SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

_______________

Or

Commission file number: 000-50250

MasterCard Incorporated

(914) 249-2000
(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

MASTERCARD INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

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MASTERCARD INCORPORATED

MASTERCARD INCORPORATED

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

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MASTERCARD INCORPORATED

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

MASTERCARD INCORPORATED

Note 1. Summary of Significant Accounting Policies

     Organization— MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“MasterCard International”) and MasterCard Europe sprl (“MasterCard Europe”) (together, “MasterCard” or the “Company”), provide transaction processing and related services to customers principally in support of their credit, deposit access (debit), electronic cash and Automated Teller Machine (“ATM”) payment programs, and travelers cheque programs. The common stock of MasterCard Incorporated is privately owned by certain of the Company’s customers. MasterCard enters into transactions with its customers in the normal course of business and operates a system for payment processing among its customers.

     Consolidation and basis of presentation— The Company follows accounting principles generally accepted in the United States of America. Certain prior period amounts have been reclassified to conform to 20042005 classifications. The consolidated financial statements include the accounts of MasterCard and its majority-owned orand controlled entities.entities, including the Company’s variable interest entity. Intercompany transactions are eliminated in consolidation.

     The Company consolidates majority-owned or controlled entities, including variable interest entities. Minority interest is recorded for consolidated entities in which the Company owns less than 100% of the interest. Minority interest represents the equity interest not owned by the Company.

     The consolidated financial statements for the three and nine months ended September 30,March 31, 2005 and 2004 and 2003 and as of September 30, 2004March 31, 2005 are unaudited, and in the opinion of management include allnormal recurring adjustments that are necessary to present fairly the results for interim periods. The balance sheet as of December 31, 2004 was derived from the audited consolidated financial statements as of December 31, 2004. Due to seasonal fluctuations and other factors, the results of operations for the three and nine months ended September 30, 2004March 31, 2005 are not necessarily indicative of the results to be expected for the full year.

     The accompanying unaudited consolidated financial statements are presented in accordance with the requirements of Quarterly Reports on Form 10-Q and, consequently, do not include all of the disclosures required by accounting principles generally accepted in the United States of America. Reference should be made to the Company’s 20032004 Annual Report on Form 10-K for additional disclosures, including a summary of the Company’s significant accounting policies.

Note 2. Supplemental Cash FlowsGoodwill and Other Intangible Assets

     The carrying amount of goodwill as of March 31, 2005 was $207,982 compared to $217,654 as of December 31, 2004. The change in the balance is primarily related to the foreign currency translation of the goodwill relating to the acquisition of MasterCard Europe.

     The following table includes supplemental cash flow disclosures:sets forth net intangible assets, other than goodwill:

     On January 1, 2003, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation Number No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) and consolidated the MasterCard International O’Fallon 1999 Trust (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. The Trust financed the Company’s global technology and operations facility located in O’Fallon, Missouri, named Winghaven, through a combination of a third party equity investment and the issuance of 7.36 percent Series A Senior Secured Notes (the “Secured Notes”) in the amount of $149,380 due September 1, 2009. The redemption value of the minority interest approximates its carrying value. The minority interest will be redeemed by the minority interest holders upon the maturity of the Secured Notes. MasterCard

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share and percent data)

International has guaranteed 85.15 percent of the Secured Notes outstanding, totaling $127,197 at September 30, 2004. Additionally, upon the occurrence of specific events of default, MasterCard International guarantees repayment of the total outstanding principal and interest on the Secured Notes and would own the facility.

Note 3. Net Income (Loss) Per Share

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

Note 4. Acquisition of Europay International (“EPI”)

     On June 28, 2002, MasterCard Incorporated issued 23,760 shares of its common stock to the shareholders of EPI and MasterCard Europay U.K. Limited (“MEPUK”), in return for directly and indirectly acquiring 100% of the shares of EPI not previously owned by MasterCard International. However, of the 23,760 shares issued, only 17,610 were considered to be issued unconditionally. 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 17,610 unconditional shares issued, the purchase price of EPI was $267,856, excluding estimated acquisition costs of $10,486 that were incurred by the Company.

     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 relating to the EPI acquisition 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 23,760 shares attributable to the exchange of EPI and MEPUK shares, 6,150 shares are conditional shares subject to reallocation at the end of the transition period. EPI and MEPUK shareholders therefore received 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 will 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.

