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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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

The following notes should be read in conjunction with the proxy statement-prospectus forming part of Post-Effective Amendment No. 2 to MasterCard Incorporated’s Registration Statement on Form S-4 filed May 7, 2002 (No. 333-67544).

MasterCard Incorporated is a stock company incorporated under the laws of Delaware, United States of America. MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“~~MCI”~~MasterCard International”) and MasterCard Europe ~~Sprl~~sprl (together, “MasterCard” or the “Company”), provide transaction processing, branding and related services to ~~the members of MCI~~customers principally in support of ~~the members’~~their credit, ~~debit, smart card,~~deposit access, electronic cash and Automated Teller Machine (“ATM”) payment card programs, and travelers cheque programs. MasterCard enters into transactions with ~~the members of MCI~~its customers in the normal course of business and operates a system for authorizing, clearing and settling payment transactions among ~~the members of MCI.~~its customers. The Company’s stockholders are all principal members of ~~MCI.~~MasterCard International.

~~As more fully described in Note 4,~~ MasterCard converted from a membership to a stock company on June 28, 2002 through the creation of MasterCard Incorporated, a new holding company. Also on June 28, 2002, ~~as more fully described in Note 4,~~ MasterCard Incorporated directly and indirectly acquired all of the outstanding stock, not previously owned by MasterCard International, of Europay International SAS.A. (“EPI”), a company incorporated under the laws of ~~Belgium, not previously owned by MCI.~~Belgium. On July 16, 2002, EPI was renamed MasterCard Europe ~~SA.~~S.A. On September 30, 2002, MasterCard Europe SAS.A. was reorganized in Belgium as MasterCard Europe ~~Sprl~~sprl (“MasterCard Europe”).

Note 2. ~~Summary of Significant Accounting Policies~~Subsequent Event — U.S. Merchant Lawsuit

On April 30, 2003, MasterCard International signed a Memorandum of Understanding (“MOU”) with plaintiffs in a class action suit brought by U.S. merchants against MasterCard International and Visa, U.S.A. Inc. (“Visa”) in the U.S. District Court for the Eastern District of New York. In this lawsuit, plaintiffs challenged MasterCard’s “Honor All Cards” rule (and a similar Visa rule) and claimed that MasterCard and Visa had unlawfully tied acceptance of debit cards to acceptance of credit cards. Plaintiffs also alleged that MasterCard and Visa had conspired to monopolize what they characterized as the point-of-sale debit card market. MasterCard denies all claims in the lawsuit and nothing in the MOU constitutes an admission of wrongdoing or liability by MasterCard. For a description of the MOU, see Item 1 — Legal Proceedings in Part II of this Quarterly Report on Form 10-Q.

In connection with signing the MOU, MasterCard recorded a pre-tax charge of $721,000 ($469,000 after-tax) for the period ended March 31, 2003, consisting of (i) the monetary amount of the proposed settlement (discounted at 8% over the payment term) and (ii) certain additional costs in connection with and in order to comply with other requirements of the proposed settlement. Amounts recorded are estimates and are subject to change in the future.

The proposed settlement would require MasterCard to make payments of $125,000 in 2003 and $100,000 in 2004 through 2012.

The consolidated financial statements for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~ and as of ~~September 30, 2002~~March 31, 2003 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial position, results of operations and ~~financial position for the periods and dates presented.~~cash flows. The ~~accompanying consolidated financial statements have been prepared in accordance with~~Company follows accounting principles generally accepted ~~accounting principles~~ in the United ~~States. The~~States of America. Due to seasonal fluctuations and other factors, the results of operations for the three ~~and nine~~ months ended ~~September 30, 2002 and 2001~~March 31, 2003 are not necessarily indicative of the results to be expected for the full year. ~~All intercompany accounts and transactions have been eliminated in consolidation.~~ Certain ~~amounts for~~ prior ~~periods~~period amounts have been reclassified to conform to ~~the current period presentation.~~2003 classifications.

~~Cash and cash equivalents~~ ~~— Cash and cash equivalents include certain highly liquid investments with a maturity~~The results of MasterCard Europe have been consolidated as of June 28, 2002. Accordingly, financial results presented in this Quarterly Report on Form 10-Q for the three months ~~or less from~~ended March 31, 2002 do not include the ~~date~~results of ~~purchase. Such investments are recorded at cost, which approximates fair value.~~

~~Use of estimates~~ — The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from these estimates.

~~Restricted security deposits held for MCI members~~ — MasterCard requires and holds security deposits from certain members of MCI in order to maintain collateral for settlement of their transactions. These assets are fully offset by corresponding liabilities included in the consolidated balance sheets.

~~Capitalized software~~ — Capitalized software, which includes internal and external costs incurred in developing or obtaining computer software for internal use, is capitalized in other intangible assets in the consolidated balance sheets in accordance with Statement of Position 98-1, “Accounting for the Costs ofEurope.

~~Computer Software Developed or Obtained for Internal Use” and related guidance. Development costs~~ The accompanying unaudited consolidated financial statements are ~~expensed during~~presented in accordance with the preliminary project management phase until it is probable that the project will be completed and the software will be used to perform the function intended. Thereafter, all qualifying direct internal and external costs related to the design, development and testing phase are capitalized, and upon the project being substantially complete and ready for its intended use, are amortized using the straight-line method over the estimated useful life of the software, not to exceed three years. Costs related to post-implementation activities for software that is developed or obtained for internal use are expensed as incurred.

~~Special purpose entity (“SPE”)~~ — MCI is the lessee in one synthetic lease transaction involving an SPE. The SPE was established for a single discrete purpose, is not an operating entity, and has a limited life and no employees. The legal documents that govern MasterCard’s SPE transaction describe how the cash earned on the assets held in the SPE must be allocated to the investors and other parties that have rights to these cash flows. The SPE constructed and owns MasterCard’s Winghaven facility located in O’Fallon, Missouri, and leases this facility to MCI (see Note 10 and the discussion under the heading “Liquidity and Capital Resources” in Part I, Item 2 of this report). The decision whether to consolidate the SPE depends not only on the applicable accounting principles for SPEs and the treatment of the synthetic lease as operating or capital, but also on a determination regarding the nature and amount of the investments made by third parties in the SPE. Consideration is given, for example, to whether a third party has made a substantive equity investment in the SPE, which party has voting rights, who makes decisions about the assets in the SPE, and who is at risk for loss. The SPE is not consolidated because, under the applicable accounting principles, MasterCard does not exercise control over the risks and rewards of the assets in the SPE. The Financial Accounting Standards Board (“FASB”) is currently reviewing the consolidation requirements of SPEs. Such review may result in more stringent requirements for the ~~consolidation~~Quarterly Report on Form 10-Q and, consequently, do not include all of ~~SPEs.~~the disclosures required by generally accepted accounting principles in the United States. Reference should be made to the Company’s 2002 Annual Report on Form 10-K for additional disclosures, including a summary of the Company’s significant accounting policies.

~~Revenue recognition~~ ~~— Revenues are~~Effective January 1, 2003, the Company changed its method of calculating the market-related value of plan assets used in determining the expected return-on-asset component of its annual pension cost. Under the previous method, 80 percent of the gains and losses on plan assets were deferred and recognized ~~when services are performed and when products are sold.~~in the calculated market-related value over a period of five years. Under the new method, the market-related value equals the current fair value of the plan assets. The ~~Company’s revenue~~new method is ~~comprised~~considered preferable because annual pension expense will reflect changes in the market performance of ~~operations fees and assessments. Certain revenues are estimated based upon aggregate transaction information provided by MCI members.~~

~~Operations fees represent user fees for authorization, clearing, settlement and other products and services that facilitate transaction and information management among MCI’s members~~plan assets on a ~~global~~timelier basis. These fees are recognized as revenue in the same period as the related transactions occur or services are rendered. Products sold include holograms, paper warning bulletins, manuals and publications. Revenue from product sales is recognized when sales are completed.

~~Assessments predominantly represent payments made by members~~The cumulative effect of ~~MCI with respect~~this change in accounting principle related to their card programs carrying the marks of one or more of the brands within the MasterCard family of brands, principally the MasterCard, Maestro and Cirrus brands. Assessments are based principally upon daily, monthly or quarterly gross dollar volumes (“GDV”), which represent gross spending on MasterCard, Maestro and Cirrus branded cards for goods and services including balance transfers and convenience checks. Assessments are recorded as revenue in the month they are earned, whichperiods prior to 2003 is ~~when the related GDV is generated on the cards.~~

~~MasterCard has strategic arrangements with certain MCI members that provide for fee rebates when the members meet certain hurdles. Such rebates are generally calculated on~~ a ~~monthly basis based upon MCI members’ performance and the contracted discount rates~~benefit to earnings for the ~~services provided,~~period ended March 31, 2003 of $4,949, net of income taxes of $2,819. Applying the new methodology retroactively to January 1, 2002 would have had a de minimis impact on net income and are recorded as a reduction of revenue in the same period as the revenue is earned. Rebates are based on management’s estimate of the MCI member’s performance in a given period and actual results may differ from these estimates.

In addition, MasterCard enters into agreements with certain MCI members and merchants to provide volume-based and support incentives that are recorded as a reduction of revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a

Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”). Incentives are based on management’s estimate of the MCI members’ performance as detailed in the agreements in a given period and actual results may differ from these estimates.

~~Advertising expense~~ — The cost of media advertising is generally expensed when the advertising takes place. Production costs are expensed as costs are incurred. Promotional items are expensed at the time the promotional event occurs.

~~Legal fees~~ — MasterCard accrues legal costs that are expected to be incurred to defend MasterCard in certain litigation discussed in Note 12. The accruals are estimated based on management’s expectations of foreseeable costs, which are assessed in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” after consultation with outside counsel. This policy has been consistently applied since the commencement of certain litigation discussed in Note 12.

~~Impairment~~ — Management evaluates the recoverability of all long-lived assets accounted for under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, on an ongoing basis. If the sum of expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash flows.

~~Net income per share~~ ~~— MasterCard computes basic and diluted~~ net income per share ~~by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the period.~~

~~Recent accounting pronouncements~~ — In February 2002, the EITF finalized Issue No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”. EITF 01-9 is effective for fiscal years beginning after December 15, 2001 and provides guidance on the income statement classification of consideration from a vendor to a customer in connection with the customer’s purchase of the vendor’s products or to promote sales of the vendor’s products. On January 1, 2002, MasterCard implemented EITF 01-9 which resulted in certain payments to members of MCI and merchants previously classified as advertising and market development expense being reclassified as a reduction of revenue. The amounts of such consideration were $50,519 and $113,235 for the three ~~and nine month periods~~months ended ~~September 30, 2001, respectively.~~

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 supersedes Accounting Principles Board Opinion (“APB”) No. 16, “Business Combinations” and requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS 141 specifies criteria for the recognition of certain intangible assets apart from goodwill. The acquisition of EPI discussed in Note 4 was accounted for in accordance with SFAS 141.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 supersedes APB No. 17, “Intangible Assets” and primarily addresses the financial accounting and reporting for acquired goodwill and intangible assets subsequent to their acquisition. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and was adopted by the Company on January 1,March 31, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives will no longer be amortized and must be tested for impairment at least annually. SFAS 142 further requires that intangible assets with finite useful lives be amortized over their useful lives and reviewed periodically for impairment. The Statement requires that transitional goodwill (goodwill recorded before the adoption of SFAS No. 142) be tested for impairment within six months of adoption of SFAS 142. Accordingly, MasterCard tested its existing goodwill of $7,141 at June 30, 2002 recorded in connection with

the acquisition of certain businesses and no impairment was required. The acquired goodwill and intangible assets that resulted from the acquisition of EPI was accounted for in accordance with SFAS 142. The Company will evaluate goodwill and other indefinite-lived intangible assets recorded in connection with the EPI acquisition in the fourth quarter of 2002, as part of its annual impairment analysis. The adoption of SFAS 142 did not have a material impact on the Company’s financial statements (See Note 7).

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and nullifies FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. SFAS 144 also supersedes certain aspects of APB No. 30 , “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as required by APB No. 30). The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company’s financial position or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs associated with exit or disposal activities for entities newly acquired in a business combination are not within the scope of SFAS 146. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company early adopted SFAS 146 on July 1, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s financial position or results of operations.

The following table sets forth the computation of basic and diluted net income (loss) per share:

On June 28, 2002, ~~pursuant to an Agreement and Plan of Merger dated as of February 13, 2002, MCI merged with a subsidiary of~~ MasterCard Incorporated ~~(the “Conversion”). In~~issued 23,760 shares to the ~~Conversion, each principal member~~shareholders of MCI received shares of class A redeemable common stock and class B convertible common stock of MasterCard Incorporated, representing that member’s equity interest in the Company. Additionally, each principal member of MCI received a class A membership interest in MCI, representing that member’s continued rights as a licensee to use MasterCard’s brands, programs, products and services. MasterCard Incorporated owns the sole class B membership interest in MCI, entitling MasterCard Incorporated to exercise all economic rights and substantially all voting rights in MCI. MCI is the Company’s principal operating subsidiary.

On June 28, 2002, in connection with the Conversion, MasterCard Incorporated acquired, directly and indirectly, 100% of the shares of EPI not previously owned by MCI pursuant to a Share Exchange and Integration Agreement, dated as of February 13, 2002, entered into by MasterCard Incorporated, MCI and EPI (the “Integration Agreement”). EPI, now MasterCard Europe, is the Company’s principal operating subsidiary in Europe.

~~In connection with the Integration Agreement, each shareholder of EPI (other than MCI~~ and MasterCard Europay U.K. Limited (“MEPUK”)) was required to enter into a separate share exchange agreement with MasterCard Incorporated and MCI, pursuant to which it exchanged its EPI shares for a specified number of shares of class A redeemable common stock and class B convertible common stock of MasterCard Incorporated. In addition, the shareholders of MEPUK were required to enter into an agreement with MasterCard Incorporated pursuant to which they exchanged their MEPUK shares for a specified number of shares of class A redeemable common stock and class B convertible common stock of MasterCard Incorporated. As a result of the Integration, EPI and MEPUK became wholly-owned subsidiaries of MasterCard Incorporated. At the time of the Integration, MEPUK’s sole asset was certain shares of EPI. MCI and MEPUK continue to hold shares of EPI (now MasterCard Europe).

MasterCard Europe is a leading payment solutions company in Europe, headquartered in Waterloo, Belgium. MasterCard Europe’s primary business is to license a full range of payment programs and services to financial institutions in the European region and to provide a sophisticated set of information processing and transaction delivery services to these institutions. The Integration has allowed MCI and MasterCard Europe to form an integrated, global payments company with a single management team and governance structure that is better able to address member needs around the world.

~~The results of EPI’s operations have been included in the consolidated financial statements of the Company from June 28, 2002.~~

~~MasterCard Incorporated issued 23.76 million shares to the shareholders of EPI and MEPUK in the Integration,~~, in return for directly and indirectly acquiring 100% of the shares of EPI not previously owned by ~~MCI.~~MasterCard International. However, of the ~~23.76 million~~23,760 shares issued, only ~~17.61 million~~17,610 were considered to be issued unconditionally. ~~As discussed more fully below, the~~The purchase price for EPI was based on the estimated value of the unconditional shares only, and this estimated value was determined on the basis of an independent valuation. Considering this valuation and the ~~17.61 million~~17,610 unconditional shares issued, the purchase price of EPI was $267,856, excluding estimated acquisition costs of $10,486 that were incurred by the Company. A change

~~change~~ in estimate which increased acquisition costs resulted in a corresponding increase to goodwill of ~~$166~~$190 subsequent to the date of the acquisition of EPI.

In calculating the purchase price of EPI, the Company considered only the unconditional shares issued to the former shareholders of EPI and MEPUK because the agreement between MasterCard Incorporated, MasterCard International and EPI relating to the Integration ~~Agreement~~ provides that the number of shares allocated to these shareholders will potentially increase or decrease at the end of a three-year transition period as a result of the application of a global proxy formula for the third year of the transition period. Of the ~~23.76 million~~23,760 shares attributable to the exchange of EPI and MEPUK shares, ~~6.15 million~~6,150 shares are conditional shares subject to reallocation at the end of the transition period and allocable to EPI and MEPUK shareholders. EPI and MEPUK shareholders therefore received ~~17.61 million~~17,610 unconditional shares at closing.

Since former EPI and MEPUK shareholders would retain or receive additional shares of MasterCard Incorporated at the end of the transition period without remitting any additional consideration, any shares retained or received by them that are above their minimum allocation at that time would constitute a part of the purchase price. Any such additional shares would be valued at that time based upon the fair value of the stock of MasterCard Incorporated. Any such reallocation of shares to former EPI and MEPUK shareholders will increase the purchase price for EPI and, accordingly, the amount of goodwill and additional paid-in capital recorded.

~~The following table summarizes the estimated fair values~~A summary of the ~~assets acquired and liabilities assumed at the date of the acquisition of EPI, as determined based on an independent appraisal. Certain balances~~liability for ~~assets acquired and liabilities assumed have been reclassified to conform with MCI presentation for consistency:~~

At June 28, 2002, other intangible assets (see Note 8) include capitalized software of $32,664 and trademarks and tradenames of $10,795. Both of these asset classes have a weighted average useful life of approximately three years and are amortized on a straight-line basis. In addition, other intangible assets include customer relationships of $143,693 that have an indefinite useful life. Goodwill (see Note 7) and other intangible assets with indefinite lives are not subject to amortization. Goodwill is not tax deductible.

