a
certain level. Derivative financial instruments are generally expressed in
terms of notional principal or contract amounts which are much larger than the
amounts potentially at risk for nonpayment by counterparties. We have never
suffered a loss due to counterparty failure.

   Fair Value and Cash Flow Hedges. To manage our exposure to changes in
interest rates, we enter into interest rate swap agreements and currency swaps
which have been designated as fair value or cash flow hedges under FAS 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 FAS No. 133 for 94 percent of the notional amounts of such interest
rate swaps. 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, FAS
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 a foreign currency into pay variable U.S. dollar debt. Hedge
ineffectiveness associated with fair value hedges was a loss of $.1 million,
net of tax, in 2001 and was recorded as other income. During 2001, all of our
fair value hedges were associated with debt. At December 31, 2001, we had
recorded fair value adjustments for open fair value hedges which decreased the
carrying value of our debt by $162.9 million.

   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 a foreign currency into pay fixed U.S. dollar debt. At December
31, 2001, we had approximately $645.6 million of unrealized losses on
derivative instruments designated as cash flow hedges, net of taxes, in
accumulated other comprehensive income. We expect $358.4 million of currently
unrealized net losses, after taxes, will be reclassified to earnings within one
year, however, these unrealized losses will be offset by decreased interest
expense associated with the variable cash flows of the hedged items and will
result in no net economic impact to our earnings. Hedge ineffectiveness
associated with cash flow hedges reported in 2001 in the other income line was
immaterial.

   At December 31, 2001, $6.7 million of derivative instruments, at fair value,
were recorded in other assets and $1,435.4 million in other liabilities.

   Deferred gains resulting from termination of derivatives were $524.2 million
at December 31, 2001 and $41.7 million at December 31, 2000. Deferred losses
from termination of derivatives were $70.2 million at December 31, 2001 and
$61.1 million at December 31, 2000. Amortization of net deferred gains totaled
$41.9 million in 2001 and $12.3 million in 2000. The weighted-average
amortization period associated with the deferred gains was 6.4 years at
December 31, 2001 and 3.0 years at December 31, 2000. The weighted-average
amortization period for the deferred losses was 5.2 years at December 31, 2001
and 6.0 years at December 31, 2000. At December 31, 2001, net deferred gains
and losses increased the carrying value of senior and senior subordinated debt
by $475.9 million and decreased accumulated other comprehensive income by $21.9
million.

                                     F-24

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Non-Qualifying Hedging Activities. We use forward rate agreements, interest
rate caps, exchange traded futures, and some interest rate swaps which were not
designated as hedges under FAS 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. During 2001, we recognized $.6 million, net of tax, in net fair
value gains on derivatives which were not designated as hedges. These gains
were reported as other income.

   Derivative Financial Instruments. The following table summarizes derivative
financial instrument activity in 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                          Exchange Traded                                    Non-Exchange Traded
                            ------------------------------------------  --------------------------------------------------
                                                                                                                 Interest
                                                                                                                   Rate
                             Interest Rate Futures                                             Foreign Exchange   Forward
                                   Contracts              Options        Interest               Rate Contracts   Contracts
                            ----------------------  ------------------     Rate               -----------------  ---------
                             Purchased     Sold     Purchased  Written    Swaps       Swaps   Purchased   Sold     Sold
                            ----------  ----------  ---------  -------  ----------  --------  --------- -------  ---------
                                                                          (In millions)
<S>                         <C>         <C>         <C>        <C>      <C>         <C>       <C>       <C>      <C>
1999
Notional amount, 1998...... $     70.0          --  $   544.0       --  $ 12,005.3  $3,190.4        --  $(781.0)       --
New contracts..............    5,608.0  $ (4,725.0)   1,158.0  $ (50.0)   19,783.0   1,176.5   $ 488.5   (135.5)  $ 500.0
Matured or expired
 contracts.................     (878.0)       25.0     (949.0)      --    (2,577.9)   (447.8)    (16.2)   121.3    (500.0)
Terminated contracts.......         --          --         --       --    (1,593.7)    (66.1)       --       --        --
In-substance maturities (1)   (4,700.0)    4,700.0      (50.0)    50.0          --        --    (373.1)   373.1        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
Notional amount, 1999...... $    100.0          --  $   703.0       --  $ 27,616.7  $3,853.0   $  99.2  $(422.1)       --
                            ==========  ==========  =========  =======  ==========  ========   =======  =======   =======
Fair value, 1999 (2)....... $      (.1)         --         --       --  $   (113.6) $ (286.7)  $    .2  $   5.7        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
2000
Notional amount, 1999...... $    100.0          --  $   703.0       --  $ 27,616.7  $3,853.0   $  99.2  $(422.1)       --
New contracts..............   21,715.0  $(20,321.0)   1,300.0  $(300.0)   13,653.3   2,677.9        --       --        --
Matured or expired
 contracts.................   (1,494.0)         --   (1,403.0)      --   (13,231.2)   (574.5)    (80.1)   350.7        --
Terminated contracts.......         --          --     (600.0)   300.0    (4,983.7)   (654.9)       --       --        --
In-substance maturities (1)  (20,321.0)   20,321.0         --       --          --        --     (19.1)    19.1        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
Notional amount, 2000......         --          --         --       --  $ 23,055.1  $5,301.5        --  $ (52.3)       --
                            ==========  ==========  =========  =======  ==========  ========   =======  =======   =======
Fair value, 2000 (2).......         --          --         --       --  $    263.8  $ (506.6)       --  $   4.0        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
2001
Notional amount, 2000......         --          --         --       --  $ 23,055.1  $5,301.5        --  $ (52.3)       --
New contracts.............. $ 36,615.0  $(22,706.0) $ 4,750.0       --    21,608.6   1,991.0   $ 273.0   (447.5)       --
Matured or expired
 contracts.................  (21,790.0)      300.0         --       --    (7,508.6)   (396.1)       --     52.3        --
Terminated contracts.......         --          --   (2,750.0)      --    (8,829.9)   (165.6)       --       --        --
In-substance maturities (1)  (13,406.0)  (13,406.0)        --       --          --        --    (273.0)   273.0        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
Notional amount, 2001...... $  1,419.0  $ (9,000.0) $ 2,000.0       --  $ 28,325.2  $6,730.8        --  $(174.5)       --
                            ==========  ==========  =========  =======  ==========  ========   =======  =======   =======
Fair value, 2001 (2):
   Fair value hedges.......         --          --         --       --  $   (162.2) $    (.6)       --       --        --
   Cash flow hedges........         --          --         --       --      (301.1)   (964.8)       --       --        --
   Non-hedging
    derivatives............ $       .4  $     (3.4) $      .4       --          --        --        --  $   2.8        --
                            ----------  ----------  ---------  -------  ----------  --------   -------  -------   -------
Total...................... $       .4  $     (3.4) $      .4       --  $   (463.3) $ (965.4)       --  $   2.8        --
                            ==========  ==========  =========  =======  ==========  ========   =======  =======   =======
</TABLE>
<TABLE>
<CAPTION>