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

Note 9. Credit Facility5. Accrued Expenses

     On June 18, 2004, the Company entered into a committed unsecured $1,950,000 revolving credit facility (the “Credit Facility”) with certain financial institutions, which expires on June 17, 2005. Borrowings under the facility are available to provide liquidity in the event of one or more settlement failures by MasterCard International members and, subject to a limit of $300,000, for general corporate purposes. The Credit Facility replaced MasterCard Incorporated’s prior $1,200,000 credit facility which expired on June 18, 2004. Interest on borrowings under the Credit Facility is charged at the London Interbank Offered Rate plus 28 basis points. An additional 10 basis points would be applied if the aggregate borrowings under the Credit Facility were to exceed 33%Accrued expenses consist of the commitments. MasterCard agreed to pay a facility fee which varies based on MasterCard’s credit rating and is currently equal to 7 basis points on the total commitment. MasterCard was in compliance with the Credit Facility covenants as of September 30, 2004. There were no borrowings under the Credit Facility at September 30, 2004. The majority of Credit Facility lenders are members or affiliates of members of MasterCard International.following:

     In July 2004, MasterCard Europe and European Payment System Services sprl, subsidiaries of MasterCard, reduced a multi-purpose uncommitted credit facility with a bank from 35,000 euros to a 1,000 euro overdraft facility for MasterCard Europe and European Payment System Services sprl and a 1,000 euro guarantee facility for MasterCard Europe. Additionally, MasterCard Europe has canceled an uncommitted credit agreement totaling 30,000 euros as of June 30, 2004.

Note 10.6. Commitments and Contingent Liabilities

     The future minimum payments under non-cancelable operating or capital leases for office buildings and equipment, sponsorships, and licensing and other agreements at September 30, 2004March 31, 2005 are as follows:

MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and described further in Note 13 herein, several lawsuits have been commenced by merchants who have opted not to participate in the plaintiff percent data)

class in the U.S. merchant lawsuit. The “opt out”“opt-out” merchant lawsuits are not covered by the terms of the Settlement Agreement. The $721,000 pre-tax charge amount was an estimate, which was subsequently revised based onDuring the approval of the Settlement Agreement by the court, and other factors. If necessary, future refinements will also be made.

     During 2004,three months ended March 31, 2005, total liabilities for the U.S. merchant lawsuit and other legal settlements changed as follows:

     Interest accretion of $12,933 and $14,161 for the three months ended September 30, 2004 and 2003, respectively, and $38,029 and $28,240 for the nine months ended September 30, 2004 and 2003, respectively, are included in interest expense.

Note 12. Income Tax

     The effective tax rate for the three and nine months ended September 30, 2004 was 30.7% and 31.3%, respectively, compared to 33.2% and 35.8% for the three and nine months ended September 30, 2003, respectively. The decrease in the rate in 2004 is primarily attributable to discrete items that occurred in the second and third quarters of 2004. The primary discrete item in the third quarter was an increase in the Company’s deferred state tax assets as a result of a change in the taxation of our state and local income. The primary

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

Visa’s largest 100 debit issuers to rescind any debit issuance agreements they entered into with Visa while the settlement service fee was in effect. The motion is scheduled to be fully briefed on May 16, 2005. At this time it is not possible to determine the ultimate resolution of this matter.

     On October 4, 2004, Discover Financial Services, Inc., filed a complaint against MasterCard, Visa U.S.A., Inc. and Visa International Incorporated. The complaint was filed in the U.S. District Court for the Southern District of New York and was designated as a related case to the DOJ litigation, and preliminarily assigned to the same judge. The complaint alleges that the implementation and enforcement of MasterCard’s CPP and Visa’s bylaw provision as well as MasterCard’s “Honor All Cards” rule (and a similar Visa rule), which require merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card, violated Sections 1 and 2 of the Sherman Act as well as California’s Unfair Competition Act. The complaint also challenged MasterCard’s “no surcharge rule” (and a similar Visa rule) under the same statutes. On December 10, 2004, MasterCard moved to dismiss the complaint in its entirety for failure to state a claim. In lieu of filing its opposition papers to MasterCard’s motion, Discover filed an amended complaint on January 7, 2005. In the amended complaint, Discover dropped some of its claims, including its challenge against the no surcharge rule and its claims under California’s Unfair Competition Act, but continues to allege that the implementation and enforcement of the Company’s CPP, Visa’s bylaw provision and the Honor All Cards rules are in violation of Sections 1 and 2 of the Sherman Act. Discover requests that the District Court apply collateral estoppel with respect to its final judgment in the DOJ litigation and enter an order that the CPP and Visa’s bylaw provision have injured competition and caused injury to Discover. Discover seeks treble damages in an amount to be proved at trial along with attorneys’ fees and costs. MasterCard’s timeOn February 7, 2005, MasterCard moved to dismiss Discover’s amended complaint in whichits entirety for failure to respondstate a claim. On April 14, 2005, the Court denied Discover’s request to give collateral estoppel effect to the complaint is currently running.findings in the DOJ litigation. In addition, the Court denied MasterCard’s motion to dismiss the majority of Discover’s claims. However, the Court reserved ruling with respect to MasterCard’s motion to dismiss those portions of Discover’s claims that are based on MasterCard’s Honor All Cards rule as well those claims under Section 2 of the Sherman Act. At this time it is not possible to determine the ultimate resolution of this matter. At the time of this report, American Express has not initiated a similar private lawsuit against MasterCard although its executives have made public comments that they are currently considering such an action. No provision for losses has been provided in connection with the Discover litigation.