~~Pursuant~~exit costs relating to the Integration ~~Agreement,~~is as follows:

Property, plant and equipment consist of the ~~bylaws of MCI adopted on June 28,~~following:

Depreciation and amortization expense for the above property, plant and equipment was $12,940 and $8,494 for the three months ended March 31, 2003 and 2002, provide that the Company will assume the first $7,000 of losses or liabilities that relate to any breach of EPI’s representations or warranties in the Integration Agreement; any such losses or liabilities in excess of $7,000 could, under therespectively.

MCI’s bylaws, be levied against MCI’s European members as an assessment. MasterCard anticipates that certain former EPI liabilities could trigger this bylaw provision. The $7,000 is included in total liabilities assumed above.

Included in the total liabilities assumed above are estimates of exit costs relating to the Integration. A change in estimate reduced the liability for exit costs and resulted in a corresponding reduction to the goodwill and to deferred taxes recorded in connection with the acquisition of EPI. A rollforward of the liability for exit costs is summarized as follows:

The unaudited pro forma results of operations for the three months ended September 30, 2001 and nine months ended September 30, 2002 and 2001, as if EPI had been combined as of January 1, 2001, are as follows:

~~These results have been prepared for comparative purposes only, and are not necessarily indicative of the results that would have occurred had the acquisition of EPI occurred on the dates indicated.~~

~~The amortized cost and fair value of investment securities available-for-sale are as follows:~~

~~The maturity distribution based on contractual terms of investment securities available-for-sale at September 30, 2002 is as follows:~~

The Company holds a 5.25 percent Missouri Development Bond maturing August 1, 2009 as an investment security held-to-maturity. The amortized cost of this security was $6,563 and $7,326 at September 30, 2002 and December 31, 2001, respectively. Principal and interest payments are received on a semi-annual basis. The fair value of this security approximates amortized cost.

Depreciation and amortization expense for the above property, plant and equipment was $11,941 and $9,967 for the three months ended September 30, 2002 and 2001, respectively, and was $29,084 and $30,981 for the nine months ended September 30, 2002 and 2001, respectively.

The changes in the carrying amount of goodwill for the ~~nine~~year ended December 31, 2002 and for the three months ended ~~September 30, 2002~~March 31, 2003 are as ~~follows (See Note 4):~~follows:

14 During the three months ended March 31, 2003, the Company capitalized $9,105 of software not yet put into production for which license fees are due in future periods.

The following table sets forth the ~~impact of the adoption of SFAS 142 on the Company’s earnings:~~

~~The following table sets forth net intangible assets, other than goodwill:~~

~~The following table sets forth the~~ estimated future amortization expense on ~~amortized~~amortizable intangible assets:

In June 2002, MCI entered into a senior unsecured revolving credit facility in the amount of $1,200,000 with certain financial institutions that will expire on June 3, 2003. Under the facility, interest is charged at the London Interbank Offered Rate (“LIBOR”) plus 28 basis points, and the rate increases depending upon the amount of any draw down. The commitment fee is 7 basis points plus upfront fees of $434. The purpose of the facility is to provide liquidity in the event of one or more settlement failures by MCI members. On August 1, 2002, the borrower under the facility was converted from MCI to MasterCard Incorporated. MasterCard was in compliance with the facility covenants as of September 30, 2002. There were no borrowings under the facility at September 30, 2002.

In June 1998, MCI issued ten-year unsecured, subordinated notes (“the Notes”) paying a fixed interest rate of 6.67% per annum. The terms of the Notes require MasterCard to repay the principal amount on June 30, 2008. The Company has the option to prepay the Notes with a “make whole” payment to the investors, if market interest rates are lower at the time of prepayment. The interest on the notes for each of the three months and nine months ended September 30, 2002 and 2001 were $1,334 and $4,002, respectively. The Company was in compliance with the note covenants as of September 30, 2002. The principal amount of notes outstanding at September 30, 2002 was $80,000. The fair value of the notes is estimated at $88,830 and $80,418 at September 30, 2002 and December 31, 2001, respectively.

In October 1993, MasterCard Europe entered into a revolving credit agreement with a bank to satisfy certain operational funding requirements. The final amendment of this agreement, dated October 1999, allows for borrowings of up to twelve months from the borrowing date for a maximum amount of 35,000 Euros. This agreement requires interest to be paid at the Euro Interbank Offered Rate (“EURIBOR”) plus 62.5 basis points for borrowings up to six months and EURIBOR plus 125 basis points for borrowings of six to twelve months. In February 2001, MasterCard Europe entered into an additional revolving credit agreement with the same bank to provide fixed term financing to fund certain settlement service operations for up to 30,000 Euros. This agreement allows for borrowings to be outstanding for a period of seven to thirty days. Amounts borrowed under this agreement are subject to the same interest rate provisions as those set forth in the 35,000 Euro credit agreement. There were no outstanding loans under either of these agreements at September 30, 2002. Under an informal arrangement, both the bank and MasterCard Europe allow borrowings to exist, under certain conditions, without triggering either agreement. These borrowings incur interest at the Euro Overnight Index Average plus 50 basis points. From time to time, MasterCard directs the bank to provide funding under the above mentioned credit agreements in order to obtain a lower interest rate and to minimize interest costs. There were no borrowings under this informal arrangement at September 30, 2002.

In September 2002, MasterCard Europe increased its overdraft facility with a separate bank from 10,000 Euros to 100,000 Euros to cover multi-currency overdrafts. The interest rate under this facility is LIBOR plus 50 basis points per annum for amounts below 100,000 Euros and LIBOR plus 250 basis points for amounts over the 100,000 Euro limit. Various rates apply in case of borrowings in currencies other than the Euro. There were no borrowings under this facility at September 30, 2002.

~~From time to time, the Company has temporary overdrafts at banks due to timing differences related to settlement or corporate activity. The Company had no overdrafts at September 30, 2002.~~


Note 10.~~Commitments and Contingencies~~	Consolidation of Special Purpose Entity

On August 31, 1999, ~~MCI~~MasterCard International entered into a ten-year synthetic lease agreement for a global technology and operations center located in O’Fallon, Missouri, called Winghaven. The lessor under the lease agreement is ~~MCI~~MasterCard International O’Fallon 1999 Trust (the “Trust”)~~, which is the SPE referenced in Note 2.~~. The Trust financed the operations center through a combination of ana third party equity investment and the issuance of 7.36 percent Series A

Rent is payable by MasterCard International in amounts equal to interest payments on the Secured Notes and any returns to equity-holders. In conjunction with the lease agreement, ~~MCI~~MasterCard International executed a guarantee of 85.15 percent of the Secured Notes outstanding totaling $127,197 at ~~September 30, 2002.~~March 31, 2003. Additionally, upon the occurrence of specific events of default, ~~MCI will guarantee~~MasterCard International guarantees repayment of the total outstanding principal and interest on the Secured Notes and would take ownership of the facility.

The lease agreement permits ~~MCI~~MasterCard International to purchase the facility upon 180 days notice at a purchase price equal to the aggregate outstanding principal amount of the Secured Notes, including any accrued and unpaid interest and investor equity, along with any accrued and unpaid amounts due to the investor under the lease agreement after August 31, 2006.

On January 1, 2003, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” and consolidated the Trust on the Company’s consolidated balance sheet, which resulted in recording $154,000 in municipal bonds held by the Trust, $149,380 in long-term debt and $4,620 of minority interest relating to the equity in the Trust held by a third party. For the three months ended March 31, 2003, the consolidation had no impact on net loss. However, interest income and interest expense were each increased by $2,852.

The future minimum payments under non-cancelable operating leases for office buildings and equipment, ~~as well as future minimum payments for sponsorship,~~sponsorships, licensing and other agreements at ~~September 30, 2002 are:~~March 31, 2003 are as follows:

At March 31, 2003, $16,319 of the future minimum payments in the table above was accrued. Consolidated rental expense for the Company’s office space aggregated approximately ~~$7,410~~$7,164 and ~~$6,431 and $18,652 and $14,418~~$5,335 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2003 and 2002, respectively. Lease expense for automobiles, computer equipment, and ~~2001,~~office equipment aggregated $1,845 and $182 for the three months ended March 31, 2003 and 2002, respectively.

MasterCard licenses certain software to its customers. The license agreements contain guarantees, whereby the Company indemnifies licensees from any adverse judgments arising from claims of intellectual property infringement by third parties. The term of the guarantees are equal to the term of the license to which it relates. The amount of the guarantees are limited to damages, losses, costs, expenses or other liabilities incurred by the licensee as a result of any intellectual property rights claims. The Company does not generate significant revenues from software licensing. The fair value of the guarantees is estimated to be de minimis.

The Company has ~~guaranteed~~global risk management policies and procedures, which include risk standards to provide a framework for managing the Company’s settlement exposure. Generally, settlement risk is the legal exposure due to the difference in timing between the payment transaction date and subsequent settlement. MasterCard International’s rules generally guarantee the payment of MasterCard transactions and certain Cirrus and Maestro transactions between principal members. The term and amount of the guarantee are unlimited. In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International has the right to take an assignment of the underlying receivables. Subject to approval by the Board of Directors, members may be assessed for the amount of any settlement loss.

Settlement risk is estimated using the average daily card charges during the quarter multiplied by the estimated number of days to settle. Member-reported transaction data and the transaction clearing data underlying these estimations may be revised in subsequent reporting periods. MasterCard’s estimated settlement exposure for MasterCard-branded transactions utilizing the aforementioned methodology for the quarters ended March 31, 2003 and December 31, 2002, after consideration of the collateral amounts set forth below, amounted to $9,341,136 and $9,793,848, respectively. A portion of the Company’s uncollateralized estimated settlement exposure for MasterCard-branded transactions (estimated at $746,266 and $1,053,091 for the quarters ended March 31, 2003 and December 31, 2002, respectively) relates to members that are deemed not to be in compliance with, or that are under review in connection with, the Company’s risk management standards. A significant portion of this amount ($387,464 and $437,325 for the quarters ended March 31, 2003 and December 31, 2002, respectively) is concentrated in three members. The decrease in uncollateralized exposure for non-compliant members is attributable to volume decreases and certain members becoming compliant with MasterCard’s member risk standards in the first quarter of 2003. From time to time, the Company reviews its risk management methodology and standards. As such, the amounts of uncollateralized estimated settlement exposure relating to non-compliant members are revised as necessary. In the event of uncollateralized member risk losses, the Company also considers the appropriateness of establishing reserves for non-payment. MasterCard International has established such a reserve in the amount of $1,350, which is an estimate of probable future losses.

To minimize its exposure to settlement risk, MasterCard International members that are not in compliance with the Company’s risk standards in effect at the time may be required, after management review of the individual risk circumstances, to provide collateral, typically in the form of letters of credit and bank guarantees. MasterCard held collateral for estimated legal settlement risk of MasterCard-branded transactions in the amount of $1,325,526 and $1,394,644 at March 31, 2003 and December 31, 2002, respectively. In addition to these amounts, MasterCard held collateral to cover: variability and future growth in member programs; the possibility that it may choose to pay merchants to protect brand integrity in the event of acquirer

failure, although it is not contractually obligated to do so; and Cirrus and Maestro related risk as described below. MasterCard monitors its credit risk portfolio on a regular basis to estimate potential concentration risks and the adequacy of collateral on hand.

MasterCard’s estimated settlement exposure under the MasterCard brand, net of collateral, had concentrations of 60% and 62% in North America and 21% and 21% in Europe for the quarters ended March 31, 2003 and December 31, 2002, respectively. In addition to the settlement ofrisk identified above, the Company provides settlement guarantees with respect to certain Cirrus and Maestro transactions ~~among MCI principal members should an MCI principal member fail to settle its transactions. See Note 14~~that the Company processes. The Company’s estimated Cirrus and Maestro settlement exposures, utilizing the aforementioned methodology, were $481,069 and $467,560 for the quarters ended March 31, 2003 and December 31, 2002, respectively. The Company holds collateral for a ~~description~~portion of these exposures. In addition, the Company guarantees certain Cirrus- and Maestro-branded transactions in Europe and certain Maestro-branded transactions in Latin America that are processed outside of the Cirrus and Maestro settlement ~~credit risk.~~systems. The Company is currently not able to quantify these exposures. Collateral is also held for a portion of these exposures.

MasterCard has also guaranteed the payment of MasterCard-branded travelers cheques ~~outstanding.~~in the event of issuer default. The term and amount of the guarantee are unlimited. MasterCard ~~had outstanding~~guaranteed MasterCard-branded travelers cheques of ~~$1,443,156~~$1,397,776 and ~~$1,591,940~~$1,377,933 at ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001,~~2002, respectively. MasterCard holds approximately ~~$2,516~~$2,295 in cash in order to meet travelers cheques obligations of certain issuers who have discontinued their MasterCard travelers cheques programs. A significant portion of the Company’s credit risk is concentrated in one MasterCard travelers cheque issuer. MasterCard has obtained an unlimited guarantee ~~valued~~estimated at ~~$1,214,625~~$1,173,941 and ~~$1,368,526~~$1,153,233 at ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001,~~2002, respectively, from a financial institution ~~in order~~that is a member, to cover all of the exposure of outstanding travelers cheques with respect to that issuer. In addition, MasterCard has obtained guarantees estimated at $35,427 and $35,731 at March 31, 2003 and December 31, 2002, respectively, from financial institutions that are members in order to cover the exposure of outstanding travelers cheques with respect to another issuer.

Effective January 1, 2003, the Company adopted the accounting recognition and measurement provisions of FASB Interpretation No. 45 “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a guarantee, the entity (guarantor) must recognize a liability for the fair value of the obligation it assumes. The accounting recognition and measurement provisions of this pronouncement are effective for guarantees that are issued or modified after December 31, 2002.

~~Note 11.~~ ~~Income Tax~~Based on the Company’s ability to assess its members for settlement and travelers cheque losses, the effectiveness of the Company’s global risk management policies and procedures, and the historically low level of losses that the Company has experienced, management believes the probability of future payments for settlement and travelers cheque losses in excess of existing reserves is de minimis. Accordingly, adoption of the accounting recognition and measurement provisions of FIN 45 did not have an impact on the financial position and results of operations of MasterCard for the period ended March 31, 2003. However, circumstances in the future may change, requiring the Company to record an obligation for the fair value of some or all of its settlement and travelers cheque guarantees.

The ~~effective tax rate for~~Company enters into foreign exchange contracts to minimize the ~~three month period ended September 30, 2002 increased to 36.7% from 36.5% for three month period ended September 30, 2001~~risk associated with anticipated revenues and ~~the effective tax rate for the nine month period ended September 30, 2002 decreased to 36.3% from 38.4% for the nine month period ended September 30, 2001.~~expenses, and assets and liabilities denominated in foreign currencies. MasterCard’s forward contracts are listed below, classified by functional currency.

The increase in the effective tax rate for the three months ended September 30, 2002 compared with the rate for the three months ended September 30, 2001 was primarily attributable to income earned outside the United States in a jurisdiction with a higher tax rate than the United States. This was partially offset by a

~~change in the geographic distribution of pretax income from jurisdictions with higher state tax rates to those with lower rates.~~U.S. Dollar Functional Currency

The ~~decrease in~~currencies underlying the ~~effective tax rate~~foreign currency forward contracts consist primarily of euro, U.K. pounds sterling, Swiss francs, Japanese yen, and Canadian dollars. The fair value of the foreign currency forward contracts generally reflects the estimated amounts that the Company would receive or (pay to) terminate the contracts at the reporting date based on broker quotes for the ~~nine~~same or similar instruments. The terms of the foreign currency forward contracts are generally less than 18 months. The Company has deferred $6,338 and $2,498 of net losses in other comprehensive income as of March 31, 2003 and December 31, 2002, respectively, all of which is expected to be reclassified to earnings within the next twelve months ~~ended September 30, 2002 compared with the rate for the nine months ended September 30, 2001 was primarily attributable~~ to ~~a change in the geographic distribution of pretax income from jurisdictions with higher state tax rates to those with lower rates. This was partially~~provide an economic offset by income earned outside the United States in a jurisdiction with a higher tax rate than the United States. In addition, during the nine months ended September 30, 2002 the Company realized significant foreign tax credits relating to prior periods. The benefits from these credits were offset by a one-time increase in state income tax expense attributable to the ~~revaluation~~earnings impact of ~~deferred state tax assets as a result of lower state tax rates.~~the anticipated cash flows hedged.

~~MasterCard’s taxes~~The Company’s derivative financial instruments are subject to ~~challenge~~both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in ~~various jurisdictions, including Belgium~~accordance with contractual terms. Market risk is the potential change in ~~connection with~~an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. Credit and market risk related to derivative instruments were not material at March 31, 2003 and December 31, 2002.