                               Caps
                               and
                              Floors
                            ---------

<S>                         <C>
1999
Notional amount, 1998...... $ 2,073.8
New contracts..............   2,089.4
Matured or expired
 contracts.................    (261.7)
Terminated contracts.......  (1,200.0)
In-substance maturities (1)        --
                            ---------
Notional amount, 1999...... $ 2,701.5
                            =========
Fair value, 1999 (2)....... $     3.4
                            ---------
2000
Notional amount, 1999...... $ 2,701.5
New contracts..............   2,550.6
Matured or expired
 contracts.................  (2,589.8)
Terminated contracts.......    (309.4)
In-substance maturities (1)        --
                            ---------
Notional amount, 2000...... $ 2,352.9
                            =========
Fair value, 2000 (2)....... $    (2.6)
                            ---------
2001
Notional amount, 2000...... $ 2,352.9
New contracts..............   3,481.8
Matured or expired
 contracts.................  (1,997.8)
Terminated contracts.......    (847.0)
In-substance maturities (1)        --
                            ---------
Notional amount, 2001...... $ 2,989.9
                            =========
Fair value, 2001 (2):
   Fair value hedges.......        --
   Cash flow hedges........        --
   Non-hedging
    derivatives............ $     (.2)
                            ---------
Total...................... $     (.2)
                            =========
</TABLE>

                                     F-25

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

(2) (Bracketed) unbracketed amounts represent amounts to be (paid) received by
    us had these positions been closed out at the respective balance sheet
    date. Bracketed amounts do not necessarily represent risk of loss as the
    fair value of the derivative financial instrument and the items being
    hedged must be evaluated together. See Note 11, "Fair Value of Financial
    Instruments" for further discussion of the relationship between the fair
    value of our assets and liabilities.

   The table below reflects the balance sheet items hedged using derivative
financial instruments which qualify for hedge accounting at December 31, 2001.
The critical terms of the derivatives have been designed to match those of the
related asset or liability.

<TABLE>
<CAPTION>
                                     Interest  Currency
                                    Rate Swaps  Swaps     Total
                                    ---------- -------- ---------
                                            (In millions)
              <S>                   <C>        <C>      <C>
              Investment securities $    16.8        -- $    16.8
              Senior debt..........  28,308.4  $6,730.8  35,039.2
                                    ---------  -------- ---------
                     Total......... $28,325.2  $6,730.8 $35,056.0
                                    =========  ======== =========
</TABLE>