     On November 15, 2004, American Express filed a complaint against MasterCard, Visa and eight member banks, including J.P. Morgan Chase & Co., Bank of America Corp., Capital One Financial Corp., U.S. Bancorp, Household International Inc., Wells Fargo & Co., Providian Financial Corp. and USAA Federal Savings Bank. The complaint, which was filed in the U.S. District Court for the Southern District of New York, was designated as a related case to the DOJ litigation and was assigned to the same judge. The complaint alleges that the implementation and enforcement of MasterCard’s CPP and Visa’s bylaw provision violated Sections 1 and 2 of the Sherman Act. American Express seeks treble damages in an amount to be proved at trial, along with attorneys’ fees and costs. On January 14, 2005, MasterCard filed a motion to dismiss the complaint for failure to state a claim. On April 14, 2005, the District Court denied American Express’ request to give collateral estoppel effect to the findings in the DOJ litigation. In addition, the Court denied MasterCard’s motion to dismiss the majority of American Express’ claims. However, the Court reserved ruling with respect to MasterCard’s motion to dismiss those portions of American Express’ claims that are based on MasterCard’s Honor All Cards rule as well those claims under Section 2 of the Sherman Act. At this time it is not possible to determine the ultimate resolution of this matter. No provision for losses has been provided in connection with the American Express litigation.

Currency Conversion Litigations

     MasterCard International, together with Visa U.S.A., Inc. and Visa International Corp., are defendants in a state court lawsuit 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, titled Schwartz 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 the Schwartz matter commenced on May 20, 2002 and concluded on November 27, 2002. The Schwartz action 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”. MasterCard denies these allegations.allegations.

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

     On April 8, 2003, the trial court judge issued a final 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 law, and ordered that MasterCard mandate that members disclose the currency conversion process to cardholders in cardholder agreements, applications, solicitations

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

Household and Bank of America are valid as to those respective banks and MasterCard and, consequently, cardholders of those banks can no longer participate in the class action certified in his earlier decision and must pursue any claims through arbitration. Plaintiffs have moved for further reconsideration. Judge Pauley declined to give effect to the arbitration clauses in the Citibank and Chase cardholder agreements; both banks have noticed an appeal of that decision. A trial date has been set for October 10, 2005. At this time, it is not possible to determine the ultimate resolution of this matter.

     For the reasons set forth above, except as discussed above,matter and no provision for losses has been provided in connection with these currency conversion litigations.it.

Merchant Chargeback-Related Litigations

     On May 12, 2003, a complaint alleging violations of federal and state antitrust laws, breach of contract, fraud and other theories was filed in the U.S. District Court for the Central District of California (Los Angeles) against MasterCard by a merchant aggregator whose customers include businesses selling adult entertainment content over the Internet. The complaint’s allegations focus on MasterCard’s past and potential future assessments on the plaintiff’s merchant bank (acquirer) for exceeding excessive chargeback