Generally, the ~~operations~~Company does not obtain collateral related to forward contracts because of ~~EPI (now MasterCard Europe). However, MasterCard could, under its bylaws, levy an assessment on its European members for any additional EPI tax liability with respect~~the high credit ratings of the counter-parties that are members. The amount of accounting loss the Company would incur if the counterparties failed to ~~periods before June 28, 2002,~~perform according to the ~~extent that such liability, together with other losses and liabilities arising out~~terms of the ~~representations and warranties of EPI in the Integration Agreement, exceeds $7,000 in the aggregate.~~

MasterCard is a party to legal proceedings with respect to a variety of matters in the ordinary course of business. Except as described below, MasterCard does not believe that any legal proceedings to which it is a party would have a material ~~adverse~~ impact on its ~~business~~results of operations, financial position, or ~~prospects.~~cash flows. With respect to the matters below, MasterCard believes that an unfavorable outcome is not probable or that it is not currently possible to estimate the impact ~~if any, that the ultimate resolution~~ of ~~these matters will have in its results of operations, financial position or cash flows and as such,~~an unfavorable outcome. Accordingly, consistent with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”, no ~~accrual has~~accruals have been made.

In October 1998, the United States Department of Justice (“DOJ”) filed suit against ~~MCI,~~MasterCard International, Visa U.S.A., Inc. and Visa International Corp. (“Visa”) in the U.S. District Court for the Southern District of New York alleging that both MasterCard’s and Visa’s governance structure and policies violated U.S. federal antitrust laws. First, the DOJ claimed that “dual governance” — the situation where a

financial institution has a representative on the board of directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other association — was anti-competitive and acted to limit innovation within the payment card industry. At the same time, the DOJ conceded that “dual issuance” — a term describing the structure of the bank card industry in the United States in which a single financial institution can issue both MasterCard and Visa-branded cards — was pro-competitive. Second, the DOJ challenged MasterCard’s Competitive Programs Policy (“CPP”) and a Visa bylaw provision that prohibit financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that MasterCard’s CPP and Visa’s bylaw provision acted to restrain competition.

MasterCard denied the DOJ’s allegations. MasterCard believes that both “dual governance” and the CPP are pro-competitive and fully consistent with U.S. federal antitrust law.

A bench trial concerning the DOJ’s allegations was concluded on August 22, 2000. On October 9, 2001, the district court judge issued an opinion upholding the legality and pro-competitive nature of dual governance. In so doing, the judge specifically found that MasterCard and Visa have competed vigorously over the years, that prices to consumers have dropped dramatically, and that MasterCard has fostered rapid innovations in systems, product offerings and services.

However, the judge also held that MasterCard’s CPP and the Visa bylaw constitute unlawful restraints of trade under the federal antitrust laws. The judge found that the CPP and Visa bylaw weakened competition and harmed consumers by preventing competing proprietary payment card networks such as American Express and Discover from entering into agreements with banks to issue cards on their networks. In reaching this decision, the judge found that two distinct markets — a credit and charge card issuing market and a network services market — existed in the United States, and that both MasterCard and Visa had market power in the network market. MasterCard strongly disputes these findings and believes that the DOJ failed, among other things, to demonstrate that U.S. consumers have been harmed by the CPP.

On November 26, 2001, the judge issued a final judgment that orders MasterCard to repeal the CPP insofar as it applies to issuers and enjoins MasterCard from enacting or enforcing any bylaw, rule, policy or practice that prohibits its issuers from issuing general purpose credit or debit cards in the United States on any other general purpose card network. The judge also concluded that during the period in which the CPP was in effect, MasterCard was able to “lock up” certain members by entering into long-term agreements with them pursuant to which the members committed to maintain a certain percentage of their general purpose card volume, new card issuance or total number of cards in force in the United States on MasterCard’s network. Accordingly, the final judgment provides that there will be a period (commencing on the effective date of the judgment and ending on the later of two years from that date or two years from the resolution of any final appeal) during which MasterCard will be required to permit any issuer with which it entered into such an agreement prior to the effective date of the final judgment to terminate that agreement without penalty, provided that the reason for the termination is to permit the issuer to enter into an agreement with American Express or Discover. MasterCard would be free to apply to the district court to recover funds paid but not yet earned under any terminated agreement. The final judgment imposes parallel requirements on Visa. The judge explicitly provided that MasterCard and Visa would be free to enter into new partnership or member business agreements in the future.

MasterCard believes that it has a strong legal basis to challenge the judge’s ruling with respect to the CPP, and has appealed the decision on that count. On February 6, 2002, the judge issued an order granting MasterCard’s and Visa’s motion to stay the final judgment pending appeal. MasterCard, the DOJ and other parties to the DOJ antitrust litigation completed their submission of appellate briefs to the Second Circuit Court of Appeals in late August ~~2002, and presently are awaiting a date for oral~~2002. Oral argument on the appeal of the U.S. District Court’s decision in this ~~case. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have~~case was held on ~~MasterCard’s results of operations, financial position or cash flows.~~

~~Commencing in October 1996, several class action suits were brought by a number of U.S. merchants — including Wal-Mart Stores, Inc., Sears Roebuck & Co., Inc.,~~May 8, 2003. The ~~Limited Inc. and Safeway, Inc. — against MCI and Visa U.S.A., Inc. challenging certain aspects~~three-judge panel of the payment card industry under U.S. federal antitrust law. Those suits were later consolidated in the U.S. District Court for the Eastern District of New York. The plaintiffs challenge MasterCard’s “Honor All Cards” rule (and a similar Visa rule), which ensures universal acceptance for consumers by requiring merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card. Plaintiffs claim that MasterCard and Visa unlawfully have tied acceptance of debit cards to acceptance of credit cards. In essence, the merchants desire the ability to reject off-line, signature-based debit transactions (for example, MasterCard card transactions) in favor of other payment forms, including on-line, PIN-based debit transactions (for example, Maestro or regional ATM network transactions) which generally impose lower transaction costs for merchants. The plaintiffs also claim that MasterCard and Visa have conspired to monopolize what they characterize as the point-of-sale debit card market, thereby suppressing the growth of regional networks such as ATM payment systems. Plaintiffs allegeSecond Circuit reserved decision.

that the plaintiff class has been forced to pay unlawfully high prices for debit and credit card transactions as a result of the alleged tying arrangement and monopolization practices. There are related consumer class actions pending in two state courts that have been stayed pending developments in this matter. In addition, a related case was filed by a merchant in federal district court in Michigan, alleging antitrust violations arising from a purported tie of signature-based debit transactions to credit transactions. MasterCard is presently evaluating the procedure to have this case consolidated with the pending action in the U.S. District Court for the Eastern District of New York, if possible.

MasterCard denies the merchant allegations and believes that the “Honor All Cards” rule and MasterCard practices with respect to debit card programs in the United States are pro-competitive and fully consistent with U.S. federal antitrust law.

On February 22, 2000, the district court granted the plaintiffs’ motion for class certification. MasterCard and Visa subsequently appealed the decision to the Second Circuit Court of Appeals. On October 17, 2001, a three-judge panel affirmed the lower court decision by a two-to-one majority. MasterCard filed a petition for a writ of certiorari to the U.S. Supreme Court on April 3, 2002, which was denied on June 6, 2002.

Motions seeking summary judgment have been filed by both sides and fully briefed in the district court. An argument date for summary judgment has now been set for January 10, 2003 by an order of the court and a trial date of April 28, 2003 has been set.

Based upon publicly available information, the plaintiffs previously have asserted damage claims in this litigation of approximately $8 billion, before any trebling under U.S. federal antitrust law. More recent public estimates (including estimates set forth in the dissenting opinion of the Second Circuit) place the plaintiffs’ estimated damage claims at approximately $50 billion to $100 billion, depending on the source. In addition, the plaintiffs’ damage claims could be materially higher than these amounts as a result of the passage of time and substantive changes in the theory of damages presented by the plaintiffs. These figures reflect claims asserted and should not be construed as an acknowledgement of the reliability of the figures presented. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of this matter will have on MasterCard’s results of operations, financial position or cash flows. In accordance with its policy pertaining to legal fees described in Note 2, the Company accrued legal costs for its probable estimated legal fees in connection with its participation in these proceedings.

~~MCI,~~MasterCard International, together with Visa U.S.A., Inc. and Visa International Corp., are defendants in a state court lawsuit pending in California. The lawsuit alleges that MasterCard and Visa wrongfully imposed an asserted one percent currency conversion “fee” on every credit card transaction by U.S. MasterCard and Visa cardholders involving the purchase of goods or services in a foreign country, and that such alleged “fee” is unlawful. This action, titledSchwartz v. Visa Int’l Corp., et al., was brought in the Superior Court of California in February 2000, purportedly on behalf of the general public. Trial of theSchwartzmatter commenced on May 20, 2002 and concluded on November 27, 2002. The ~~evidence phase of the trial concluded on October 23, 2002 and closing arguments are expected to commence in late November 2002. The~~Schwartzaction claims that the alleged “fee” grossly exceeds any costs the defendants might incur in connection with currency conversions relating to credit card purchase transactions made in foreign countries and is not properly disclosed to cardholders. Plaintiffs seek to prevent defendants from continuing to engage in, use or employ the alleged practice of charging and collecting the asserted one percent currency conversion “fee” and from charging any type of purported currency conversion “fee” without providing a clear, obvious and comprehensive notice that a fee will be charged. Plaintiffs also request an order (1) requiring defendants to fund a corrective advertising campaign; and (2) awarding restitution of the monies allegedly wrongfully acquired by imposing the purported currency conversion “fee”. The ~~complaints assert~~complaint asserts that, during the four-year period that preceded the respective lawsuits, MasterCard

collected approximately $200 million as a result of allegedly imposing the claimed one percent currency conversion “fee”. MasterCard denies these allegations.

~~MCI,~~On February 5, 2003, the trial court judge issued a preliminary decision in the Schwartz matter. In his decision, the trial judge found that MasterCard’s currency conversion process does not violate the Truth In Lending Act or regulations, nor is it unconscionably priced under California law. However, the judge found that the practice is deceptive under California state law, and ordered that MasterCard mandate that members disclose the currency conversion process to cardholders in cardholder agreements, applications, solicitations and monthly billing statements. As to MasterCard, the judge also ordered unspecified restitution to California cardholders. The parties filed objections to the preliminary decision on February 27, 2003. A hearing on the objections was held on March 4, 2003. On April 8, 2003, the trial court judge issued a final decision containing substantially the same terms as the preliminary decision. The final decision does not specify a monetary amount of restitution required to be paid to plaintiffs. Instead, the trial court judge indicated that the procedure for determining restitution will be established after further briefing and argument by the parties, following which a final judgment would be entered. MasterCard will file a proposal on the method of restitution on May 13, 2003. A hearing is presently scheduled for June 6, 2003. MasterCard presently intends to appeal the decision on a number of grounds once a final judgment is entered. In addition, MasterCard has been served with complaints in state courts in New York, Arizona, Texas, Florida, Arkansas, Kentucky and Illinois seeking to, in effect, extend the judge’s decision in the Schwartz matter to MasterCard cardholders outside of California.

MasterCard International, Visa U.S.A., Inc., Visa International Corp., several member banks including Citibank (South Dakota), N.A., Citibank (Nevada), N.A., Chase Manhattan Bank USA, N.A., Bank of America, N.A. (USA), MBNA, and Diners Club are defendants in a number of federal putative class actions that allege, among other things, violations of federal antitrust laws based on the asserted one percent currency conversion “fee”.

Pursuant to an order of the Judicial Panel on Multidistrict Litigation, the federal complaints have been consolidated in MDL No. 1409 before Judge William H. Pauley III in the U.S. District Court for the Southern District of New York. In January 2002, the federal plaintiffs filed a Consolidated Amended Complaint (“MDL Complaint”) adding MBNA Corporation and MBNA America Bank, N.A. as defendants. This pleading asserts two theories of antitrust conspiracy under Section 1 of the Sherman Act, 15 U.S.C. §1: (i) an alleged~~“inter-association”~~ “inter-association” conspiracy among MasterCard (together with its members), Visa (together with its members) and Diners Club to fix currency conversion “fees” allegedly charged to

cardholders of “no less than 1% of the transaction amount and frequently more;” and (ii) two alleged~~“intra-association”~~ “intra-association” conspiracies, whereby each of Visa and MasterCard is claimed separately to have conspired with its members to fix currency conversion “fees” allegedly charged to cardholders of “no less than 1% of the transaction amount” and “to facilitate and encourage institution — and collection — of second tier currency conversion surcharges.” The MDL Complaint also asserts that the alleged currency conversion “fees” have not been disclosed as required by the Truth In Lending Act and Regulation Z.

Defendants have moved to dismiss the MDL Complaint. Oral argument on that motion was held on June 21, 2002 and Judge Pauley reserved decision. Pending determination of defendants’ motion to dismiss, the parties may engage in discovery except for non-custodial depositions. No trial date has been set.

MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on its results of operations, financial position or cash flows.

Interchange fees represent a sharing of payment system costs among the financial institutions participating in a four-party payment card system such as MasterCard’s. Generally, interchange fees are paid by the merchant bank (the “acquirer”) to the cardholder bank (the “issuer”) in connection with transactions initiated with the payment system’s cards. These fees reimburse the issuer for a portion of the costs incurred by it in providing services which are of benefit to all participants in the system, including acquirers and merchants. MasterCard establishes a multilateral interchange fee (“MIF”) in certain circumstances as a default fee that applies when there is no other interchange fee arrangement between the issuer and the acquirer. MasterCard establishes a variety of MIF rates depending on such considerations as the location and the type of transaction, and collects the MIF on behalf of the institutions entitled to receive it, but does not itself receive the ~~MIF.~~MIF or record it as revenue. As described more fully below, MIFs are subject to regulatory or legal review and/or challenges in a number of jurisdictions. MasterCard believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of these matters will have on its results of operations, financial position or cash flows.

European Union.In September 2000, the European Commission issued a “Statement of Objections” challenging Visa International’s cross-border MIF under European Community competition rules. On July 24, 2002, the European Commission announced its decision to exempt the Visa MIF from these rules based on certain changes proposed by Visa to its MIF. Among other things, in connection with the exemption order, Visa agreed to adopt a cost-based methodology for calculating its MIF similar to the methodology employed

by MasterCard, which considers the costs of certain specified services provided by issuers, and to reduce its MIF rates for debit and credit transactions to amounts at or below certain specified levels. ~~One or more parties may seek to appeal the Visa MIF decision.~~

Although MasterCard Europe is not an addressee of the Statement of Objections, its rules also contain a cross-border MIF. MasterCard Europe ~~intends to engage~~is engaged in discussions with the European Commission in order to determine under what conditions, if any, the European Commission would grant a formal exemption or comfort letter for MasterCard Europe’s MIF. Because the cross-border MIF constitutes an essential element of MasterCard Europe’s operations, changes to it could significantly impact ~~MCI’s~~MasterCard International’s European members and the MasterCard business in Europe. At this time, it is not possible to determine what action the European Commission will take with respect to MasterCard Europe’s MIF.

United Kingdom Office of Fair Trading.On September 25, 2001, the Office of Fair Trading of the United Kingdom (“OFT”) issued a ~~notice~~Statement of Objections (“SOO”) under the U.K. Competition Act of 1998 challenging the MasterCard MIF, ~~established~~the fee paid by ~~MEPUK for domestic credit card~~acquirers to issuers in connection with point of sale transactions, in the United Kingdom. The OFT’s notice claimed that the MasterCard U.K. MIF may infringe U.K. competition law and is unlikely to qualify for an exemption. The OFT considers that the MasterCard U.K. MIF and multilateral service fee (“MSF”), the fee paid by ~~issuing banks~~issuers to ~~acquiring banks~~acquirers when a customer uses a MasterCard-branded card in the United Kingdom either at an ATM or over the counter to obtain a cash advance, established by MasterCard U.K. Members Forum Limited (formerly MEPUK) (“MMF”) for domestic credit card transactions in the United Kingdom. The SOO contained preliminary conclusions to the effect that the MasterCard U.K. MIF and MSF may ~~be anti-competitive~~infringe U.K. competition law and ~~may increase retail costs~~do not qualify for an exemption in their present forms. In January 2002, MasterCard, MEPUK and ~~consumer prices.~~several MasterCard U.K. members responded to the SOO, and an oral hearing concerning the matter was held on February 5, 2002. On

February 11, 2003, the OFT issued a supplemental SOO, which also contains preliminary conclusions that challenge MasterCard’s U.K. MIF under the Competition Act. On May 2, 2003, MasterCard and MMF responded to the supplemental SOO.

Because the MIF and MSF constitute essential elements of MasterCard’s U.K. operations, changes to these fees could significantly impact ~~MCI’s~~MasterCard’s U.K. members and the MasterCard business in the U.K. At this time, it is not possible to determine what action the OFT will take with respect to the MasterCard MIF and ~~MSF, including what action the OFT will take in light of the European Commission’s decision regarding the Visa MIF.~~MSF.

Australia.On August 27, 2002, the Reserve Bank of Australia (“RBA”) announced regulations under the Payments Systems (Regulation) Act 1998 (the “Act”) applicable to four-party credit card payment systems in Australia, including MasterCard’s. The RBA regulations would impose a number of changes on the operation of four-party credit card systems that could significantly impact ~~MCI’s~~MasterCard International’s Australian members and the MasterCard business in Australia. Among other things, the RBA regulations permit non-deposit-taking institutions to issue credit cards and acquire credit card transactions in Australia, mandate a formula for calculating interchange fees that fails to account for certain costs incurred by issuers (such as credit losses) and effectively requires a reduction in domestic interchange fees, and prohibit MasterCard and other four-party credit card systems from enforcing their respective “no surcharge” and “net issuer” rules. The no surcharge rule generally prevents merchants from charging supplemental fees for the use of payment cards at the point of sale, and the net issuer rule requires institutions participating in the relevant system to issue payment cards in addition to conducting merchant acquiring activities.