   The following table summarizes the maturities and related weighted-average
receive/pay rates of interest rate swaps outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                            2002      2003     2004    2005    2006    2007    Thereafter   Total
                                          --------  --------  ------  ------  -----  --------  ---------- ---------
                                                         (All dollar amounts are stated in millions)
<S>                                       <C>       <C>       <C>     <C>     <C>    <C>       <C>        <C>
Pay a fixed rate/receive a floating rate:
   Notional value........................ $9,506.3  $7,821.2  $508.6  $266.5     --        --         --  $18,102.6
   Weighted-average receive rate.........     2.10%     2.36%   2.36%   2.17%    --        --         --       2.22%
   Weighted-average pay rate.............     5.43      4.93    4.40    4.59     --        --         --       5.17
Pay a floating rate/receive a fixed rate:
   Notional value........................ $   95.7        --  $  3.9  $100.0  $21.3  $1,479.2   $8,522.5  $10,222.6
   Weighted-average receive rate.........     6.69%       --    6.57%   6.86%  6.53%     7.45%      6.67%      6.78%
   Weighted-average pay rate.............     2.09        --    1.93    2.08   2.04      3.92       3.32       3.38
                                          --------  --------  ------  ------  -----  --------   --------  ---------
Total notional value..................... $9,602.0  $7,821.2  $512.5  $366.5  $21.3  $1,479.2   $8,522.5  $28,325.2
                                          ========  ========  ======  ======  =====  ========   ========  =========
Total weighted-average rates on swaps:
   Receive rate..........................     2.15%     2.36%   2.40%   3.45%  6.53%     7.45%      6.67%      3.87%
   Pay rate..............................     5.39      4.93    4.38    3.91   2.04      3.92       3.32       4.52
</TABLE>

   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 increased
by 17 basis points in 2001, declined by 7 basis points in 2000 and declined by
4 basis points in 1999.

                                     F-26

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

   Because we primarily lend to consumers, we do not have receivables from any
industry group that equal or exceed 10 percent of total managed receivables at
December 31, 2001 and 2000. We lend nationwide, with the following geographic
areas comprising more than 10 percent of total managed domestic receivables at
December 31, 2001: California--15 percent; Midwest (IL, IN, IA, KS, MI, MN, MO,
NE, ND, OH, SD, WI)--22 percent; Middle Atlantic (DE, DC, MD, NJ, PA, VA,
WV)--15 percent; Northeast (CT, ME, MA, NH, NY, RI, VT)--11 percent; and
Southeast (AL, FL, GA, KY, MS, NC, SC, TN)--18 percent.

11. Fair Value of Financial Instruments

   We have estimated the fair value of our financial instruments in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("FAS No. 107"). Fair value estimates,
methods and assumptions set forth below for our financial instruments are made
solely to comply with the requirements of FAS No. 107 and should be read in
conjunction with the financial statements and notes in this Annual Report. A
significant portion of our financial instruments do not have a quoted market
price. For these items, fair values were estimated by discounting estimated
future cash flows at estimated current market discount rates. Assumptions used
to estimate future cash flows are consistent with management's assessments
regarding ultimate collectibility of assets and related interest and with
estimates of product lives and repricing characteristics used in our
asset/liability management process. All assumptions are based on historical
experience adjusted for future expectations. Assumptions used to determine fair
values for financial instruments for which no active market exists are
inherently judgmental and changes in these assumptions could significantly
affect fair value calculations.

   As required under generally accepted accounting principles, a number of
other assets recorded on the balance sheets (such as acquired credit card
relationships) and other intangible assets not recorded on the balance sheets
(such as the value of consumer lending relationships for originated receivables
and the franchise values of our business units) are not considered financial
instruments and, accordingly, are not valued for purposes of this disclosure.
We believe there is substantial value associated with these assets based on
current market conditions and historical experience. Accordingly, the estimated
fair value of financial instruments, as disclosed, does not fully represent our
entire value, nor the changes in our entire value.

                                     F-27

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                       At December 31
                                            --------------------------------------------------------------------
                                                           2001                               2000
                                            ---------------------------------  ---------------------------------
                                             Carrying   Estimated               Carrying   Estimated
                                              Value     Fair Value  Difference   Value     Fair Value  Difference
                                            ----------  ----------  ---------- ----------  ----------  ----------
                                                                        (In millions)
<S>                                         <C>         <C>         <C>        <C>         <C>         <C>
Assets:
Cash....................................... $    553.1  $    553.1         --  $    294.4  $    294.4        --
Investment securities......................    2,885.4     2,885.4         --     3,223.6     3,223.6        --
Receivables................................   66,889.5    68,764.9  $ 1,875.4    55,573.9    56,140.8   $ 566.9
                                            ----------  ----------  ---------  ----------  ----------   -------
   Total...................................   70,328.0    72,203.4    1,875.4    59,091.9    59,658.8     566.9
                                            ----------  ----------  ---------  ----------  ----------   -------
Liabilities:
Advances from parent company and affiliates   (2,685.2)   (2,685.2)        --    (3,845.9)   (3,845.9)       --
Commercial paper, bank and other borrowings   (9,074.6)   (9,074.6)        --    (8,826.4)   (8,826.4)       --
Senior and senior subordinated debt........  (51,174.8)  (52,609.2)  (1,434.4)  (40,575.9)  (40,176.1)    399.8
Insurance reserves.........................     (887.3)   (1,138.7)    (251.4)     (891.8)   (1,122.0)   (230.2)
                                            ----------  ----------  ---------  ----------  ----------   -------
   Total...................................  (63,821.9)  (65,507.7)  (1,685.8)  (54,140.0)  (53,970.4)    169.6
                                            ----------  ----------  ---------  ----------  ----------   -------
Other:
Derivative financial instruments...........   (1,428.7)   (1,428.7)        --        81.2      (241.4)   (322.6)
Commitments to extend credit and guarantees         --        51.6       51.6          --        48.9      48.9
                                            ----------  ----------  ---------  ----------  ----------   -------
   Total...................................   (1,428.7)   (1,377.1)      51.6        81.2      (192.5)   (273.7)
                                            ----------  ----------  ---------  ----------  ----------   -------
   Total................................... $  5,077.4  $  5,318.6  $   241.2  $  5,033.1  $  5,495.9   $ 462.8
                                            ==========  ==========  =========  ==========  ==========   =======
</TABLE>