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

U.S. Merchant Opt Out and Consumer Litigations

     Commencing in October 1996, several class action suits were brought by a number of U.S. merchants against MasterCard International and Visa U.S.A., Inc. challenging certain aspects 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 challenged MasterCard’s “Honor All Cards” rule (andand a similar Visa rule), which required merchants who accept MasterCard cards to accept for payment every validly presented MasterCard card.rule. Plaintiffs claimed that MasterCard and Visa unlawfully tied acceptance of debit cards to acceptance of credit cards. In essence, the merchants desired 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 claimed that MasterCard and Visa conspired to monopolize what they characterized as the point-of-sale debit card market, thereby suppressing the growth of regional networks such as ATM payment systems. Plaintiffs alleged that the plaintiff class had been forced to pay unlawfully high prices for debit and credit card transactions as a result of the alleged tying arrangement and monopolization practices. On June 4, 2003, MasterCard International signed the Settlement Agreement to settle the claims brought by the plaintiffs in this matter, which the Court approved on December 19, 2003. A number of class members have appealed the district court’sDistrict Court’s approval of the settlement to the Second Circuit Court of Appeals.settlement. These appeals are largely focused on the court’sCourt’s attorneys’ fees award as well on the court’sCourt’s ruling on the scope of the release. Therelease set forth in the Settlement Agreement. On January 4, 2005, the Second Circuit heard oral argumentsCourt of Appeals issued an order affirming the District Court’s approval of the U.S. merchant Settlement Agreement. The time for which class members may seek certiorari of the Second Circuit’s decision with the Supreme Court expires on these appeals on August 25, 2004 and a decision is currently pending.May 31, 2005. For a further description of the U.S. merchant lawsuit settlement and its impact on MasterCard’s financial results, see Note 11.

     Several lawsuits have been commenced by merchants who have opted not to participate in the plaintiff class in the U.S. merchant lawsuit, including Best Buy Stores, CVS, Giant Eagle, Home Depot, Toys “R” Us and Darden Restaurants. The majority of these cases were filed in the U.S. District Court for the Eastern District of New York and we expect that all of these cases will be tried in that Court for, at minimum, pretrial issues. On March 19, 2004, the opt out merchants amended their complaints to include allegations, among other things: (i) that MasterCard’s (and Visa’s) interchange fees contravene the Sherman Act and (ii) that the opt out merchants

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

to regulatory or legal review and/or challenges in a number of jurisdictions. At this time, it is not possible to determine the ultimate resolution of any of the interchange proceedings described below. Accordingly, no provision for losses has been provided in connection with them.

     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.

     On September 25, 2003, the European Commission issued a Statement of Objections challenging MasterCard Europe’s cross-border MIF. MasterCard Europe filed its response to this Statement of Objections on January 5, 2004. MasterCard Europe is engaged in discussions with the European Commission in order to determine under what conditions, if any, the European Commission would issue a favorable ruling regarding MasterCard Europe’s MIF. If MasterCard is unsuccessful in obtaining a favorable ruling, the European Commission could issue a prohibition decision ordering MasterCard to change the manner in which it calculates its cross-border MIF. MasterCard could appeal such a decision to the European Court of Justice. Because the cross-border MIF constitutes an essential element of MasterCard Europe’s operations, changes to it could significantly impact MasterCard International’s European members and the MasterCard business in Europe. At this time, it is not possibleIn addition, a negative decision by the European Commission could lead to determine the ultimate resolutionfiling of this matter.

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

     United States.In July 2002, a 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, 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. On March 4, 2004, the court dismissed the lawsuit with prejudice in reliance upon the approval of the Settlement Agreement in the U.S. merchant lawsuit by the U.S. District Court for the Eastern District of New York, which held that the settlement and release in that case extinguished the claims brought by the merchant group in the present case. The plaintiffs have appealed the U.S. District Court for the Eastern District of New York’s approval of the U.S. merchant lawsuit settlement and release to the Second Circuit Court of Appeals and have also appealed the U.S. District Court for the Northern District of California’s dismissal of the present lawsuit to the Ninth Circuit Court of Appeals. Oral argument was held inOn January 4, 2005, the Second Circuit Court of Appeals on August 25, 2004,issued an order affirming the District Court’s approval of the U.S. merchant lawsuit settlement agreement, including the District Court’s finding that the settlement and arelease extinguished such claims. Plaintiffs’ time in which to seek certiorari of the Second Circuit’s decision with the U.S. Supreme Court is currently pending. At this time itrunning. The appeal to the Ninth Circuit is not possible to determine the outcome of this proceeding.currently pending.