On September 20, 2002, MasterCard filed an application with the Federal Court of Australia seeking to overturn the RBA regulations. MasterCard believes that in implementing the regulations the RBA has failed to comply with the obligations imposed upon it by the Act. Among other things, MasterCard believes that the RBA regulations fail to satisfy the public interest test mandated by the Act because they can be expected to impose additional costs on Australian consumers, place small businesses at a competitive disadvantage to larger retailers, and encourage small or regional banks to exit the credit card business in Australia. Visa International Corp. filed a similar application with the Federal Court of Australia on September 19, 2002. A hearing on the matter is scheduled to begin on May 19, 2003. At this time, it is not possible to determine the outcome of MasterCard’s legal challenge to the RBA regulations.

United States.In July 2002, a ~~putative~~purported class action lawsuit was filed by a group of merchants in the U.S. District Court for the Northern District of California against MasterCard International, ~~Incorporated,~~ Visa

U.S.A., Inc., Visa International Corp. and several member banks in California, alleging, among other things, that MasterCard’s and Visa’s interchange fees contravene the Sherman Act. The suit seeks treble damages in an unspecified amount, attorney’s fees and injunctive relief, including the divestiture of bank ownership of MasterCard and Visa, and the elimination of MasterCard and Visa marketing activities. Defendants filed a motion to dismiss the complaint on September 10, 2002. The case was recently reassigned to a new judge in federal district court in San Francisco. An oral argument date on the motion was held on April 18, 2003. On April 21, 2003, the judge issued a decision that dismissed several of plaintiffs’ claims and significantly narrowed the scope of the remaining claims in the case. No trial date has been set in this matter.

Other Jurisdictions.MasterCard is aware that regulatory authorities in certain other jurisdictions, including Poland, ~~and~~ Hong Kong and Switzerland, are reviewing MasterCard’s and/or its members interchange fee practices and may seek to regulate the establishment of ~~interchange fees among MasterCard members and/or impose limitations on how any MIF may be established in those jurisdictions.~~such fees.

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” MasterCard has one reportable segment, “Payment Services.” All of the Company’s activities are interrelated, and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based upon analysis of MasterCard as one operating segment. The CEO has been identified as the chief operating decision-maker.

There is no single customer that accounted for more than 10 percent of the Company’s revenue. Revenue generated in the United States accounted for approximately 57% and 62% of the Company’s total revenue for the three and nine months ended September 30, 2002, respectively and 65% for the three and nine months ended September 30, 2001, respectively. The Company estimates that no other individual country contributed a significant portion to the Company’s revenue for the three or nine months ended September 30, 2002 or September 30, 2001.

~~MasterCard does not maintain or measure long-lived assets by geographic location.~~

The Company has formalized global risk management policies and procedures, which include risk standards to provide a framework for calculating the Company’s settlement exposure. To minimize its exposure to settlement risk, MCI members that are not in compliance with established risk standards may be required, after appropriate management review of the individual risk circumstances, to provide collateral, typically in the form of cash deposits, escrow accounts, letters of credit or bank guarantees. MasterCard estimates its collateral held for legal settlement risk of MasterCard-branded transactions to be $1,365,383 and $1,343,113 at September 30, 2002 and December 31, 2001, respectively. In addition to these amounts, MasterCard held collateral to cover: variability and future growth in member programs; the possibility that it may choose to pay merchants to protect brand integrity in the event of acquirer settlement failure as described below; and Cirrus and Maestro related risk as described below. MasterCard monitors its credit risk portfolio on a regular basis to assess potential concentration risks and to evaluate the adequacy of collateral on hand. MasterCard’s estimated settlement exposure at September 30, 2002 and December 31, 2001, after consideration of the collateral amounts set forth above, amounted to $9,087,451 and $8,254,513, respectively. MasterCard’s estimated settlement exposure is calculated on the basis of member-reported transaction data, some of which is revised by members in subsequent reporting periods. MasterCard’s estimated settlement exposure net of collateral had concentrations of 63% and 65% in North America and 22% and 18% in Europe at September 30, 2002 and December 31, 2001, respectively. A portion of the Company’s uncollateralized estimated settlement exposure for MasterCard-branded transactions (estimated at $896,318 and $493,151 at September 30, 2002 and December 31, 2001, respectively) relates to members who are deemed not to be in compliance with, or who are under review in connection with, the Company’s risk management standards. The Company reviews its risk management methodology on a regular basis. As such, the amounts of uncollateral-

ized estimated settlement exposure relating to non-compliant members are revised, as necessary. In the event of uncollateralized member risk losses, the Company also considers the appropriateness of establishing reserves for non-payment.

In addition to the settlement risk identified above, the Company provides settlement guarantees with respect to certain Cirrus and Maestro transactions that the Company processes. The Company’s estimated Cirrus and Maestro settlement exposures amount to $678,319 and $476,894 at September 30, 2002 and December 31, 2001, respectively. The Company holds collateral for a portion of these exposures. In addition, the Company guarantees certain Cirrus- and Maestro-branded transactions in Europe and certain Maestro-branded transactions in Latin America that are processed outside of the Cirrus and Maestro settlement systems. The Company is currently not able to quantify these exposures. Collateral is also held for a portion of these exposures.

Although the Company is not contractually obligated to do so, it may also elect to pay merchants for transactions in the event that a principal acquiring member of MCI defaults on its obligations to the merchants in order to maintain the integrity and acceptance of the Company’s brands. MasterCard holds collateral to cover this risk from certain acquirers depending on their individual risk circumstances.

~~The Company also has risk exposure related to outstanding MasterCard-branded travelers cheques. See Note 10 for a description of this risk exposure.~~

The Company enters into foreign exchange contracts to minimize the risk associated with anticipated revenues and expenses, and assets and liabilities denominated in foreign currencies. MasterCard’s forward contracts are as follows:

The Company’s derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, equity and commodity prices, credit spreads or other variables. Credit and market risk related to derivative instruments were not material at September 30, 2002 and December 31, 2001. Foreign exchange forward, option and swap contracts are used for economic hedges that do not qualify for hedge accounting. Foreign forward exchange contracts are included in the balance sheet at fair value with changes in fair value recorded in current earnings.

Generally, the Company does not obtain collateral related to forward contracts because of the high credit ratings of the counter-parties involved. The amount of accounting loss the Company would incur if the counterparties failed to perform according to the terms of the contracts is not considered material.

The following discussion should be read in conjunction with the consolidated financial statements and notes of MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“~~MCI”~~MasterCard International”) and MasterCard Europe ~~Sprl~~sprl (“MasterCard Europe”) (together, “MasterCard” or the “Company”) included elsewhere in this ~~report.~~Report. References to “we”, “our” and similar terms in the following discussion are references to the Company.

This ~~report~~Quarterly Report on Form 10-Q contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this ~~report,~~Report, the words “believe,” “expect,” “could,” “may,” “will” and similar words are intended to identify forward-looking statements. These statements relate to ~~the Company’s~~our future prospects, developments and business strategies. Many factors and uncertainties relating to ~~the Company’s~~our operations and business environment, all of which are difficult to predict and many of which are outside of ~~the Company’s~~our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause ~~the Company’s~~our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by ~~the Company~~MasterCard or on its behalf.

Below are the principal factors that ~~the Company believes~~we believe are important to ~~its~~our business, and that could cause actual results to differ from expectations. For a more complete discussion of these ~~and other~~ risk factors, see the discussion under the caption “Risk Factors” in Item 1 — Business, in the ~~proxy statement prospectus forming part of Post-effective Amendment No. 2 to the Company’s Registration Statement~~Annual Report on Form ~~S-4 filed May 7, 2002 (No. 333-67544). Although these factors are important, this list should not be considered as exhaustive or as an admission regarding~~10-K of MasterCard for the ~~adequacy of the disclosure.~~year ended December 31, 2002.


	•	the ~~Company’s~~sustainability of our relationships with ~~MCI member financial institutions;~~our customers and of our customers’ relationships with their cardholders and merchants;

	•	substantial and increasingly intense competition worldwide in the ~~current or future~~ global payments industry and consolidation in the payments industry;

	•	the threat of disintermediation from our customers as a result of the actions of certain competitors;

	•	global economic and political conditions;

	•	technological developments in the global payments industry;

	•	potential disruptions of ~~the Company’s~~our transaction processing ~~computer~~ systems by natural disaster or otherwise;

	•	potential breach of the security of ~~the Company’s~~our systems;

	•	risk of ~~MCI members’~~our customers’ settlement default and/or non-payment to ~~a merchant;~~

	•	~~the Company’s ability to attract, retain~~merchants and ~~motivate key personnel which could impact the Company’s ability to execute its business plans;~~

	•	~~general political and economic conditions, especially consumer spending and interest rates;~~

	•	~~the Company’s ability to effectively realize the benefits~~ of the ~~Integration;~~continuing credit quality of our customers;

	•	the outcome or impact of antitrust claims by the U.S. Department of Justice;

	•	the ~~outcome or~~ impact of ~~a class action~~the proposed settlement of the U.S. merchant lawsuit ~~by U.S. merchants;~~described elsewhere in this Report;

	•	the outcome or impact of litigation relating to ~~the Company’s~~our currency conversion practices;

	•	the outcome or impact of legal and regulatory proceedings in various jurisdictions relating to interchange fees;

	•	the outcome or impact of other regulatory ~~activities;~~initiatives, including those conducted by tax authorities;

	•	the outcome or impact of European Union regulations on cross-border payments;

	•	risks associated with international operations; and

	•	currency fluctuations and foreign exchange risks.

This report contains performance statistics relating to the number of transactions, transaction dollar volumes, and related matters that are provided to the Company by the members of MCI. These performance statistics are subject to limited logical and statistical verification by the Company. A portion of the data underlying these performance statistics is estimated.

On June 28, 2002, MasterCard Incorporated acquired all of the outstanding stock of Europay International SAS.A. (“EPI”) not previously owned by ~~MCI.~~MasterCard International. On July 16, 2002, EPI, as a wholly owned subsidiary of MasterCard Incorporated, was renamed MasterCard Europe ~~SA.~~S.A. On September 30, 2002, MasterCard Europe SAS.A. was reorganized in Belgium as MasterCard ~~Europe Sprl (“MasterCard Europe”).~~Europe. The results of MasterCard Europe’s operations have been included in ~~the~~our consolidated statements of income and cash flows of the Company from June 28, 2002.

Revenue was ~~$1.4 billion~~$512 million for the ~~nine~~three months ended ~~September 30, 2002,~~March 31, 2003 compared to ~~$1.2 billion~~$393 million for the ~~nine~~three months ended ~~September 30, 2001,~~March 31, 2002, an increase of ~~$184~~$119 million or ~~15%. MasterCard’s~~30%, of which $70 million was due to the acquisition of MasterCard Europe.

We enter into agreements with certain customers to provide volume-based and support incentives that are recorded as a reduction of revenue ~~is comprised of operations fees and assessments. On January 1, 2002, the Company implemented~~in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” ~~(“EITF 01-9”) and reclassified as~~(EITF 01-9). We anticipate that future revenue growth could be moderated by an increase in these incentives which are accounted for on a ~~reduction~~contra-revenue basis. In addition, due to slowing global economic conditions, including reduced cross-border travel caused by Severe Acute Respiratory Syndrome (“SARS”), the rate of revenue ~~certain payments to members~~growth experienced for the three months ended March 31, 2003, exclusive of the effects of the acquisition of MasterCard Europe, may not be sustainable for the remainder of the year.

Our revenue is comprised of operations fees and ~~merchants that were previously recognized as advertising and market development expense.~~

assessments. Operations fees represent user fees for authorization, clearing, settlement and other products and services that facilitate transaction and information management among ~~MCI members~~our customers on a global basis. Operations fees increased to $887 million for the nine months ended September 30, 2002 compared to $803 million for the nine months ended September 30, 2001, an increase of $85 million or 11%. The increase in operations fees over the prior period was primarily attributable to the acquisition of MasterCard Europe and an increase in the number of transactions processedare generally driven by MasterCard. Operations fees increased $37 million due to the acquisition of MasterCard Europe during the nine months ended September 30, 2002. Increases in operations fees were partially offset by a $7 million decline in warning bulletin revenue in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001, exclusive of MasterCard Europe’s warning bulletin revenue. Operations fees were also offset by lower average pricing based on the Company’s pricing structure, which rewards customers with lower prices for incremental volume, and a $10 million increase in rebates provided to MCI members in the nine months ended September 30, 2002 over the same period in 2001.

transactions. The number of transactions processed increased to approximately ~~7.22~~2.206 billion for the ~~nine~~three months ended ~~September 30, 2002,~~March 31, 2003, compared to approximately ~~6.26~~1.946 billion for the ~~nine~~three months ended ~~September 30, 2001,~~March 31, 2002, an increase of approximately ~~15%~~13%. During the same period, MasterCard branded-transactions, including transactions not processed by the Company, increased to approximately 9.84 billion from approximately 8.46 billion, an increase of approximately 16%. All MasterCard Europe transactions are included in both periods. Operations fees were $315 million for the three months ended March 31, 2003 compared to $256 million for the three months ended March 31, 2002, an increase of $59 million or 23%. Approximately $33 million of operations fees in first three months of 2003 were due to the acquisition of MasterCard Europe.

Assessments predominantly represent payments made by members ~~of MCI in respect of~~for their card programs carrying the marks of one or more of the brands within the MasterCard family of brands, principally the MasterCard, Maestro and Cirrus brands. Assessments were ~~$495~~approximately $197 million for the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2003 compared to ~~$396~~$137 million for the ~~nine~~three months ended ~~September 30, 2001,~~March 31, 2002, an increase of ~~$99~~approximately $60 million or ~~25%~~44%. Approximately ~~$48~~$37 million of ~~the Company’s~~our assessments ~~for the nine~~in first three months ~~ended September 30, 2002~~of 2003 were due to the acquisition of MasterCard Europe. ~~Excluding this incremental revenue,~~In addition, the increase in assessments was ~~primarily~~ attributable to ~~a 16%~~an increase in gross dollar volume (“GDV”) between the periods. GDV represents gross ~~spending~~usage (purchase and cash disbursements) on MasterCard cards for goods and services ~~as well as cash disbursements.~~including balance transfers and convenience checks. GDV was ~~$832~~$286 billion for the ~~nine~~three months ended ~~September 30, 2002,~~March 31, 2003 compared to ~~$716~~$255 billion for the ~~nine~~three months ended ~~September 30, 2001.~~March 31, 2002. GDV growth in first three months of 2003 as compared to same period in 2002 was approximately 7% when measured in local currency terms and approximately 12% when measured on a U.S. dollar converted basis. The difference in GDV growth measured in local currency terms compared to GDV growth measured on a U.S. dollar converted basis during the first quarter 2003 compared to the same period in 2002 is due to the weakening of the U.S. dollar against most major currencies worldwide. GDV includes MasterCard Europe activity ~~for~~in both periods presented. Offsetting the increase in assessments were rebates and incentives provided to ~~MCI members,~~customers, which increased by ~~$21~~$7 million in the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2003 over the same period in ~~2001.~~2002, primarily related to the acquisition of MasterCard Europe.