   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 approximates
carrying value because interest rates on these receivables adjust with changing
market interest rates. The fair value of fixed rate consumer receivables was
estimated by discounting future expected cash flows at interest rates which
approximate the rates that would achieve a similar return on assets with
comparable risk characteristics.

   Receivables also includes our interest-only strip receivables. The
interest-only strip receivables are carried at fair value on our balance
sheets. Fair value is based on an estimate of the present value of future cash
flows associated with securitizations of certain real estate secured, auto
finance, MasterCard and Visa, private label and personal non-credit card
receivables.

   Advances from parent company and affiliates: The carrying value approximates
fair value for this instrument due to its short-term nature.

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

   Senior and senior subordinated debt: The estimated fair value of our gross
fixed rate debt instruments was determined using either quoted market prices or
by discounting future expected cash flows at interest rates

                                     F-28

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

offered for similar types of debt instruments. Carrying value is typically used
to estimate the fair value of floating rate debt.

   Insurance 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, 2001 and 2000. The fair value
of other insurance reserves is not required to be determined in accordance with
FAS No. 107.

   Derivative financial instruments: As of January 1, 2001, all derivative
financial instruments are carried at fair value on the balance sheet. Where
practical, quoted market prices were used to determine fair value of these
instruments. For non-exchange traded contracts, fair value was determined using
accepted and established valuation methods (including input from independent
third parties) which consider the terms of the contracts and market
expectations on the valuation date for forward interest rates (for interest
rate contracts) or forward foreign currency exchange rates (for foreign
exchange contracts). We enter into foreign exchange contracts to hedge our
exposure to currency risk on foreign denominated debt. We also enter into
interest rate contracts to hedge our exposure to interest rate risk on assets
and liabilities, including debt. As a result, decreases/increases in the fair
value of derivative financial instruments which have been designated as
effective hedges are offset by a corresponding increase/decrease in the fair
value of the individual asset or liability being hedged. See Note 10,
"Derivative Financial Instruments and Concentrations of Credit Risk," for
additional discussion of the nature of these items.

   Commitments to extend credit and guarantees: These commitments were valued
by considering our relationship with the counterparty, the creditworthiness of
the counterparty and the difference between committed and current interest
rates.

12. Leases

   We lease certain offices, buildings and equipment for periods of up to 25
years. The leases expire at various dates through 2019 and have various renewal
options. The office space leases generally require us to pay certain operating
expenses. Net rental expense under operating leases was $107.7 million in 2001,
$91.2 million in 2000 and $69.9 million in 1999.

   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:

<TABLE>
<CAPTION>
                                               At December 31, 2001
                                             ------------------------
                                             Minimum  Minimum
                                              Rental  Sublease
                                             Payments  Income   Net
                                             -------- -------- ------
                                                  (In millions)
           <S>                               <C>      <C>      <C>
           2002.............................  $133.5   $ 20.8  $112.7
           2003.............................   111.7     21.0    90.7
           2004.............................    95.3     21.5    73.8
           2005.............................    79.5     21.8    57.7
           2006.............................    70.6     21.8    48.8
           Thereafter.......................   261.1     76.2   184.9
                                              ------   ------  ------
              Net minimum lease commitments.  $751.7   $183.1  $568.6
                                              ======   ======  ======
</TABLE>

                                     F-29

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Employee Benefit Plans

   Substantially all of our employees are covered by defined benefit pension
plans which are sponsored by Household International. At December 31, 2001,
plan assets included an investment in 1,112,546 shares of Household
International's common stock with a fair value of $64.5 million.