     On October 8, 2004, a new 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, 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 and the Clayton Act. The complaint appears to contain substantivelycontains similar claimsallegations to those brought in the interchange case described in the preceding paragraph, and plaintiffs have designated it as a related case. The plaintiffs seek damages and an injunction against MasterCard (and Visa) setting interchange and engaging in “joint marketing activities,” which plaintiffs allege include the purported negotiation of merchant discount rates with certain merchants. On November 19, 2004, MasterCard filed an answer to the complaint. On March 29, 2005, the Court granted MasterCard’s time in whichrequest for permission to respond is currently running.file a motion for partial summary judgment, and the Court scheduled oral argument on that motion for July 8, 2005. Plaintiffs filed an amended complaint on April 25, 2005.

     Other Jurisdictions.

     In Spain, the competition tribunal issued a decision in April 2005 denying the interchange fee exemption applications of two of the three domestic credit and debit card processing systems and beginning the process to revoke the exemption it had previously granted to the third such system. In addition, the tribunal expressed views as to the appropriate manner for setting domestic interchange fees which, if implemented, would result in substantial reductions in credit and debit card interchange fees in Spain. This could have a material impact on MasterCard’s business in Spain.

MasterCard is aware that regulatory authorities in certain other jurisdictions, including Poland, Spain, New Zealand, Portugal, Mexico, Colombia, South Africa and Switzerland are reviewing MasterCard’s and/or its members’ interchange fees and/or related practices and may seek to regulate the establishment of such fees and/or such practices. At this time it is not possible to determine the outcome of these proceedings.

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

Note 14.9. Settlement and Travelers Cheque Risk Management

     Settlement risk is the legal exposure due to the difference in timing between the payment transaction date and subsequent final settlement. Settlement risk is estimated using the average daily card charges during the quarter multiplied by the estimated number of days to settle. The Company has global risk management policies and procedures, which include risk standards to provide a framework for managing the Company’s settlement exposure. 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. Member-reported transaction data and the transaction clearing data underlying the settlement risk exposure calculation may be revised in subsequent reporting periods.

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

     MasterCard guarantees the payment of MasterCard-branded travelers cheques in the event of issuer default. The guarantee estimate is based on all outstanding MasterCard-branded travelers cheques, reduced by an actuarial determination of cheques that are not anticipated to be presented for payment. The term and amount of the guarantee are unlimited. MasterCard calculated its MasterCard-branded travelers cheques exposure under this guarantee as $1,185,500$1,078,882 and $1,205,921$1,172,533 at September 30, 2004March 31, 2005 and December 31, 2003,2004, respectively.

     A significant portion of the Company’s credit risk is concentrated in one MasterCard travelers cheque issuer. MasterCard has obtained an unlimited guarantee estimated at $984,934$885,131 and $996,927$969,593 at September 30, 2004March 31, 2005 and December 31, 2003,2004, respectively, from a financial institution 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 $28,833$27,449 and $32,101$28,592 at September 30, 2004March 31, 2005 and December 31, 2003,2004, respectively, from financial institutions that are members in order to cover the exposure of outstanding travelers cheques with respect to another issuer. These guarantee amounts have also been reduced by an actuarial determination of cheques that are not anticipated to be presented for payment.

     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

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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — Continued
(In thousands, except per share and percent data)

is the potential change in 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 September 30, 2004March 31, 2005 and December 31, 2003.2004.

     Generally, the Company does not obtain collateral related to forward contracts because of the high credit ratings of the counter-partiescounterparties that are members. 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.

20Note 11. Acquisition of MasterCard Europe

     On June 28, 2002, MasterCard Incorporated issued 23,760 shares of its common stock to the shareholders of Europay International (“EPI”), now MasterCard Europe, and MasterCard Europay U.K. Limited (“MEPUK”), in return for directly and indirectly acquiring 100% of the shares of EPI not previously owned by MasterCard International. Of the 23,760 shares attributable to the exchange of EPI and MEPUK shares, 6,150 shares are conditional shares subject to reallocation at the end of the three-year transition period as a result of the application of a global proxy formula for the third year of the transition period. In calculating the purchase price of EPI, the Company considered only the unconditional shares issued to the former shareholders of EPI and MEPUK. Since former EPI and MEPUK shareholders would retain or receive additional shares without remitting any additional consideration, any conditional shares retained or received by them would constitute a part of the purchase price. Any conditional shares would be valued based upon the fair value of the stock of MasterCard Incorporated as of June 28, 2005, would increase the purchase price for EPI and, accordingly, the amount of goodwill and additional paid-in capital initially recorded.

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

     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 (“MasterCard International”) and MasterCard Europe sprl (“MasterCard Europe”)(together, “MasterCard” or the “Company”) included elsewhere in this report. References to “we”, “our” and similar terms in the following discussion are references to the Company.