Operating expenses were ~~$1,125~~$1.180 billion for the three months ended March 31, 2003 compared to $315 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2002, ~~compared to $971 million for the nine months ended September 30, 2001,~~ an increase of ~~$154~~$865 million or ~~16%~~275%. ~~Operating~~

Our operating expenses are comprised of general and administrative, advertising and market development, U.S. merchant lawsuit costs, depreciation and amortization expenses. Operating expenses increased ~~$64~~$721 million due to the
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U.S. merchant lawsuit costs and $85 million due to our acquisition of MasterCard Europe. ~~MasterCard expects to invest significantly, primarily~~In addition, we are evaluating an increase in our advertising and ~~market~~marketing support over the next several years to accelerate ~~the Company’s~~our profitable growth and to enhance the global position of MasterCard and ~~MCI members.~~its customers. The primary focus of these ~~investments~~initiatives is to build brand recognition, promote brand acceptance, and to enhance the development of ~~MasterCard’s~~our programs and services. ~~MasterCard expects operating~~There is no assurance that these initiatives will be successful or that they will be continued. Operating expenses tomay increase ~~significantly~~ over the next several years as a result of these initiatives. ~~These initiatives did not have a material impact on expenses during the nine months ended September 30, 2002.~~
     General and administrative expenses consist primarily of personnel, telecommunications, data processing, travel and professional fees. General and administrative expenses were ~~$663~~$277 million for the ~~nine~~three months ended ~~September 30, 2002,~~March 31, 2003 compared to ~~$589~~$197 million for the ~~nine~~three months ended ~~September 30, 2001,~~March 31, 2002, an increase of ~~$74~~$80 million or ~~13%~~40%. This increase was primarily attributable to increases in personnel costs of ~~$66~~$42 million ~~resulting from additional personnel, including MasterCard Europe personnel,~~ and ~~salary~~ increases in ~~2002. MasterCard Europe’s general and administrative expenses were $36~~professional fees of $16 million, net of ~~the Company’s total general and administrative expenses~~adjustments for the nine months ended September 30, 2002. General and administrative expenses include net foreign exchange gains of $4 million and net foreign exchange losses of $7 million for the nine months ended September 30, 2002 and 2001, respectively. These gains and losses primarily result from the re-measurement of foreign currency balances.
     For the nine months ended September 30, 2002, the Company made significant expenditures in advertising and market development to build value in the Company’s brands to develop programs to differentiate itself from its competition. Advertising and market development expenses were $399 million for the nine months ended September 30, 2002, compared to $331 million for the nine months ended September 30, 2001, an increase of $68 million or 21%, primarily consisting of a $46 million increase in promotions and sponsorships expense, an $18 million increase in advertising expense and a $4 million increase in marketing expense. Approximately $18 million of advertising and market development expenses for the nine months ended September 30, 2002 were due to the acquisition of MasterCard Europe. The Company’s promotions and sponsorship expenses increased primarily as a result of incremental promotions and increased contractual sponsorship feeslegal costs associated with the World Cup and Major League Baseball organizations. MasterCard incurred increased advertising spending for special programming primarily associated with the World Cup events as well as the Grammy and the Academy awards.
     ~~Depreciation expense was $28 million for the nine months ended September 30, 2002 and 2001, of which $4 million related to the acquisition of MasterCard Europe.~~
     ~~Amortization expense was $35 million for the nine months ended September 30, 2002, compared to $22 million for the nine months ended September 30, 2001, an increase of $13 million or 58%.~~U.S. merchant lawsuit. The increase in ~~amortization expense was primarily due to amortization~~personnel costs of ~~additional capitalized software. Approximately $6 million of amortization expense was due to the acquisition of MasterCard Europe.~~
     Other income and (expense) was approximately $6 million and $8 million for the nine months ended September 30, 2002 and September 30, 2001, respectively. Other income and expense was comprised primarily of interest, dividend and other investment income related to the portfolio of investments held, as well as interest expense and other income and expenses.
     The effective tax rate for the nine months ended September 30, 2002 decreased to 36.3% from 38.4% for the nine months ended September 30, 2001. The decrease in the rate was primarily attributable to a change in the geographic distribution of pretax income from jurisdictions with higher state tax rates to those with lower rates. This was partially offset by income earned outside the United States in a jurisdiction with a higher tax rate than the United States. In addition, the Company realized significant foreign tax credits relating to prior periods. The benefits from these credits were offset by a one-time increase in state income tax expense attributable to the revaluation of deferred state tax assets as a result of lower state tax rates.
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As a result of the foregoing, MasterCard’s net income was $168 million for the nine months ended September 30, 2002 compared to $146 million for the nine months September 30, 2001, an increase of $22 million or 15%. Net income increased $12 million due to the acquisition of MasterCard Europe during the nine months ended September 30, 2002. Compared to its performance in recent periods, the Company expects that growth in its net income may slow over the next several years as a result of the initiatives discussed above, which involve significant expenditures to support and build value in the MasterCard family of brands. EBITDA, which the Company defines as operating income before depreciation and amortization, was $321 million for the nine months ended September 30, 2002 compared to $279 million for the nine months ended September 30, 2001, an increase of approximately $42 million ~~or 15%. In~~resulted principally from increases in personnel, including the ~~opinion~~impact of management, EBITDA, as defined, does not replace generally accepted accounting principles, but used in conjunction with the generally accepted accounting principles metrics such as net income, operating income and cash flow, enhances management’s ability to understand and direct MasterCard’s business.
~~Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001~~
     ~~Revenue was $539 million for the three months ended September 30, 2002, compared to $403 million for the three months ended September 30, 2001, an increase of $136 million or 34%.~~
     Operations fees increased to $342 million for the three months ended September 30, 2002 compared to $283 million for the three months ended September 30, 2001, an increase of $59 million or 21%. The increase in operations fees over the prior period was primarily attributable to the acquisition of MasterCard Europe, and ~~an increase~~salary and benefit increases in ~~the number of transactions processed by MasterCard. Operations fees of $36~~2003. Approximately $45 million were due to the acquisition of MasterCard Europe. Increases in operations fees were partially offset by lower average pricing based on the Company’s pricing structure, which rewards MCI members with lower prices for incremental volume. Operations fees were further offset by rebates provided to MCI members in the three months ended September 30, 2002, which increased by $2 million over the same period in 2001.
     The number of transactions processed increased to approximately 2.62 billion in the three months ended September 30, 2002, compared to approximately 2.27 billion in the three months ended September 30, 2001, an increase of approximately 15%. During the same period, total MasterCard-branded transactions, including transactions not processed by the Company, increased to approximately 3.50 billion compared to approximately 2.98 billion, an increase of approximately 17%. MasterCard Europe transactions are included in both periods.
     Assessments were $197 million for the three months ended September 30, 2002, compared to $120 million for the three months ended September 30, 2001, an increase of $77 million or 64%. The increase in assessments was primarily attributable to a 19% increase in GDV between the periods. Assessments increased by $48 million due to the acquisition of MasterCard Europe. GDV was $296 billion for the three months ended September 30, 2002, compared to $249 billion for the three months ended September 30, 2001. GDV includes MasterCard Europe activity in both periods. Offsetting the increase in assessments were rebates and incentives provided to MCI members, which increased by $8 million in 2002 over 2001.
     Operating expenses were $413 million for the three months ended September 30, 2002 compared to $329 million for the three months ended September 30, 2001, an increase of $83 million or 25%. The Company’s operating expenses are comprised of general and administrative ~~advertising and market development, depreciation and amortization expenses. Operating~~ expenses increased by $60 million due to the acquisition of MasterCard Europe. MasterCard expects operating expenses to increase significantly over the next several years as a result of the initiatives discussed above. These initiatives did not have a material impact on expenses during the three months ended September 30, 2002.
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     General and administrative expenses were $248 million for the three months ended September 30, 2002, compared to $195 million for the three months ended September 30, 2001, an increase of $54 million or 28%. This increasein 2003 was primarily attributable to increases in personnel costs of $33 million resulting from additional personnel, including MasterCard Europe personnel, and salary increases in 2002. General and administrative expenses include net foreign exchange losses of $2 million for the three months ended September 30, 2002 and 2001, respectively. These primarily result from re-measurement of foreign currency balances. General and administrative expenses of $35 million were due to the acquisition of MasterCard Europe.
     For the three months ended ~~September 30, 2002, MasterCard~~March 31, 2003, we made significant ~~expenditures~~investments in advertising and market development to ~~support and~~ build value in ~~the Company’s~~our brands and to develop programs to differentiate ~~MasterCard~~ourselves from ~~its~~our competition. Advertising and market development expenses were ~~$137~~$152 million for the three months ended ~~September 30, 2002,~~March 31, 2003 compared to ~~$117~~$101 million for the three months ended ~~September 30, 2001,~~March 31, 2002, an increase of ~~$21~~$51 million or ~~18%~~51%, primarily consisting of ana $24 million increase in advertising expense and a $21 million increase in promotions and sponsorships expense. Approximately $31 million of ~~$16 million~~advertising and market development expenses in first three months of 2003 was due to the acquisition of MasterCard Europe. ~~MasterCard’s promotions~~The increase, exclusive of MasterCard Europe, was due to our initiatives to increase our investment in advertising and ~~sponsorship expenses increased primarily~~market support in order to increase brand recognition and promote brand acceptance. We plan to evaluate the level of our investment in advertising, as well as other programs and sponsorships for the remainder of 2003 and thereafter.
     Costs associated with the U.S. merchant lawsuit totaled $721 million for the period ended March 31, 2003, consisting of a charge related to the signing of a Memorandum of Understanding in connection with the proposed settlement of this class action lawsuit. For a description of the Memorandum of Understanding, see Item 1 — Legal Proceedings in Part II of this Quarterly Report on Form 10-Q. We discounted the payment obligations under the MOU using a discount rate of 8%. As a result of ~~incremental promotions~~discounting the payment obligations, we will incur interest charges of approximately $41 million for the remainder of 2003, $49 million in 2004, $44 million in 2005, and ~~contractual sponsorship expenses associated with the Major League Baseball organization.~~declining amounts thereafter through 2012.
     Depreciation expense was ~~$11~~$12 million for the three months ended ~~September 30, 2002, compared to $10 million for the three months ended September 30, 2001, an increase of $1 million or 9%.~~
     ~~Amortization expense was $16 million for the three months ended September 30, 2002,~~March 31, 2003 compared to $8 million for the three months ended ~~September 30, 2001,~~March 31, 2002, an increase of ~~$8 million or 108%. Amortization expense increased $6 million~~$4 million. This increase was due principally to the acquisition of MasterCard Europe.
     ~~Other income and (expense)~~Amortization expense was ~~approximately $(3) million and $(1)~~$18 million for the three months ended ~~September 30,~~March 31, 2003 compared to $8 million for the three months ended March 31, 2002, ~~and September 30, 2001, respectively.~~an increase of $10 million. This increase was primarily driven by $5 million of amortization expense due to the acquisition of MasterCard Europe as well as additional amortization of capitalized computer software.
     Other income ~~and expense is comprised~~(expense) was $2 million for the three months ended March 31, 2003 compared to $6 million for the three months ended March 31, 2002, a decrease of $4 million. Other income (expense) comprises primarily of interest, dividend and other investment income related to the portfolio of investments held, as well as interest expense, minority interest ~~in earnings of subsidiaries,~~ and other expense. As discussed in Note 10 to the Consolidated Financial Statements included herein, investment income and ~~expenses.~~interest expense were each increased by $3 million due to the consolidation of the MasterCard International O’Fallon 1999 Trust (“Trust”) in our consolidated financial statements. Investment income decreased $3 million, exclusive of the consolidation of the Trust, for the three months ended March 31, 2003 compared to the same period in 2002, primarily as a result of lower market values of the trading securities portfolio.
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     The effective tax rate for the three months ended ~~September 30, 2002 increased to 36.7% from 36.5%~~March 31, 2003 was 35.3% versus 36.3% for the three months ended ~~September 30, 2001. The increase~~March 31, 2002. Exclusive of the effects of the charge for the U.S. merchant lawsuit described in Note 2 to the Consolidated Financial Statements included herein, which was treated as a discrete item in the determination of the tax provision, the effective tax rate was 30.8% versus 36.3%. The decrease, exclusive of the effect of the U.S. merchant litigation charge, was primarily attributable to higher tax-exempt income ~~earned outside~~as a percentage of pretax income, the ~~United States~~settlement of certain tax examinations on a favorable basis and a change in the geographic distribution of pretax income from jurisdictions with higher state rates to those with lower rates. In addition, the rate in 2002 was increased by a ~~jurisdiction with~~one-time increase in state income tax expense attributable to lower deferred state tax assets as a ~~higher~~result of lower state tax ~~rate than~~rates, partially offset by the ~~United States.~~realization of foreign tax credits.
     Effective January 1, 2003, we changed our method of calculating the market-related value of plan assets used in determining the expected return-on-asset component of pension cost. Under the previous accounting method, 80 percent of the gains and losses on plan assets were deferred and recognized in the calculated market-related value over a period of five years. Under the new method, the market-related value equals the current fair value of the plan assets. The new method is considered preferable because annual pension expense will reflect changes in the market performance of plan assets on a more timely basis. The cumulative effect of this change in accounting principle related to periods prior to 2003 is a benefit to earnings for the period ended March 31, 2003 of $5 million, net of income taxes of $3 million.
     As a result of the foregoing, ~~MasterCard’s~~our net ~~income~~loss was ~~$78~~$425 million for the three months ended ~~September 30, 2002~~March 31, 2003 compared to ~~$47~~net income of $54 million for the three months September 30, 2001, an increase of $31 million or 66%. Net income increased by $14 million due to the acquisition of MasterCard Europe. Compared to its performance in recent periods, the Company expects that growth in its net income may slow over the next several years as a result of theended March 31, 2002. The advertising and market support initiatives discussed above, which involve significant expenditures to support and build value in the MasterCard family of ~~brands. EBITDA, which~~brands, could result in reduced revenue and additional operating expenses over the Company defines as operating income before depreciation and amortization, was $154 million for the three months ended September 30, 2002 compared to $92 million for the three months ended September 30, 2001, an increasenext several of approximately $62 million or 67%. In the opinion of management, EBITDA, as defined, does not replace generally accepted accounting principles, but used in conjunction with the generally accepted accounting principles metrics such as net income, operating income and cash flow, enhances management’s ability to understand and direct MasterCard’s business.years.
Liquidity and Capital Resources
     ~~Net~~We need capital resources and liquidity to fund our global development, to cover any settlement risk, to finance our capital expenditures and any future acquisitions and to service the payments of principal and interest on our outstanding debt, legal obligations and other contractual commitments. At March 31, 2003, we had $637 million of liquid investments with which to manage operations. We expect that the cash generated from our operations and our borrowing capacity will be sufficient to meet our operating, working capital and capital needs in 2003 and beyond.
     For the three months ended March 31, 2003, net cash used in operating activities was $149 million compared to net cash provided by operating activities ~~was $174~~of $35 million for the ~~nine~~three months ended ~~September 30, 2002 and $196 million for~~March 31, 2002. The utilization of cash by operating activities in the ~~nine~~three months ended ~~September 30, 2001, a decrease~~March 31, 2003 was principally due to the payment of $22 million or 11%. The primary sources of cash during the nine months ended September 30, 2002 were net income, an increase in accrued expenses, a decrease in trading securities, a decrease in settlement due from MCI members and a decrease in accounts receivable. These sources were offset by the net change in other assets and liabilities, a decrease in accounts payable and ~~a decrease in settlement~~accrued expense balances that had increased at December 31, 2002 due to ~~MCI members. Cash provided by operating activities also includes $63 million~~heavy fourth quarter advertising and market development spending, payment of 2002 accrued incentive compensation, and changes in our net settlement position as a result of the timing of receiving payments for ~~depreciation and amortization.~~
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weekend activity.
     Net cash used in investing activities was ~~$46~~$47 million and ~~$161~~$11 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2003 and 2002, respectively. The outlay of cash in 2003 was primarily due to capital expenditures and ~~2001, respectively,~~expenditures for capitalized software. The primary capital expenditure was MasterCard’s purchase of a ~~decrease of $116 million or 72%. In the current year,~~building in Kansas City, Missouri for a backup data center.
     No cash ~~from investing activities~~ was used ~~to purchase $164 million of investments securities, purchase $32 million~~ in ~~fixed assets and invest $33 million in capitalized software, offset by $145 million of proceeds from~~financing activities for the ~~sale of investment securities and $31 million of cash received, net of expenses, from the acquisition of EPI during the second quarter of 2002.~~
three months ended March 31, 2003. Net cash used in financing activities ~~was $35 million~~ for the ~~nine~~three months ended ~~September 30,~~March 31, 2002 ~~and net cash provided by~~was $10 million. In the prior year quarter, financing activities ~~was $11 million for the nine months ended September 30, 2001 a change of $46 million. In both periods, financing activities relate~~related to ~~repayment~~repayments of MasterCard’s net settlement overdraft positions.
     ~~MasterCard’s financial position continues~~Cash paid for income taxes in the period ended March 31, 2003 was reduced to ~~reflect strong liquidity. Working capital, consisting~~a nominal amount as a result of ~~current assets less current liabilities, was $581 million at September 30, 2002 and $468 million at December~~significant tax deductions generated during the last four months of 2002.
     At March 31, ~~2001, representing~~2003, we recorded a ~~working capital ratio~~liability in connection with the proposed settlement of ~~1.7~~the U.S. merchant antitrust lawsuit, which is more fully discussed in Note 2 to ~~1 at both September 30, 2002 and 2001. At September 30, 2002,~~ the ~~Company had $754 million of liquid investments~~Consolidated Financial
22
Statements included herein. We expect to ~~manage its operations. In addition, the Company expects that the~~be able to fund amounts payable in connection with this legal proceeding through cash generated from operations ~~working capital~~ and ~~its~~our borrowing ~~capacity will be sufficient to meet the Company’s operating and capital needs in 2002.~~
     In June 2002, MCI entered into a senior unsecured revolving credit facility in the amount of $1,200,000 with certain financial institutions that will expire on June 3, 2003. Under the facility, interest is charged at the London Interbank Offered Rate (“LIBOR”) plus 28 basis points, and the rate increases depending upon the amount of any draw down. The commitment fee is 7 basis points plus upfront fees of $434. The purpose of the facility is to provide liquidity in the event of one or more settlement failures by MCI members. On August 1, 2002, the borrower under the facility was converted from MCI to MasterCard Incorporated. MasterCard was in compliance with the facility covenants as of September 30, 2002. MCI maintained its minimum net worth requirements of $669 million under the facility at September 30, 2002. There were no borrowings under the facility at September 30, 2002.
     In October 1993, MasterCard Europe entered into a revolving credit agreement with a bank to satisfy certain operational funding requirements. The final amendment of this agreement, dated October 1999, allows for borrowings of up to twelve months from the borrowing date for a maximum amount of 35 million Euros. This agreement requires interest to be paid at the Euro Interbank Offered Rate (“EURIBOR”) plus 62.5 basis points for borrowings up to six months and EURIBOR plus 125 basis points for borrowings of six to twelve months. In February 2001, MasterCard Europe entered into an additional revolving credit agreement with the same bank to provide fixed term financing to fund certain settlement service operations for up to 30 million Euros. This agreement allows for borrowings to be outstanding for a period of seven to thirty days. Amounts borrowed under this agreement are subjectcapacity. Primarily due to the same interest rate provisions as those set forth in the 35 million Euro credit agreement. There were no outstanding loans under either of these agreements at September 30, 2002. Under an informal arrangement, both the bank and MasterCard Europe allow borrowings to exist, under certain conditions, without triggering either agreement. These borrowings incur interest at the Euro Overnight Index Average plus 50 basis points. From time to time, MasterCard Europe directs the bank to provide funding under the above mentioned credit agreements in order to obtain a lower interest rate and to minimize interest costs. There were no borrowings under this informal arrangement at September 30, 2002.
     In September 2002, MasterCard Europe increased its overdraft facility with a separate bank from 10 million Euros to 100 million Euros to cover multi-currency overdrafts. The interest rate under this facility is LIBOR plus 50 basis points per annum for amounts below 100 million Euros and LIBOR plus 250 basis points for amounts over the 100 million Euro limit. Various rates apply in case of borrowings in currencies other than the Euro. There were no borrowings under this facility at September 30, 2002.
     ~~From time to time, the Company has temporary overdrafts at banks due to timing differences related to settlement or corporate activity. The Company had no overdrafts at September 30, 2002.~~
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     In June 1998, MCI issued ten-year unsecured, subordinated notes (“the Notes”) paying a fixed interest rate of 6.67% per annum. The terms of the Notes require MasterCard to repay the principal amount on June 30, 2008. The Company has the option to prepay the Notes with a “make whole” paymentdevelopment pertaining to the ~~investors, if market interest rates are lower at the time of prepayment. The interest payments~~U.S. merchant lawsuit, on ~~the notes for each of the three months and nine months ended September 30, 2002 and 2001 were $1 million and $4 million, respectively. The Company was in compliance~~May 1, 2003, Standard & Poor’s placed MasterCard on CreditWatch with the note covenants as of September 30, 2002. The principal amount of notes outstanding at September 30, 2002 was $80 million. The fair value of the notes is estimated at $89 million and $80 million at September 30, 2002 and December 31, 2001, respectively. MCI maintained its minimum net worth requirements under the terms of the Notes of $424 million at September 30, 2002.
     MCI is the lessee in one synthetic lease transaction for its Winghaven facility that was structured by creating a Special Purpose Entity (“SPE”) which constructed and owns the facility. See Note 2 and Note 10 of the Consolidated Financial Statements herein. The decision whether to consolidate the SPE, or record the Winghaven facility on the consolidated balance sheets, depends not only on the applicable accounting principles for SPEs and the treatment of the lease as operating or capital, but also on a determination regarding the nature and amount of the equity investments made by third parties to the SPE. The SPE is not consolidated because, under the applicable accounting principles, MCI does not exercise the requisite control over the risks and rewards of the assets in the SPE. In conjunction with the lease agreement, MCI executed a guarantee of 85.15 percent of the SPE’s secured notes outstanding, totaling $127 million as of September 30, 2002. The events of default under the guarantee include MCI failing to meet minimum net worth requirements of $412 million at September 30, 2002 and the failure to make rent payments. Upon the occurrence of an event of default, MCI would guarantee repayment of the total outstanding principal and interest on the secured notes and take ownership of the building.
     The FASB is currently reviewing the consolidation requirements of SPEs. Such review may result in more stringent requirements for the consolidation of SPEs. At September 30, 2002, the impact of consolidating the SPE and recording the assets on MasterCard’s balance sheet would result in $154 million in debt for the Company and $8 million of minority interest relating to the equity in the SPE held by a third party.negative implications.
     In the normal course of business, MasterCard operates systems for clearing and settling payment transactions among ~~the members of MCI.~~its members. Net settlements are generally cleared daily among members by wire transfer or other bank clearing means, via settlement cash accounts. However, some transactions may not settle until subsequent business days due to varying local currency settlement value date intervals and other timing differences. These timing differences result in amounts due ~~to MasterCard by MCI~~from members or amounts due to ~~MCI~~ members ~~from MasterCard~~ for a duration normally ranging from one to four calendar ~~days. These amounts~~days and are included in the ~~consolidated~~ balance ~~sheets~~sheet of MasterCard as settlement due to/due from ~~MCI~~ members. ~~The net impact~~
     Our financial position continues to reflect strong liquidity. Working capital, consisting of ~~the settled transactions~~current assets less current liabilities, was ~~the main contributor to the cash account overdraft positions of $10~~$408 million at March 31, 2003 and $526 million at December 31, ~~2001. No overdraft positions existed~~2002, representing a working capital ratio of 1.4 and 1.6 in 2003 and 2002, respectively.
     We provide for settlement liquidity through a 364-day revolving credit facility (the “Credit Facility”) with certain financial institutions that are members, which expires on June 3, 2003. Under the terms of the Credit Facility, MasterCard has commitments of $1.2 billion that can be borrowed in the form of revolving loans. Interest is charged at ~~September 30, 2002.~~
     ~~Primarily due~~the London Interbank Offered Rate (“LIBOR”) plus 28 basis points, and the rate increases depending upon the amount of any draw down. Under the Credit Facility, MasterCard has agreed to ~~uncertainty surrounding lawsuits, in particular~~pay a facility fee equal to 7 basis points per annum on each lender’s commitment. MasterCard is required to maintain a minimum level of consolidated net worth under the terms of the Credit Facility. As a result of the proposed settlement of the U.S. merchant ~~antitrust litigation~~lawsuit described in ~~Note 12~~Part II, Item 1 — Legal Proceedings herein, MasterCard and the lenders under the Credit Facility agreed to waive the application of the net worth covenant for the remainder of its existing term. MasterCard intends to replace the existing Credit Facility with a new 364-day credit facility on or prior to the ~~Consolidated Financial Statements included herein,~~expiration of the existing Credit Facility on June ~~17,~~3, 2003.
     MasterCard International has issued ten-year unsecured, subordinated notes (the “Notes”) paying a fixed interest rate of 6.67% per annum. The terms of the Notes require MasterCard to repay the principal amount on June 30, 2008. MasterCard has the option to prepay the Notes with a “make whole” payment to the investors if market interest rates are lower at the time of prepayment. The principal amount of the Notes outstanding at March 31, 2003 and December 31, 2002 ~~Standard & Poor’s placed~~was $80 million.
     MasterCard Europe and European Payment System Services sprl, a subsidiary of MasterCard, have entered into a multi-purpose unsecured credit facility with a bank that is a member to satisfy certain operational funding requirements. The final amendment of this agreement, dated October 1999, allows for funding for a period of up to twelve months from the borrowing date for a maximum amount of 35 million euros. The credit facility can be used for overnight overdrafts, intraday overdrafts, straight loans, and guarantees. This agreement requires the payment of interest at varying rates. For a straight loan, drawdown interest is paid at the Euro Interbank Offered Rate (“EURIBOR”) plus 15 basis points. For overdrafts on ~~negative outlook. However, Standard & Poor’s reaffirmed MasterCard’s~~euro accounts and U.S. dollar accounts, interest is paid at a rate of the Euro Overnight Index Average (“EONIA”) plus 50 basis points and the U.S. dollar call rate plus 50 basis points, respectively. To cover overdrafts, the bank will automatically activate the credit ~~rating on September 4, 2002.~~facility. For bank guarantees, the guarantee fee is paid at a rate of 1.5% per annum.
     MasterCard Europe entered into an unsecured credit agreement with a bank that is a member to provide fixed-term financing to fund certain settlement service operations for up to 30 million euros. This agreement allows for borrowings to be outstanding for a period of seven to thirty days. Under this agreement, interest is paid at EURIBOR plus 15 basis points. The rates of interest are set at the current market rate, and the bank at its discretion can modify the offered margins to reflect market conditions.
     MasterCard Europe has a credit facility with a separate bank that is a member in the amount of 100 million euros to cover multi-currency overdrafts. The interest rate under this facility is Euro LIBOR plus 50 basis points per annum for amounts below 100 million euros and Euro LIBOR plus 250 basis points for
23
amounts over the 100 million euro limit. For drawings in currencies other than the euro, interest will be charged at the above margins over the relevant currency base rate.
We have entered into contractual commitments associated with operating lease agreements for office space and equipment as well as for sponsorship, licensing and other agreements. Obligations relating to these contractual commitments are estimated to be payable in the following periods:

Sponsorship,
Operating Licensing &
Total Leases Other
(In thousands)
The remainder of 2003 $ 185,034 $ 27,360 $ 157,674
2004 203,171 25,086 178,085
2005 169,726 20,326 149,400
2006 109,892 16,777 93,115
2007 51,823 15,015 36,808
Thereafter 43,292 20,551 22,741

Total $ 762,938 $ 125,115 $ 637,823

     At March 31, 2003, $16.3 million of the future minimum payments in the table above was accrued.
     An adverse outcome of certain of the legal proceedings described in Note 1214 to the Consolidated Financial Statements included herein could have a detrimental impact on liquidity and capital resources if ~~they~~the proceedings result in adverse awards of damages to the relevant ~~plaintiffs.~~
~~Economic Fluctuations~~
     Although the Company cannot precisely determine the impact of inflation on its operations, the Company does not believe its operations have been significantly affected by inflation. For the most part, MasterCard has utilized technology and operating efficiencies to offset increased operating expenses. In addition, a portion of
31
~~revenues is based upon a percentage of GDV, which partially insulates operating margins on these revenues from the effects of inflation.~~
     ~~Portions of MasterCard’s business can be seasonal. The Company’s revenue is favorably affected by progressively increased card purchasing volume throughout the year, particularly~~plaintiffs or equitable relief in the ~~fourth quarter during the holiday shopping period.~~form of return of funds.
     We believe that our cash provided by operating activities, our liquid investments and our borrowing capacity provide sufficient liquidity to meet our ongoing business requirements.
Critical Accounting Policies & Estimates
     ~~The preparation~~Our accounting policies are integral to understanding the results of operations and financial ~~statements in conformity with generally accepted accounting principles in the United States of America requires management~~condition. We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. ~~Management believes that~~We have established detailed policies and control procedures to ensure the ~~most critical accounting policies, which require significant~~methods used to make estimates and assumptions are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management judgments.
Revenue Recognition
     Certain revenues are estimated based upon transactional information accumulated from our systems or reported by our customers. This information is reviewed against historical and projected customer performance.
     We have business agreements with certain customers that provide for fee rebates when the customers meet certain hurdles. Such rebates are generally calculated on a monthly basis based upon the estimated customer’s performance and the contracted discount rates for the services provided, and are recorded as a reduction of revenue in the ~~preparation of MasterCard’s consolidated financial statements, are set forth below.~~same period as the revenue is earned.
     ~~MasterCard enters~~In addition, we enter into agreements with certain ~~MCI members and merchants~~customers to provide volume-based and support incentives that are recorded as a reduction of revenue in accordance with EITF ~~Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.~~01-9. Incentives are based on management’s estimate of the ~~members’~~customer’s performance in a given ~~period~~period.
     Our estimate of customers’ performance is a critical component in the calculation of rebates and ~~actual~~incentives. Rebates and incentives are calculated based upon estimates of future customer performance and
24
the terms in the related customer agreements. Customers’ performance is estimated by using historical performance, member reported information, discussions with our customers, and transactional information accumulated from our systems. Actual results may differ from these estimates.
Capitalized Software
     ~~Capitalized~~Our capitalized software, which includes internal and external costs incurred in developing or obtaining computer software for internal use, is ~~capitalized~~included in other intangible assets in the consolidated balance sheets in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and related guidance. Development costs are expensed during the preliminary project management phase until it is probable that the project will be completed and the software will be used to perform the function intended. Thereafter, all qualifying direct internal and external costs related to the design, development and testing phase are capitalized, and upon the project being substantially complete and ready for its intended use, are amortized using the straight-line method over the estimated useful life of the software, not to exceed three years. Costs related to post-implementation activities for software that is developed or obtained for internal use are expensed as incurred.
     ~~MasterCard accrues legal~~We are required to make judgments to determine if each project will satisfy its intended use and the phase of each project. In addition, we estimate the internal costs ~~that are expected to be incurred to defend the Company in certain litigation discussed in Note 12 to the Consolidated Financial Statements herein. The accruals are estimated~~ based on ~~management’s expectations~~hours spent on the design, development and testing phases of ~~foreseeable costs, which we have assessed~~the project. These judgments and estimates impact the accounting for capitalized software in our financial statements.
Impairment
     We test goodwill and intangible assets for impairment in accordance with ~~FASB~~ Statement of Financial Accounting Standards (“SFAS”) No. ~~5 “Accounting~~142, “Goodwill and Other Intangible Assets” and test property, plant and equipment for ~~Contingencies” after consultation~~impairment in accordance with ~~outside counsel. Our policy has been consistently applied since the commencement of certain litigation discussed in Note 12 to the Consolidated Financial Statements herein.~~
     ~~Management evaluates the recoverability of all long-lived assets accounted for under~~ SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,. We test investments in affiliates for a loss in value, which is other than temporary, in accordance with Accounting Principles Board No. 18, “The Equity Method of Accounting for Investments in Common Stock”. Whenever indicators of impairment exist, these assets are tested. Goodwill and intangible assets with indefinite lives are tested at least annually.
     Our test for impairment requires management to make assumptions regarding the expected net future cash flows of each asset. These assumptions are based on ~~an ongoing basis.~~our internal forecasts. If the sum of expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset exceeds its fair value calculated using the present value of estimated net future cash ~~flows.~~flows or other methodologies.
Goodwill and intangible assets represent a significant portion of our balance sheet. Therefore, impairment could result in a material reduction of our assets, as well as a charge to our Consolidated Statement of Income (Loss).
Pensions
     Certain assumptions are used in the determination of our annual pension costs and the disclosure of the funded position of our pension plans. Key assumptions include the discount rate used to measure the plan’s projected benefit obligation and the expected rate of return on plan assets. We utilize a discount rate of 6.75% and an expected return on plan assets of 8.5%. A quarter of a percentage point decrease in our discount rate would increase our projected benefit obligation by $2 million, and would increase our annual pension expense by $.3 million. An equal but opposite effect would be experienced for a quarter of a percentage point increase in the discount rate. A quarter of a percentage point increase or decrease in the expected rate of return on plan assets would decrease or increase the annual pension costs by $.3 million.
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Discount Rate
     We estimated the discount rate we used to calculate the present value of our obligations under the U.S. merchant lawsuit to be 8%. The discount rate is a matter of management judgment, which considers our credit rating and rates for sources of credit that could be used to finance the payment of such obligations with similar terms.
     A 1% increase in the discount rate would decrease the after-tax amount we recorded as a charge for the period ended March 31, 2003 by approximately $20 million, and increase annual interest expense by approximately $3.6 million, $4.3 million, and $4.2 million in 2003, 2004, and 2005, respectively, and declining amounts thereafter. The reverse impact would be experienced for a 1% decrease in the discount rate.
Recent Accounting Pronouncements
     In ~~February~~November 2002, the EITF ~~finalized~~reached a consensus on Issue No. ~~01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”~~00-21, “Revenue Arrangements with Multiple Deliverables”, (“EITF 00-21”). EITF ~~01-9 is effective~~00-21 addresses how to determine when a revenue arrangement for fiscal years beginning after December 15, 2001 and provides guidance on the income statement classification of consideration from a vendor to a customer in connection with the customer’s purchase of the vendor’s products or to promote sales of the vendor’s products. On January 1, 2002, MasterCard implemented EITF 01-9 which resulted in certain payments to members of MCI and merchants previously classified as advertising and market development expense being reclassified as a reduction of revenue. The amounts of such consideration were $51 million and $113 million for the three and nine month periods ended September 30, 2001, respectively.
32
     In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 supersedes Accounting Principles Board Opinion (“APB”) No. 16, “Business Combinations” and requires that the purchase methodmultiple deliverables should be divided into separate units of accounting and, if separation is appropriate, how the arrangement consideration should be used for all business combinations initiated or completed after June 30, 2001. SFAS 141 specifies criteria for the recognition of certain intangible assets apart from goodwill. The acquisition of EPI was accounted for in accordance with SFAS 141.
     In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 supersedes APB No. 17, “Intangible Assets” and primarily addresses the financial accounting and reporting for acquired goodwill and intangible assets subsequent to their acquisition. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and was adopted by the Company on January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives will no longer be amortized and must be tested for impairment at least annually. SFAS 142 further requires that intangible assets with finite useful lives be amortized over their useful lives and reviewed for impairment. The Statement requires that transitional goodwill (goodwill recorded before the adoption of SFAS No. 142) be tested for impairment within six months of adoption of SFAS 142. Accordingly, MasterCard tested its existing goodwill of $7 million at June 30, 2002 and no impairment was required. The acquired goodwill and intangible assets resulting from the acquisition of EPI was accounted for in accordance with SFAS 142. The Company will evaluate goodwill and other indefinite-lived intangible assets recorded in connection with the EPI acquisition in the fourth quarter of 2002, as part of its annual impairment analysis. The adoption of SFAS 142 did not have a material impact on the Company’s financial position or results of operations. See Note 7allocated to the ~~Consolidated Financial Statements herein.~~
     In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses financialidentified accounting and reporting for the impairment or disposal of long-lived assets and nullifies FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. SFAS 144 also supersedes certain aspects of APB No. 30 , “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as required by APB No. 30). The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company’s financial position or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs associated with exit or disposal activities for entities newly acquired in a business combination are not within the scope of SFAS 146.units. The provisions of ~~SFAS 146~~EITF 00-21 are effective for ~~exit or disposal activities that are initiated~~revenue arrangements entered into in fiscal periods beginning after ~~December 31, 2002, with early application encouraged. The Company adopted SFAS 146 early on July 1, 2002. The adoption~~June 15, 2003. MasterCard is in the process of ~~SFAS 146 did not have a material~~determining the impact, ~~on the Company’s financial position or results~~if any, of ~~operations.~~adopting this accounting pronouncement.
Item 3.~~Quantitative and Qualitative Disclosures About Market Risk~~ Quantitative and Qualitative Disclosures About Market Risk
     Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market indices such as interest rates and foreign currency exchange rates. ~~MasterCard has~~We have limited exposure to market risk from changes in both interest rates and foreign exchange rates. Management establishes and oversees the implementation of board of director approved policies governing our funding, investments, and use of derivative financial instruments and ~~monitors~~we monitor aggregate risk
33
exposures on an ongoing basis. There have been no material changes in our market risk exposures at ~~September 30, 2002~~March 31, 2003 as compared to December 31, ~~2001.~~
2002.
     ~~MasterCard enters~~We enter into ~~foreign exchange~~ forward currency contracts to minimize risk associated with anticipated revenues and expenses and assets and liabilities denominated in foreign currencies. ~~This~~The objective of this activity ~~minimizes the Company’s~~is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against the U.S. ~~dollar. The terms of the contracts are generally less than 18 months.~~dollar and euro.
     At ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001, foreign~~2002, forward currency ~~forward~~ contracts against the U.S. dollar were both ~~committed to be~~ sold (with notional amounts of ~~$134~~$57 million and $3$25 million, respectively) and ~~committed to be~~ purchased (with notional amounts of ~~$44~~$82 million and ~~$11~~$39 million, respectively) ~~to manage anticipated cash flows in major overseas markets for fiscal year 2002.~~.
     ~~Based on~~At March 31, 2003 no forward currency contracts against the ~~September 30,~~euro were sold. At December 31, 2002, forward currency contracts against the euro were sold with notional amounts of $8 million. At March 31, 2003 and December 31, ~~2001 foreign exchange positions,~~2002, forward currency contracts against the ~~effect~~euro were purchased (with notional amounts of ~~a hypothetical 10 percent weakening of the U.S. dollar is estimated to create a loss valued at $9.9~~$214 million ~~at September 30, 2002~~ and ~~a 10 percent strengthening of the U.S. dollar is estimated to create a loss valued at $.738~~$199 million, ~~at December 31, 2001, respectively. The change in market value is due to additional hedging of foreign currency positions and anticipated cash flows.~~respectively).
Item 4.~~Controls and Procedures~~ Controls and Procedures
     ~~The Company’s~~MasterCard Incorporated’s management, including the ~~chief executive officer~~Chief Executive Officer and ~~chief financial officer, evaluated~~Chief Financial Officer, carried out an evaluation of the ~~effectiveness of MasterCard’s~~Company’s disclosure controls and procedures (as defined in Rule 15d-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days of the filing date of this ~~Form 10-Q (the “Evaluation Date”) and, based~~Report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that ~~as of the Evaluation Date, the Company~~MasterCard Incorporated had sufficient procedures for recording, processing, summarizing and reporting information that is required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended. ~~The Company’s~~MasterCard Incorporated’s disclosure controls and procedures were designed by the Company’s management.
     ~~Since the Evaluation Date, there~~There have not been any significant changes to ~~the Company’s~~MasterCard Incorporated’s internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material ~~weaknesses.~~weakness.
3426
[~~LETTERHEAD OF PRICEWATERHOUSECOOPERS]~~PRICEWATERHOUSECOOPERS letterhead]