   The fair value of Household International's pension plan assets exceeded the
projected benefit obligations by $182.0 million at December 31, 2001 and $503.7
million at December 31, 2000. The assumptions used in determining the benefit
obligation and pension income of the domestic defined benefit plans at December
31 were as follows:

<TABLE>
<CAPTION>
                                                        2001  2000  1999
                                                        ----  ----  ----
       <S>                                              <C>   <C>   <C>
       Discount rate...................................  7.5% 8.25%  8.0%
       Salary increase assumption......................  4.0   4.0   4.0
       Expected long-term rate of return on plan assets 10.0  10.0  10.0
</TABLE>

   Our share of Household International's net prepaid pension cost was $121.8
million at December 31, 2001 and $119.6 million at December 31, 2000. Our share
of net pension income (expense) was $2.9 million in 2001, $1.4 million in 2000
and $(4.8) million in 1999.

   We also participate in various 401(k) savings plans and profit sharing plans
for employees meeting certain eligibility requirements. Under the Household
International plan, each participant's contribution is matched by the company
in Household common stock up to a maximum of 6 percent of the participant's
compensation. We incurred expenses relating to these plans of $46.5 million in
2001, $41.0 million in 2000 and $34.9 million in 1999.

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

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

   While no separate actuarial valuation has been made for our participation in
Household International's plans for postretirement medical, dental and life
benefits, our share of the liability and expense has been estimated. Household
International's accumulated postretirement benefit obligation was $196.8
million at December 31, 2001 and $161.0 million at December 31, 2000. Our
estimated share of Household International's accrued postretirement benefit
obligation was $156.5 million at December 31, 2001 and $157.4 million at
December 31, 2000. In addition, our estimated share of postretirement benefit
expense recognized was $14.5 million in 2001, $14.6 million in 2000 and $16.1
million in 1999.

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

<TABLE>
<CAPTION>
                                              2001 2000  1999
                                              ---- ----  ----
                   <S>                        <C>  <C>   <C>
                   Discount rate............. 7.5% 8.25% 8.0%
                   Salary increase assumption 4.0   4.0  4.0
</TABLE>

                                     F-30

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A 9.8 percent annual rate of increase in the gross cost of covered health
care benefits was assumed for 2002. This rate of increase is assumed to decline
gradually to 5.4 percent in 2008.

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

<TABLE>
<CAPTION>
                                                          1 Percent 1 Percent
                                                          Increase  Decrease
                                                          --------- ---------
                                                             (In millions)
  <S>                                                     <C>       <C>
  Effect on total of service and interest cost components   $ .6      $ (.6)
  Effect on postretirement benefit obligation............    8.1       (7.6)
</TABLE>

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

   Household International accounts for options and shares issued under the
ESPP in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," pursuant to which no compensation cost has been
recognized.

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

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

14. Income Taxes

   Total income taxes were allocated as follows:

<TABLE>
<CAPTION>
                                                                             Year ended December 31
                                                                             ----------------------
                                                                               2001    2000   1999
                                                                             -------  ------ ------
                                                                                  (In millions)
<S>                                                                          <C>      <C>    <C>
Provision for income taxes related to operations............................ $ 949.8  $773.1 $658.6
Income taxes related to adjustments included in common shareholder's equity:
   Unrealized gain (loss) on investments, net...............................    92.1    56.3  (50.8)
   Unrealized losses on cash flow hedging instruments.......................  (360.7)     --     --
   Foreign currency translation adjustments.................................    (2.2)    8.9     .5
                                                                             -------  ------ ------
       Total................................................................ $ 679.0  $838.3 $608.3
                                                                             =======  ====== ======
</TABLE>

                                     F-31

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Provisions for income taxes related to operations were:

<TABLE>
<CAPTION>
                                             Year ended December 31
                                             --------------------
                                              2001    2000   1999
                                             ------  ------ ------
                                                 (In millions)
              <S>                            <C>     <C>    <C>
              Current:
                 United States.............. $927.2  $726.0 $654.2
                 Foreign....................    2.9     5.9    5.8
                                             ------  ------ ------
                     Total current..........  930.1   731.9  660.0
              Deferred--United States          19.7    41.2   (1.4)
                                             ------  ------ ------
                     Total income taxes..... $949.8  $773.1 $658.6
                                             ======  ====== ======
</TABLE>

   Income before income taxes were:

<TABLE>
<CAPTION>
                                             Year ended December 31
                                           --------------------------
                                             2001     2000     1999
                                           -------- -------- --------
                                                 (In millions)
          <S>                              <C>      <C>      <C>
          United States................... $2,669.3 $2,165.9 $1,859.0
          Foreign.........................      8.4      3.3      5.1
                                           -------- -------- --------
          Total income before income taxes $2,677.7 $2,169.2 $1,864.1
                                           ======== ======== ========
</TABLE>

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

   Effective tax rates are analyzed as follows:

<TABLE>
<CAPTION>
                                                        Year ended December 31
                                                        ---------------------
                                                        2001    2000    1999
                                                        ----    ----    ----
      <S>                                               <C>     <C>     <C>
      Statutory federal income tax rate................ 35.0%   35.0%   35.0%
      Increase (decrease) in rate resulting from:
         State and local taxes, net of federal benefit.  2.8     2.8     2.7
         Tax credits................................... (2.8)   (2.6)   (1.6)
         Other.........................................   .5      .4     (.8)
                                                         ----    ----   ----
             Effective tax rate........................ 35.5%   35.6%   35.3%
                                                         ====    ====   ====
</TABLE>

   Provision for U.S. income taxes had not been made at December 31, 2001 and
2000 on $80.1 million of undistributed earnings of life insurance subsidiaries
accumulated as policyholders' surplus under tax laws in effect prior to 1984.
If this amount was distributed, the additional income tax payable would be
approximately $28.0 million.