Forward-Looking Statements

     This 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, the words “believe,” “expect,” “could,” “may,” “would”, “will” and similar words are intended to identify forward-looking statements. These statements relate to our future prospects, developments and business strategies. Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by MasterCard or on its behalf. We believe there are certain risk factors that are important to our business, and these could cause actual results to differ from our expectations. Please seeReference should be made to the Company’s 2004 Annual Report on Form 10-K for a complete discussion of these risk factors under the caption “Risk Factors” in Item 1 — Business of the Annual Report on Form 10-K of MasterCard for the year ended December 31, 2003.Business.

Overview

     We achieved double-digit revenue growth of 12%11% in the first three months of 2005 from the comparable period in 2004, of which 1% was due to the impact of favorable foreign currency fluctuation against the euro. The increase in revenue was due to higher gross dollar volume (“GDV”) and more transactions being processed by MasterCard, primarily from the expansion of our customer relationships and higher cross-border travel. Rebates and incentives were 19% and 15% of our gross revenues in the three months ended September 30,March 31, 2005 and 2004, respectively, and 15%accordingly, are moderating our revenue growth. In addition, in the ninefirst three months ended September 30, 2004 from the comparable periods in 2003. Of these increases, 2% in each period was due to the weakening of the U.S. dollar against the euro in 2004 versus the comparable period in 2003, which created a favorable foreign currency translation. Increased usage of MasterCard products spurred by economic recovery in many of the countries in which2005, we do business resulted in higher gross dollar volume and more transactions processed by MasterCard. In addition, the conflict in Iraq, threat of terrorism, and SARS negatively impacted cross-border travel in the beginning of 2003. As international travel returned to more normal levels in 2004, our cross-border transactions and related revenue have increased significantly.

     Our cost control initiatives have taken effect. Excluding the impact of the U.S. merchant lawsuit and other legal settlements,reduced our operating expenses as a percentage of totalnet revenues declined to 76% from 79%77% compared to 80% for the same period in 2004. As a result, our net income increased 26% in the first three months ended September 30, 2004, and to 80% from 86% for the nine months ended September 30, 2004, in each case fromof 2005 versus the comparable period in 2003. Excluding2004.

     We believe revenue growth was positively impacted by the impactworldwide trend in which payments are migrating from paper-based forms to electronic forms such as payment cards. This trend has helped drive our volume and revenue growth for a number of the U.S. merchant lawsuit and other legal settlements,years. However, our operating expenses increased 8%net revenue growth in 2005 will be moderated by pricing arrangements with certain large customers. These pricing arrangements reflect enhanced competition in the three months ended September 30, 2004 and 6% for the nine months ended September 30, 2004, in each case from the comparable period in 2003. In each of the periods 1% of the increase was due to the weakening of the U.S. dollar against the euro, creating an unfavorable currency translation.

     As theglobal payments industry and the continued consolidation and globalization of our key customers and merchants.

     Our financial position continues to evolve, we face increased competition, consolidationreflect strong liquidity. We have $1.1 billion in cash, cash equivalents and globalization.available-for-sale securities and $1 billion in stockholders’ equity as of March 31, 2005. We are,have begun to implement strategic initiatives by hiring additional resources and will continuedeveloping sales personnel to be, significantly dependent on our relationships with our issuers and acquirers and their further relationships with cardholders and merchants to support our programs and services. Most ofimprove our relationships with our customers are not exclusive and may be terminated at the convenience ofmerchants that accept our cards. We will seek to leverage our expertise in payment programs, consulting services, brand marketing, technology and processing to expand the value-added services we provide our customers. The consolidation or merger of one or more ofWe expect our customers with financial institutions aligned with our competitors could have a material adverse impact on our revenues.

     In recent years, our corporate strategy has been to focus on our key customers toefforts will drive our business growth; to strengthen our brands, technology and acceptance network; and to differentiate MasterCard from our competition by developing innovative payment solutions and customized consulting services. In 2004, we remain committed to this strategic direction and have begun to implement initiatives to expand our customer-focused approach to a broader group of customers, as well as to further develop relationships with merchants that accept our cards. In addition, we will continueintend to focus resources on proactively addressingaddress the legal, regulatory and regulatoryother industry risks that impact our business, as described more fully below.business. We believe our resources are sufficient to fund our initiatives in 2005 and beyond.