Report of Independent Accountants
To the Board of Directors and Shareholders
of MasterCard Incorporated:
     We have reviewed the accompanying consolidated balance sheet of MasterCard Incorporated and its subsidiaries as of ~~September 30, 2002~~March 31, 2003, and the related consolidated statements of income ~~and~~(loss), comprehensive income (loss) and cash flows for ~~each of~~ the three-month ~~and nine-month~~ periods ended ~~September 30,~~March 31, 2003 and March 31, 2002, ~~and September 30, 2001~~ and the consolidated statement ~~of cash flows and of~~ changes in stockholders’~~/ members’~~ equity for the ~~nine-month periods~~three-month period ended ~~September 30, 2002 and September 30, 2001.~~March 31, 2003. These financial statements are the responsibility of the Company’s management.
     We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
     As discussed in Note 4 to the financial statements, effective January 1, 2003 the Company changed its method for calculating the market-related value of plan assets used in determining the expected return on the assets component of annual pension cost.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
     We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, ~~2001,~~2002, and the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’/members’ equity for the year then ended (not presented herein), and in our report dated March ~~6, 2002~~5, 2003 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2001,~~2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
New York, NY
~~November~~May 8, ~~2002~~2003
3527
MASTERCARD INCORPORATED
FORM 10-Q
PART II — OTHER INFORMATION

Item 1.      Legal Proceedings
     Refer to Note 1214 to the Consolidated Financial Statements herein.
     On April 30, 2003, MasterCard International signed a Memorandum of Understanding (“MOU”) with plaintiffs in a class action lawsuit brought by U.S. merchants against MasterCard International and Visa, U.S.A. Inc. (“Visa”) in the U.S. District Court for the Eastern District of New York. In this lawsuit, plaintiffs challenged MasterCard’s “Honor All Cards” rule (and a similar Visa rule) and claimed that MasterCard and Visa had unlawfully tied acceptance of debit cards to acceptance of credit cards. Plaintiffs also alleged that MasterCard and Visa had conspired to monopolize what they characterized as the point-of-sale debit card market. For a description of the material claims in the lawsuit, see the caption “Merchant Antitrust Litigation” in Note 14 to the consolidated financial statements contained in MasterCard’s Annual Report on Form 10-K for the year ended December 31, 2002.
     In the MOU, MasterCard and plaintiffs reached an agreement in principle, subject to execution of a final settlement agreement and approval by the Court, to settle all claims against MasterCard and its affiliates and members resulting from this lawsuit. As part of the settlement, MasterCard agreed to take the following actions.
• MasterCard will pay into a settlement fund $100 million per year over the next ten years. These payments are due by December 22 of each year, except for the first year in which $10 million is due within thirty days of execution of the final settlement agreement and the balance is due by December 22, 2003.
• MasterCard will permit merchants to elect not to accept MasterCard-branded, signature-based debit cards issued in the United States, while still accepting MasterCard-branded credit and charge cards. Notwithstanding the foregoing, MasterCard may adopt and enforce an “honor all cards rule” that requires merchants who choose to accept MasterCard-branded debit cards to accept all MasterCard-branded debit cards. In addition, MasterCard may implement an “honor all cards” rule with respect to all MasterCard-branded cards not coming within the definition of debit cards, including credit and charge cards. MasterCard must adopt rules implementing these requirements as of forty-five days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier.
• MasterCard will require issuers of MasterCard-branded debit cards to place the word “Debit” or a similar term on the face of those cards and to allow those cards to be identified through electronic terminals. MasterCard must adopt rules implementing these requirements as of forty-five days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier. The rules must require issuers to make the changes within the normal reissuance cycles for existing cards, provided that MasterCard must cause 80 percent of all outstanding MasterCard-branded debit cards to be compliant with these requirements within 18 months of the earlier of the effective date of the Court order approving the settlement or January 1, 2004, and the remainder to be compliant within 36 months of such time. MasterCard remains free to adopt a new brand or program name for MasterCard-branded debit cards, provided that this is done in a uniform and consistent manner.
• MasterCard will provide acquiring banks, upon request, signage for merchant use at the point of sale and at the entrance to stores communicating the fact that a given merchant accepts MasterCard-branded debit cards. The signage must be provided as of ninety days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier.
• On or before August 1, 2003, MasterCard will set a separate interchange rate for MasterCard-branded debit cards that reduces current interchange rates by at least one-third. MasterCard expects to adopt a new interchange rate by this deadline that will incent both issuance and acceptance of MasterCard-
28
branded debit cards. To compensate merchants for the time it will take MasterCard to implement the new interchange rates, MasterCard will pay $25 million into the settlement account in 2003, in addition to the payment amounts described above.
• MasterCard will not enact rules that prohibit merchants from encouraging or steering MasterCard-branded debit cardholders to use other forms of payment or that prohibit merchants from providing a discount to consumers who pay by any other form of payment. Presently MasterCard does not have such rules in force.
MasterCard denies all claims in the lawsuit and nothing in the MOU constitutes an admission of wrongdoing or liability by MasterCard. There are consumer class actions pending in two state courts related to the merchant antitrust lawsuit that have been stayed pending developments in this matter. In addition, several lawsuits have been commenced by merchants who have opted not to participate in the merchant antitrust lawsuit, including Meijer Stores, Toys “R” Us, Giant Eagle and Home Depot. Neither the consumer class actions nor the “opt out” merchant litigations are covered by the terms of the MOU.

Item 6. Exhibits and Reports on Form 8-K
     (a) Exhibits
     Refer to the Exhibit Index herein.
     (b) Reports on Form 8-K
     On ~~July 12, 2002~~February 3, 2003 the Company filed a Current Report on Form 8-K ~~dated June 28, 2002 relating to~~announcing the ~~closing of~~performance results for the ~~Conversion~~Company’s payment programs for the three and ~~Integration described in Note 4 to~~twelve month periods ended December 31, 2002.
     On May 7, 2003 the ~~Consolidated Financial Statements herein.~~Company filed a Current Report on Form 8-K announcing the performance results for the Company’s payment programs for the three month period ended March 31, 2003.
3629
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 14, 2003 MASTERCARD INCORPORATED

(Registrant)
~~Date: November 14, 2002~~
Date: May 14, 2003 /s/ ROBERT W. SELANDER

Robert W. Selander
President and Chief Executive Officer
(Principal Executive Officer)
~~Date: November 14, 2002~~
Date: May 14, 2003 /s/ DENISE K. FLETCHER

Denise K. Fletcher
Executive Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer)
~~Date: November 14, 2002~~
Date: May 14, 2003 /s/ ~~SPENCER SCHWARTZ~~CHRIS A. MCWILTON

~~Spencer Schwartz~~ Chris A. McWilton
Senior Vice President and Controller
(Principal Accounting Officer)
~~Date: November 14, 2002~~
3730
CERTIFICATIONS
I, Robert W. Selander, certify that:
     1.     I have reviewed this quarterly report on Form 10-Q of MasterCard Incorporated;
     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
     5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
     6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: ~~November~~May 14, ~~2002~~2003
By: /s/ ROBERT W. SELANDER
Robert W. Selander
President and
Chief Executive Officer
3831
I, Denise K. Fletcher, certify that:
     1.     I have reviewed this quarterly report on Form 10-Q of MasterCard Incorporated;
     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
     5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
     6.     The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: ~~November~~May 14, ~~2002~~2003
By: /s/ DENISE K. FLETCHER
Denise K. Fletcher
Executive Vice President, Chief Financial Officer and Treasurer
3932
EXHIBIT INDEX
     The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Item Description
3 .1(a) Amended and Restated Certificate of Incorporation of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 28, 2002 and filed July 12, 2002 (No. 333-67544)).
3 .1(b) Amended and Restated Bylaws of MasterCard Incorporated (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 28, 2002 and filed July 12, 2002 (No. 333-67544)).
3 .2(a) Amended and Restated Certificate of Incorporation of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(a) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).
3 .2(b) Amended and Restated Bylaws of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(b) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).
10 .1 Euro 100,000,000 Multi-Currency Overdraft Facility Agreement, dated as of September 30, 2002, between MasterCard Europe Sprl and HSBC Bank plc.
99 .1 Certification of Robert W. Selander, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 .2 Certification of Denise K. Fletcher, Executive Vice President, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Item Description
3 .1(a) Amended and Restated Certificate of Incorporation of MasterCard Incorporated (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 28, 2002 and filed July 12, 2002 (No. 333-67544)).
3 .1(b) Amended and Restated Bylaws of MasterCard Incorporated (incorporated by reference to Exhibit 3.1(b) to the Company’s Annual Report on Form 10-K filed March 7, 2003 (No. 333-67544)).
3 .2(a) Amended and Restated Certificate of Incorporation of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(a) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).
3 .2(b) Amended and Restated Bylaws of MasterCard International Incorporated (incorporated by reference to Exhibit 3.2(b) to the Company’s Quarterly Report on Form 10-Q filed August 14, 2002 (No. 333-67544)).
10 .1 MasterCard International Incorporated Executive Incentive Plan as amended and restated effective January 1, 2003.
18 .1 Letter re change in accounting principles by PriceWaterhouseCoopers LLP dated May 8, 2003.
99 .1 Certification of Robert W. Selander, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99 .2 Certification of Denise K. Fletcher, Executive Vice President, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
4033


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15 (d)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended ~~September 30, 2002~~March 31, 2003

or

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

		For the transition period from to


Delaware		13-4172551
(State or other jurisdiction of		(IRS Employer
Incorporation or organization)		Identification Number)
2000 Purchase Street		10577
Purchase, NY		(Zip Code)
(Address of principal executive offices)


Class		Outstanding at ~~October 31, 2002~~April 30, 2003

Class A redeemable common stock, par value $.01 per share		84,000,000
Class B convertible common stock, par value $.01 per share		16,000,000


		Page No.

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ~~(Unaudited)~~
	Consolidated Statements of Income (Loss) — Three Months Ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~ ~~Nine Months Ended September 30, 2002 and 2001~~(Unaudited)		3
	Consolidated Balance Sheets — ~~September 30, 2002~~March 31, 2003 (Unaudited) and December 31, ~~2001~~2002 (Audited)		4
	Consolidated Statements of Cash Flows — ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~(Unaudited)		5
	Consolidated ~~Statements~~Statement of Changes in Stockholders’~~/ Members’~~ Equity — ~~Nine~~Three Months Ended ~~September 30, 2002 and 2001~~March 31, 2003 (Unaudited)		6
	Consolidated Condensed Statements of Comprehensive Income (Loss) — Three Months Ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~ ~~Nine Months Ended September 30, 2002 and 2001~~(Unaudited)		6
	Notes to Consolidated Financial Statements		7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			2519
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			3326
ITEM 4. CONTROLS AND PROCEDURES			3426
Report of Independent Accountants			3527

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			3628
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K			3629
SIGNATURES			3730
CERTIFICATIONS			3831



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001


		(In thousands, except net income per share)

		(Unaudited)
Revenue		$	539,435		$	403,425		$	1,382,576		$	1,198,884
Operating Expenses
General and administrative			248,068			194,539			663,129			589,349
Advertising and market development			137,247			116,644			398,907			330,826
Depreciation			11,321			10,414			27,578			27,970
Amortization			16,272			7,811			35,362			22,424

	Total operating expenses		412,908			329,408			1,124,976			970,569

	Operating income		126,527			74,017			257,600			228,315
Other Income and Expense
Investment income (loss), net			(167	)		5,036			13,863			16,568
Interest expense			(3,121	)		(2,570	)		(7,658	)		(7,459	)
Minority interest in (earnings) losses of subsidiaries			(64	)		334			(343	)		1,759
Other expense			(119	)		(3,361	)		(3	)		(2,672	)

	Total other income and (expense)		(3,471	)		(561	)		5,859			8,196

Income before taxes			123,056			73,456			263,459			236,511
Income tax expense			45,126			26,831			95,544			90,743

Net Income		$	77,930		$	46,625		$	167,915		$	145,768

Net income per share (basic and diluted)		$	.78		$	.65		$	2.06		$	2.03



		Three Months Ended
		March 31,

		2003			2002


		(In thousands, except per
		share data)

		(Unaudited)
Revenue		$	512,215		$	392,952
Operating Expenses
General and administrative			276,892			197,174
Advertising and market development			152,294			101,036
Proposed settlement of U.S. merchant lawsuit			721,000			—
Depreciation			12,193			8,094
Amortization			17,596			8,324

	Total operating expenses		1,179,975			314,628

	Operating income (loss)		(667,760	)		78,324
Other Income (Expense)
Investment income			8,512			8,544
Interest expense			(5,344	)		(2,450	)
Minority interest in earnings of subsidiaries			(59	)		(267	)
Other expense, net			(617	)		(60	)

	Total other income (expense)		2,492			5,767

Income (loss) before income taxes			(665,268	)		84,091
Income tax expense (benefit)			(234,928	)		30,495

Income (loss) before cumulative effect of accounting change			(430,340	)		53,596
Cumulative effect of accounting change, net of tax			4,949			—

Net Income (Loss)		$	(425,391	)	$	53,596

Net Income (Loss) per Share (Basic and Diluted):
Income (loss) before cumulative effect of accounting change		$	( 4.30	)	$	.75
Cumulative effect of accounting change, net of tax			.05			—

Net Income (Loss) per Share (Basic and Diluted)		$	(4.25	)	$	.75


		September 30,			December 31,				March 31,			December 31,
		2002			2001				2003			2002