                                     F-32

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                        At December 31
                                                      -----------------
                                                        2001     2000
                                                      -------- --------
                                                        (In millions)
       <S>                                            <C>      <C>
       Deferred Tax Liabilities:
       Receivables sold.............................. $  842.9 $  827.4
       Leveraged lease transactions, net.............    393.9    385.4
       Deferred loan origination costs...............    183.3    110.1
       Original issue discount.......................    139.5     78.0
       Partnership income............................     50.3     86.5
       Other.........................................    203.1    169.5
                                                      -------- --------
              Total deferred tax liabilities......... $1,813.0 $1,656.9
                                                      -------- --------
       Deferred Tax Assets:
       Credit loss reserves.......................... $1,178.9 $1,090.4
       Market value adjustments......................    257.6       --
       Other postemployment benefit expense..........     66.9     67.2
       Other.........................................    390.1    319.6
                                                      -------- --------
              Total deferred tax assets..............  1,893.5  1,477.2
                                                      -------- --------
              Net deferred tax asset (liability)..... $   80.5 $ (179.7)
                                                      ======== ========
</TABLE>

15. Transactions with Parent Company and Affiliates

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

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

<TABLE>
<CAPTION>
                                                           At December 31
                                                         ------------------
                                                           2001      2000
                                                         --------  --------
                                                            (In millions)
    <S>                                                  <C>       <C>
    Parent company and other subsidiaries............... $  419.5  $  (38.4)
    Household Bank, f.s.b...............................  2,630.8   4,133.5
    Household Global Funding, Inc.......................   (365.1)   (249.2)
                                                         --------  --------
       Advances (to) from parent company and affiliates. $2,685.2  $3,845.9
                                                         ========  ========
</TABLE>

                                     F-33

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                                  Year December 31
                                                                             -------------------------
                                                                               2001     2000     1999
                                                                             -------  -------  -------
                                                                                   (In millions)
<S>                                                                          <C>      <C>      <C>
Parent company and other subsidiaries....................................... $   5.5  $  19.5  $   8.2
Household Bank, f.s.b.......................................................  (171.4)  (252.6)  (132.0)
Household Global Funding, Inc...............................................    17.3     28.4     40.1
                                                                             -------  -------  -------
   Net interest expense on advances (to) from parent company and affiliates. $(148.6) $(204.7) $ (83.7)
                                                                             =======  =======  =======
</TABLE>

   Our wholly-owned bank subsidiary periodically buys and sells federal funds
with the Bank. Sales to the Bank are included in investment securities while
purchases are included in commercial paper, bank and other borrowings. We had
investments of $60.0 million at December 31, 2001 and $714.0 million at
December 31, 2000. Net interest income on these sales totaled $17.4 million in
2001, $37.9 million in 2000 and $52.4 million in 1999.

   Household International has a Regulatory Capital Maintenance/Dividend
Agreement with the Office of Thrift Supervision. Under this agreement, as
amended, as long as Household International is the parent company of the Bank,
Household International and HFC agree to maintain the capital of the Bank at
the required levels. However, HFC is only required to provide additional
capital if Household International fails to maintain the Bank's required
capital levels. We do not currently believe that such direct capital infusions
by HFC into the Bank will be required.

   We purchase and sell receivables, at fair market value, under various
agreements with the Bank. These transactions were as follows:

<TABLE>
<CAPTION>
                                                Year ended
                                                December 31
                                             ----------------
                                               2001     2000
                                             -------- -------
                                               (In millions)
                  <S>                        <C>      <C>
                  Agency offices............ $  600.3 $(110.8)
                  Delinquent receivables....    709.4   504.9
                  Other receivable purchases  2,535.9   591.3
                                             -------- -------
                         Total.............. $3,845.6 $ 985.4
                                             ======== =======
</TABLE>

   In December 2001, we purchased $600.3 million of real estate secured and
personal non-credit card receivables, at fair market value, from the Bank as a
result of re-acquiring former bank agency offices which are now operated as
consumer finance offices. In November 2000, approximately 60 of our agency
offices had become Household Bank offices. In conjunction with the 2000
transaction, we sold $110.8 million of personal non-credit card loans, at fair
market value, to the Bank.

   We also purchase real estate secured and personal non-credit card
receivables from the Bank at various stages of contractual delinquency.
Delinquent loan purchases totaled $709.4 million in 2001 and $504.9 million in
2000. We will discontinue purchasing delinquent loans from our affiliate in
2002.

   We also purchase non-delinquent real estate secured, auto and personal
non-credit card receivables from the Bank. Purchases of real estate receivables
totaled $1.6 billion in 2001 and $475.9 million in 2000. Auto and

                                     F-34

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

personal non-credit purchases totaled $961.0 million in 2001 and $115.4 million
in 2000. A portion of the auto and personal non-credit card receivables were
subsequently securitized.

   Household International designated us, under a written contractual
arrangement, as the issuer of new GM Card(R) accounts. In effect, Household
International licensed to us the GM Card(R) account relationships and GM's
obligation to administer its rebate program in an arrangement similar to an
operating lease. License fees are paid monthly to Household International based
on the number of GM Card(R) account relationships. License fee expense is
included in other operating expenses and was $52.2 million in 2001, $65.7
million in 2000 and $67.8 million in 1999.

   Under the terms of an agreement between the Bank and Household Tax Masters,
Inc. ("Tax Masters"), a wholly-owned subsidiary of HFC, the Bank originates tax
refund anticipation products for qualifying individuals who anticipate a tax
refund. Tax Masters purchases the refund anticipation products from the Bank
within two days of originating the account. During 2001, we paid $38.5 million
in fees on approximately 6.4 million refund anticipation accounts that were
purchased from the Bank. During 2000, we paid $39.6 million in fees on
approximately 6.7 million accounts purchased.

   HFC and Household Credit Services, Inc., a wholly-owned subsidiary of HFC,
have negotiated a market rate agreement with the Bank for services such as
underwriting, data processing, item processing, check clearing, bank
operations, accounts payable and payroll processing. Fees received for these
services totaled $68.1 million in 2001, $46.1 million in 2000 and $32.8 million
1999.

   We were allocated costs incurred on our behalf by Household International
for administrative expenses, including insurance, credit administration, legal
and other fees. These administrative expenses were recorded in other operating
expenses and totaled approximately $64.8 million in 2001, $41.6 million in 2000
and $35.9 million in 1999.

16. Commitments And Contingent Liabilities

   In the ordinary course of business there are various legal proceedings
pending against us. Management believes the aggregate liability, if any,
resulting from such actions would not have a material adverse effect on our
consolidated financial position, results of operations or cash flows. However,
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.

   At December 31, 2001, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.1 billion of real estate secured
receivables at fair market value, subject to availability based on underwriting
guidelines specified by our mortgage services business. These commitments have
terms of up to one year and can be renewed upon mutual agreement.

   See Note 12 for discussion of lease commitments.

17. Segment Reporting

   We have one reportable segment, Consumer, which is managed separately and
characterized by different middle-market consumer lending products, origination
processes, and locations. Our Consumer segment includes our consumer lending,
mortgage services, retail services, credit card services and auto finance
businesses. Our consumer segment provides real estate secured, automobile
secured and personal non-credit card loans. Loans are

                                     F-35

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

offered with both revolving and closed-end terms and with fixed or variable
interest rates. Loans are originated through branch locations, correspondents,
direct mail, telemarketing, independent merchants or automobile dealers.
MasterCard and Visa credit cards are also offered via strategic affinity
relationships. We also cross sell our credit cards to existing real estate
secured, private label and Refund Anticipation Loan ("RAL") customers. All
businesses offer products and service customers through the Internet.
Additionally, we purchase loans of a similar nature from other lenders and an
affiliate. The All Other caption includes our insurance and tax services and
commercial businesses, as well as our corporate and treasury activities, each
of which falls below the quantitative threshold tests under Statement of
Financial Accounting Standards No. 131 for determining reportable segments.

   The accounting policies of our reportable segment are the same as those
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. Certain
segment information previously presented on an owned basis has been restated to
a managed basis presentation.

                                     F-36

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Reportable Segments--Managed Basis