									(Unaudited)			(Audited)
		(In thousands, except share data)
									(In thousands,
		(Unaudited)							except share data)
Assets
ASSETS								ASSETS
Cash and cash equivalents	Cash and cash equivalents	$	269,939		$	176,143		Cash and cash equivalents	$	141,219		$	336,474
Investment securities, at fair value:	Investment securities, at fair value:							Investment securities, at fair value:
	Available-for-sale		484,068			451,090		Available-for-sale		495,970			504,939
	Trading		28,378			43,153		Trading		28,350			30,511
Accounts receivable	Accounts receivable		200,650			180,510		Accounts receivable		202,925			198,855
Settlement due from MCI members			270,466			189,573
Restricted security deposits held for MCI members			58,563			—
Settlement due from members								Settlement due from members		295,311			229,282
Restricted security deposits held for members								Restricted security deposits held for members		52,091			58,088
Prepaid expenses and other current assets	Prepaid expenses and other current assets		92,721			65,994		Prepaid expenses and other current assets		126,978			97,489

	Total Current Assets		1,404,785			1,106,463		Total Current Assets		1,342,844			1,455,638
Property, plant and equipment, at cost (less accumulated depreciation and amortization of $264,769 and $256,253)			215,839			159,742
Property, plant and equipment, at cost (less accumulated depreciation and amortization of $270,229 and $258,116)								Property, plant and equipment, at cost (less accumulated depreciation and amortization of $270,229 and $258,116)		251,089			226,720
Deferred income taxes	Deferred income taxes		53,850			66,535		Deferred income taxes		235,352			41,337
Goodwill	Goodwill		140,169			7,141		Goodwill		157,042			152,941
Other intangible assets (less accumulated amortization of $101,677 and $65,933)			271,851			84,113
Other intangible assets (less accumulated amortization of $133,002 and $117,166)								Other intangible assets (less accumulated amortization of $133,002 and $117,166)		300,628			285,703
Municipal bonds held-to-maturity								Municipal bonds held-to-maturity		160,166			6,563
Other assets	Other assets		93,380			50,811		Other assets		100,890			91,973

Total Assets		$	2,179,874		$	1,474,805
								Total Assets	$	2,548,011		$	2,260,875
Liabilities and Stockholders’/ Members’ Equity
Liabilities
Overdraft		$	—		$	9,531

LIABILITIES AND STOCKHOLDERS’ EQUITY								LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	Accounts payable		104,262			110,907		Accounts payable	$	129,063		$	172,242
Settlement due to MCI members			175,430			143,471
Restricted security deposits held for MCI members			58,563			—
Settlement due to members								Settlement due to members		173,783			175,515
Restricted security deposits held for members								Restricted security deposits held for members		52,091			58,088
Obligations under U.S. merchant lawsuit — current								Obligations under U.S. merchant lawsuit — current		142,000			—
Accrued expenses	Accrued expenses		443,087			353,194		Accrued expenses		383,659			486,436
Other current liabilities	Other current liabilities		42,193			21,368		Other current liabilities		53,752			37,463

	Total Current Liabilities		823,535			638,471		Total Current Liabilities		934,348			929,744
Deferred income taxes								Deferred income taxes		68,078			67,445
Obligations under U.S. merchant lawsuit								Obligations under U.S. merchant lawsuit		579,000			—
Long-term debt								Long-term debt		229,577			80,107
Other liabilities	Other liabilities		218,009			149,608		Other liabilities		133,100			159,529
Long-term debt			80,481			80,065

	Total Liabilities		1,122,025			868,144		Total Liabilities		1,944,103			1,236,825
Minority interest	Minority interest		214			—		Minority interest		4,879			644
Commitments and contingencies (Note 10)
Stockholders’ Equity/ Members’ Equity
Commitments and contingent liabilities (Note 11)								Commitments and contingent liabilities (Note 11)
Stockholders’ Equity								Stockholders’ Equity
Class A redeemable common stock, $.01 par value; authorized 275,000,000 shares, issued 84,000,000 shares	Class A redeemable common stock, $.01 par value; authorized 275,000,000 shares, issued 84,000,000 shares		840			—		Class A redeemable common stock, $.01 par value; authorized 275,000,000 shares, issued 84,000,000 shares		840			840
Class B convertible common stock, $.01 par value; authorized 25,000,000 shares, issued 16,000,000 shares	Class B convertible common stock, $.01 par value; authorized 25,000,000 shares, issued 16,000,000 shares		160			—		Class B convertible common stock, $.01 par value; authorized 25,000,000 shares, issued 16,000,000 shares		160			160
Additional paid-in capital	Additional paid-in capital		967,368			—		Additional paid-in capital		967,368			967,368
Retained earnings			78,015			602,724
Retained earnings (accumulated deficit)								Retained earnings (accumulated deficit)		(398,862	)		26,529
Accumulated other comprehensive income, net of tax:	Accumulated other comprehensive income, net of tax:							Accumulated other comprehensive income, net of tax:
								Cumulative foreign currency translation adjustments		23,073			16,542
	Cumulative translation adjustment		(3,054	)		(678	)	Net unrealized gain on investment securities available-for-sale		12,788			14,465
	Net unrealized gain on investment securities available-for-sale		14,306			4,615		Net unrealized loss on derivatives accounted for as hedges		(6,338	)		(2,498	)

Total accumulated other comprehensive income, net of tax	Total accumulated other comprehensive income, net of tax		11,252			3,937		Total accumulated other comprehensive income, net of tax		29,523			28,509

	Total Stockholders’ Equity		1,057,635			—		Total Stockholders’ Equity		599,029			1,023,406

Total Liabilities and Stockholders’ Equity								Total Liabilities and Stockholders’ Equity	$	2,548,011		$	2,260,875
	Total Members’ Equity		—			606,661

Total Liabilities and Stockholders’/ Members’ Equity		$	2,179,874		$	1,474,805



													Additional
							Accumulated Other		Common Shares				Paid-in Capital
				Retained			Comprehensive
		Total		Earnings			Income, net of tax		Class A		Class B		Class A		Class B


		(In thousands)

		(Unaudited)
Balance at January 1, 2002		$	606,661	$	602,724		$	3,937	$	—	$	—	$	—	$	—
	Net income		167,915		167,915			—		—		—		—		—
	Issuance of common stock		275,744		(692,624	)		—		840		160		812,589		154,779
	Other comprehensive income		7,315		—			7,315		—		—		—		—

Balance at September 30, 2002		$	1,057,635	$	78,015		$	11,252	$	840	$	160	$	812,589	$	154,779

Balance at January 1, 2001		$	462,408	$	460,663		$	1,745	$	—	$	—	$	—	$	—
	Net income		145,768		145,768			—		—		—		—		—
	Other comprehensive income		5,007		—			5,007		—		—		—		—

Balance at September 30, 2001		$	613,183	$	606,431		$	6,752	$	—	$	—	$	—	$	—


								Accumulated
					Retained			Other
					Earnings			Comprehensive		Common Shares				Additional
					(Accumulated			Income,						Paid-in
		Total			Deficit)			Net of Tax		Class A		Class B		Capital


								(In thousands)
								(Unaudited)
Balance at January 1, 2003		$	1,023,406		$	26,529		$	28,509	$	840	$	160	$	967,368
	Net loss		(425,391	)		(425,391	)		—		—		—		—
	Other comprehensive income		1,014			—			1,014		—		—		—

Balance at March 31, 2003		$	599,029		$	(398,862	)	$	29,523	$	840	$	160	$	967,368


		At June 28, 2002

Current assets		$	193,865
Property, plant, and equipment			46,376
Goodwill			134,661
Other intangible assets			187,152
Other assets			6,652

	Total assets acquired		568,706

Current liabilities			196,021
Deferred income taxes			74,197
Other liabilities			20,146

	Total liabilities assumed		290,364

Net assets acquired		$	278,342


			Redundant
			Computer
	Europay’s		Systems/
	Brand/Logo		Technology			Workforce
	Elimination		Elimination			Reduction		Total

Balance as of December 31, 2002 (audited)	$	11,881	$	8,111		$	2,120	$	22,112
Utilization		—		(908	)		—		(908	)
Change in estimate		—		871			95		966
Foreign currency translation		304		28			55		387

Balance as of March 31, 2003 (unaudited)	$	12,185	$	8,102		$	2,270	$	22,557


	March 31, 2003			December 31,2002

	(Unaudited)			(Audited)
Equipment	$	303,482		$	294,541
Building and land		155,610			130,028
Furniture and fixtures		35,389			34,486
Leasehold improvements		26,837			25,781

		521,318			484,836
Less accumulated depreciation and amortization		(270,229	)		(258,116	)

	$	251,089		$	226,720


				Redundant
				Computer
	Europay			Systems/
	Brand/Logo			Technology			Workforce
	Elimination			Elimination			Reduction			Total

Balance as of June 30, 2002	$	11,225		$	7,794		$	2,515		$	21,534
Payments					(1,004	)		—			(1,004	)
Change in estimate		—			(1,031	)		(230	)		(1,261	)
Change in currency translation		(83	)		(4	)		(19	)		(106	)

Balance as of September 30, 2002	$	11,142		$	5,755		$	2,266		$	19,163


	September 30,			December 31,
Municipal Bonds	2002			2001

Amortized cost	$	461,733		$	443,398
Gross unrealized gains		22,344			9,029
Gross unrealized losses		(9	)		(1,337	)

Fair value	$	484,068		$	451,090


	Amortized
	Cost		Fair Value

Due within 1 year	$	6,801	$	6,927
Due after 1 year through 5 years		389,731		408,815
Due after 5 years through 10 years		65,201		68,326

	$	461,733	$	484,068


Note 7.	Property, Plant and Equipment


Note 8.	Goodwill



			March 31, 2003							December 31, 2002


			(Unaudited)							(Audited)
			Gross					Net		Gross					Net
			Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
			Amount		Amortization			Amount		Amount		Amortization			Amount

Amortizable intangible assets:
	Capitalized software		$	237,817	$	(107,435	)	$	130,382	$	211,250	$	(93,184	)	$	118,066
	Franchise rights			20,879		(20,879	)		—		20,879		(20,879	)		—
	Trademarks and tradenames			18,219		(4,097	)		14,122		17,926		(2,557	)		15,369
	Other			728		(591	)		137		728		(546	)		182

		Total		277,643		(133,002	)		144,641		250,783		(117,166	)		133,617
Unamortizable intangible assets:
	Customer relationships			155,987		—			155,987		152,086		—			152,086

Total			$	433,630	$	(133,002	)	$	300,628	$	402,869	$	(117,166	)	$	285,703



			September 30, 2002							December 31, 2001

								Net							Net
			Gross Carrying		Accumulated			Carrying		Gross Carrying		Accumulated			Carrying
			Amount		Amortization			Amount		Amount		Amortization			Amount

Amortized intangible assets
	Capitalized software		$	198,580	$	(79,183	)	$	119,397	$	128,439	$	(44,690	)	$	83,749
	Franchise rights			20,879		(20,879	)		—		20,879		(20,879	)		—
	Trademarks and tradenames			10,715		(1,115	)		9,600		—		—			—
	Other			728		(500	)		228		728		(364	)		364

		Total		230,902		(101,677	)		129,225		150,046		(65,933	)		84,113
Unamortized intangible assets
	Customer relationships			142,626		—			142,626		—		—			—

		Total	$	373,528	$	(101,677	)	$	271,851	$	150,046	$	(65,933	)	$	84,113


Balance as of December 31, 2001.	$	7,141
EPI acquisition goodwill		134,661
Balance as of December 31, 2001 (audited)				$	7,141
MasterCard Europe acquisition, at date of Integration					134,661
Change in estimate of exit costs relating to the Integration, net of tax		(757	)		1,221
Change in estimate of acquisition costs for EPI		166			190
Change in estimated purchase price allocation, net of tax					2,890
Foreign currency translation		(1,042	)		6,838

Balance as of September 30, 2002.	$	140,169
Balance as of December 31, 2002 (audited)					152,941
Change in estimate of exit costs relating to the Integration, net of tax					638
Foreign currency translation					3,463

Balance as of March 31, 2003 (unaudited)				$	157,042



	For the Three Months
	Ended March 31,

	2003		2002

Amortization	$	16,849	$	7,924



	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,

	2002		2001		2002		2001

Reported net income	$	77,930	$	46,625	$	167,915	$	145,768
Goodwill amortization		—		276		—		827

Adjusted net income	$	77,930	$	46,901	$	167,915	$	146,595

Reported net income per share	$	.78	$	.65	$	2.06	$	2.03
Goodwill amortization		—		—		—		.01

Adjusted net income per share	$	.78	$	.65	$	2.06	$	2.04


For the three months ending December 31, 2002	$	16,371
For the year ending December 31, 2003	$	57,871
For the nine months ending December 31, 2003			$	51,391
For the year ending December 31, 2004	$	41,231	$	53,900
For the year ending December 31, 2005	$	13,292	$	29,209
For the year ending December 31, 2006	$	460	$	7,844
For the year ending December 31, 2007			$	2,123
For the year ending December 31, 2008			$	174


					Sponsorship,						Sponsorship,
			Operating		Licensing &				Operating		Licensing &
	Total		Leases		Other		Total		Leases		Other

The remainder of 2002	$	61,688	$	12,965	$	48,723
2003		136,581		35,409		101,172
The remainder of 2003							$	185,034	$	27,360	$	157,674
2004		102,367		24,828		77,539		203,171		25,086		178,085
2005		61,088		21,035		40,053		169,726		20,326		149,400
2006		40,585		18,752		21,833		109,892		16,777		93,115
2007								51,823		15,015		36,808
Thereafter		37,336		37,336		—		43,292		20,551		22,741

Total	$	439,645	$	150,325	$	289,320	$	762,938	$	125,115	$	637,823


Note 12.	Settlement and Travelers Cheque Risk Management



	September 30, 2002					December 31, 2001

			Estimated					Estimated
Forward Contracts	Notional		Fair Value			Notional		Fair Value

Commitments to purchase foreign currency	$	43,739	$	3,857		$	10,622	$	11
Commitments to sell foreign currency		134,247		(2,500	)		2,505		(12	)


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	*~~Nine~~Three Months Ended ~~September 30, 2002~~March 31, 2003 Compared to ~~the Nine~~Three Months Ended ~~September 30, 2001~~March 31, 2002*


	*~~Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001~~*


Item 3.~~Quantitative and Qualitative Disclosures About Market Risk~~	*Quantitative and Qualitative Disclosures About Market Risk*


Item 4.~~Controls and Procedures~~	*Controls and Procedures*


	/s/ PRICEWATERHOUSECOOPERS LLP

	PricewaterhouseCoopers LLP
	New York, NY


	•	MasterCard will pay into a settlement fund $100 million per year over the next ten years. These payments are due by December 22 of each year, except for the first year in which $10 million is due within thirty days of execution of the final settlement agreement and the balance is due by December 22, 2003.

	•	MasterCard will permit merchants to elect not to accept MasterCard-branded, signature-based debit cards issued in the United States, while still accepting MasterCard-branded credit and charge cards. Notwithstanding the foregoing, MasterCard may adopt and enforce an “honor all cards rule” that requires merchants who choose to accept MasterCard-branded debit cards to accept all MasterCard-branded debit cards. In addition, MasterCard may implement an “honor all cards” rule with respect to all MasterCard-branded cards not coming within the definition of debit cards, including credit and charge cards. MasterCard must adopt rules implementing these requirements as of forty-five days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier.

	•	MasterCard will require issuers of MasterCard-branded debit cards to place the word “Debit” or a similar term on the face of those cards and to allow those cards to be identified through electronic terminals. MasterCard must adopt rules implementing these requirements as of forty-five days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier. The rules must require issuers to make the changes within the normal reissuance cycles for existing cards, provided that MasterCard must cause 80 percent of all outstanding MasterCard-branded debit cards to be compliant with these requirements within 18 months of the earlier of the effective date of the Court order approving the settlement or January 1, 2004, and the remainder to be compliant within 36 months of such time. MasterCard remains free to adopt a new brand or program name for MasterCard-branded debit cards, provided that this is done in a uniform and consistent manner.

	•	MasterCard will provide acquiring banks, upon request, signage for merchant use at the point of sale and at the entrance to stores communicating the fact that a given merchant accepts MasterCard-branded debit cards. The signage must be provided as of ninety days after the effective date of the Court order approving the settlement or January 1, 2004, whichever is earlier.

	•	On or before August 1, 2003, MasterCard will set a separate interchange rate for MasterCard-branded debit cards that reduces current interchange rates by at least one-third. MasterCard expects to adopt a new interchange rate by this deadline that will incent both issuance and acceptance of MasterCard-


		branded debit cards. To compensate merchants for the time it will take MasterCard to implement the new interchange rates, MasterCard will pay $25 million into the settlement account in 2003, in addition to the payment amounts described above.

	•	MasterCard will not enact rules that prohibit merchants from encouraging or steering MasterCard-branded debit cardholders to use other forms of payment or that prohibit merchants from providing a discount to consumers who pay by any other form of payment. Presently MasterCard does not have such rules in force.


Date: May 14, 2003		/s/ ROBERT W. SELANDER

		Robert W. Selander
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: May 14, 2003		/s/ DENISE K. FLETCHER

		Denise K. Fletcher
		Executive Vice President, Chief Financial Officer
		and Treasurer (Principal Financial Officer)


Date: May 14, 2003		/s/ ~~SPENCER SCHWARTZ~~CHRIS A. MCWILTON

	~~Spencer Schwartz~~	Chris A. McWilton
		Senior Vice President and Controller
		(Principal Accounting Officer)


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

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

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


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

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