<TABLE>
<CAPTION>
                                                                                    Managed
                                                                   Adjustments/      Basis                      Owned Basis
                                                All                Reconciling    Consolidated Securitization   Consolidated
                                   Consumer    Other      Totals      Items          Totals     Adjustments        Totals
                                   --------- ---------  ---------- ------------   ------------ --------------   ------------
                                                                         (In millions)
<S>                                <C>       <C>        <C>        <C>            <C>          <C>              <C>
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 (1)................     510.9     519.8     1,030.7  $  (230.3)(2)      800.4        1,520.0(6)     2,320.4
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 taxes......................     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)(8)   67,341.6
Assets............................  90,109.1  12,512.7   102,621.8   (8,333.0)(5)   94,288.8      (19,759.3)(8)   74,529.5
Expenditures for long-lived assets      20.0     115.7       135.7         --          135.7             --          135.7
                                   --------- ---------  ----------  ---------      ---------     ----------      ---------
For the Year Ended December 31, 2000
Net interest margin............... $ 5,887.0 $   (79.3) $  5,807.7         --      $ 5,807.7       (1,608.4)(6)  $ 4,199.3
Fee income........................   1,370.2       5.6     1,375.8         --        1,375.8         (627.0)(6)      748.8
Other revenues (1)................     556.7     278.9       835.6  $  (229.9)(2)      605.7        1,151.7(6)     1,757.4
Intersegment revenues.............     224.6       5.3       229.9     (229.9)(2)         --             --             --
Provision for credit losses.......   3,030.0     (22.3)    3,007.7        5.8(3)     3,013.5       (1,083.7)(6)    1,929.8
Depreciation and amortization.....     208.0      77.1       285.1         --          285.1             --          285.1
Income taxes......................     862.4      (3.0)      859.4      (86.3)(4)      773.1             --          773.1
Net income........................   1,362.7     182.8     1,545.5     (149.4)       1,396.1             --        1,396.1
Receivables.......................  74,013.0     595.9    74,608.9         --       74,608.9      (18,923.3)(8)   55,685.6
Assets............................  77,402.3  12,884.6    90,286.9   (8,009.8)(5)   82,277.1      (18,923.3)(8)   63,353.8
Expenditures for long-lived assets     310.5     100.1       410.6         --          410.6             --          410.6
                                   --------- ---------  ----------  ---------      ---------     ----------      ---------
For the Year Ended December 31, 1999                            --
Net interest margin............... $ 4,994.3 $  (103.6) $  4,890.7         --      $ 4,890.7     $ (1,607.8)(6)  $ 3,282.9
Fee income........................   1,070.3       3.3     1,073.6         --        1,073.6         (582.2)(6)      491.4
Other revenues (1)................     302.5     329.2       631.7  $  (144.6)(2)      487.1        1,180.9(6)     1,668.0
Intersegment revenues.............     141.2       3.4       144.6     (144.6)(2)         --             --             --
Provision for credit losses.......   2,479.2        .8     2,480.0       27.4(3)     2,507.4       (1,009.1)(6)    1,498.3
Depreciation and amortization.....     194.9      83.0       277.9         --          277.9             --          277.9
Income taxes......................     695.7      36.2       731.9      (73.3)(4)      658.6             --          658.6
Net income........................   1,069.9     244.7     1,314.6     (109.1)       1,205.5             --        1,205.5
Receivables.......................  60,279.6     676.1    60,955.7         --       60,955.7      (18,334.0)(8)   42,621.7
Assets............................  63,367.2  13,616.0    76,983.2   (8,271.4)(5)   68,711.8      (18,334.0)(8)   50,377.8
Expenditures for long-lived assets      84.7      63.9       148.6         --          148.6             --          148.6
                                   --------- ---------  ----------  ---------      ---------     ----------      ---------
</TABLE>
--------
(1) Net of policyholder benefits and excluding fees.
(2) Eliminates intersegment revenues.
(3) Eliminates bad debt recovery sales and reclassifies loss reserves between
    operating segments.
(4) Tax benefit associated with items comprising adjustments/reconciling items.
(5) Eliminates investments in subsidiaries and intercompany borrowings.
(6) Reclassifies net interest margin, fee income and loss provisions relating
    to securitized receivables to other revenues.
(7) Includes goodwill associated with purchase business combinations and
    capital expenditures.
(8) Represents receivables serviced with limited recourse.

                                     F-37

<PAGE>

                HOUSEHOLD FINANCE CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Managed Receivables

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

<TABLE>
<CAPTION>
                                             At December 31
                                      -----------------------------
                                        2001      2000      1999
                                      --------- --------- ---------
                                              (In millions)
             <S>                      <C>       <C>       <C>
             Real estate secured..... $38,060.2 $31,605.7 $23,503.3
             Auto finance............   6,358.8   4,355.7   3,031.8
             MasterCard/Visa.........  16,009.5  15,142.4  13,361.8
             Private label...........  11,997.9  10,318.7   9,696.7
             Personal non-credit card  14,232.0  12,678.3  10,686.8
             Commercial..............     442.5     508.1     675.3
                                      --------- --------- ---------
             Managed receivables..... $87,100.9 $74,608.9 $60,955.7
                                      ========= ========= =========
</TABLE>

Geographic Data

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

                                     F-38

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
  No.                                                Description
-------                                              -----------
<C>     <S>
 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 Ratios of Earnings to Fixed Charges and to Combined Fixed Charges
        and Preferred Stock Dividends.
 16     Letter re change in certifying accountant (incorporated by reference to Exhibit 16 of our Annual
        Report on Form 10-K for the fiscal year ended December 31, 2001).
 23     Consent of KPMG LLP, Certified Public Accountants.
 99.1   Ratings of Household Finance Corporation and its significant subsidiaries (incorporated by reference
        to Exhibit 99.1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001).
 99.2   Certification of Chief Executive Officer.
 99.3   Certification of Principal Financial Officer.
</TABLE>