2003 ANNUAL REPORT

UNCOMMON CONSISTENCYPOWERFUL RESULTS

Alliance Data Systems is a leadingprovider of transaction services, credit services and marketing services.

The company assists retail, petroleum,utility and financial services clients inmanaging the critical interactionsbetween them and their customers.Alliance Data manages approximately95 million consumer relationships forsome of North America’s most recog-nizable companies and operates andmarkets the largest coalition loyaltyprogram in Canada. Alliance DataSystems employs approximately 7,500associates at more than 20 locationsin the United States and Canada.

UNCOMMON CONSISTENCY POWERFUL RESULTS

A public company achieves and maintains success only by reliably delivering on its promises to its clients, stockholders and employees. Supported by a strong business model, a solid growth strategy and highly effective services, Alliance Data Systems’ integrity and commitment drive us to generate powerful results with uncommon consistency for all of our stakeholders.

ALLIANCE DATA SYSTEMS

INSIDELetter to Stakeholders 2Uncommon Consistency Powerful Results of our Business Model 4 of our Services 6 for our Clients 8 for/by our Associates 12 for our Communities 14

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TO OUR FELLOW STAKEHOLDERS

UNCOMMON CONSISTENCY

Building a successful company requires keenfocus on long-term goals and a solid, effectivebusiness model to drive the achievement ofthose goals. It means staying the course –maintaining solid footing – while simultane-ously pushing ahead to new heights. During2003, Alliance Data Systems continued todemonstrate uncommon consistency in adher-ing to its strategy, business model and trackrecord of strong growth. This has enabled us toincreasingly strengthen our relationships withclients, associates, stockholders and thecommunities in which we live and work.Throughout our organization, the results havebeen powerful.

Consistently Building Our Business

We continue to benefit from the trend amongretailers to outsource their private label creditcard programs. Alliance Data helps retailersincrease the success of their private label cardprograms and build stronger relationships withtheir customers. We do this through a uniquecombination of outstanding customer serviceand industry expertise rooted in a rich retailheritage. We continued to achieve stellarresults in this area in 2003 and added a numberof important new retail clients, including EddieBauer, Spiegel, Newport News, Stage Stores,Fortunoff, Shop At Home Network, Footstarand American Home Furnishings. We alsoreceived long-term contract extensions fromestablished strategic clients like Limited Tooand Brylane.

The growth of our marketing services segment is primarily attributable to the company’s AIRMILES® Reward Program, the largest coalitionloyalty program in Canada. During 2003, JeanCoutu, a large pharmacy chain in Quebec, andWestJet, the second-largest domestic airlinecarrier in Canada, both became AIR MILESsponsors. Very early in 2004 this momentumcontinued as we saw several significantrenewals: Air Canada, BMO Bank of Montrealand Shell Canada. In 2003, we also launched anonline shopping mall (www.yourshops.ca)where collectors can earn AIR MILES reward

miles for shopping on line at a variety ofdifferent retailers. The launch of a GoldProgram for collectors, the expansion of ourreward portfolio and continuous improvementto our Web site have kept the AIR MILESReward Program fresh for collectors, renewingtheir excitement and deepening their involve-ment in the program. Even with the incrediblepenetration of this program (69 percent ofCanadian households), it continues to deliverstrong double-digit growth.

Alliance Data’s strategy of building marketshare and brand recognition in the emergingservices market for regulated and de-regulatedutilities companies has fueled significant pro-gress in our transaction services segment. In 2003, we extended our market reach in theutility industry, achieving greater scale andadding important new clients. Agreements withAmerican Electric Power, and Centrica-ownedCPL Retail Energy and WTU Retail Energy,increased our market penetration in Texas. A long-term agreement with the Orlando Utili-ties Commission, one of the largest municipal utilities in the country, marked our entry intothe municipal utility space. The acquisition of Orcom Solutions, Inc. late in the yearexpanded our presence in this market whileproviding us with clients and expertise in thewater utility sector. In addition, Alliance Dataacquired Conservation Billing Services, Inc., a Florida-based service provider that gives usthe opportunity to provide sub-metering serv-ices for multiple-tenant locations, such asshopping malls and multi-family properties.

Powerful Results For Our Stockholders

Our success in delivering powerful results forour clients consistently yields powerful resultsfor our stockholders as well. The nature of ourbusiness model allows Alliance Data to bemore than just a vendor. Our value-addedservices are an integrated part of our clients’businesses, motivating them to form long-termrelationships with us. This gives Alliance Dataexcellent revenue and earnings visibility.

In 2003, all three of our growth engines –private label credit card programs, utilitiesservices, and the AIR MILES Reward Program –once again experienced double-digit growth.Alliance Data achieved record results across all of its key financial metrics and crossed the$1 billion revenue mark for the first time in thecompany’s history.

Revenue for 2003 increased 21 percent to $1.05billion from $866.6 million in 2002. Earningsbefore interest, taxes, depreciation and amorti-zation (EBITDA) was $213.9 million for 2003, up47 percent from $145.2 million in 2002. OperatingEBITDA was $235.3 million for 2003 – up 43percent from $164.8 million in 2002. Cash earn-ings per share grew by 75 percent to $1.03 pershare for 2003 from $0.59 per share for 2002.

Alliance Data completed an aggregate offeringof $600 million of asset-backed notes in Juneand August of 2003. Issued as part of thecompany’s securitization program for itsprivate label credit card banking subsidiary,this transaction benefits Alliance with histori-cally favorable interest rates, lower operatingcosts, enhanced cash flow and increased visi-bility. The company also successfully com-pleted two secondary public offerings of itscommon stock during 2003, increasing theliquidity of the stock and making it more acces-sible to large investment funds.

Building A Powerful Company

Alliance Data has a proven business model andstrategy. But the company’s success lies in thecommitment of its associates. Every day, ourassociates demonstrate their commitment tothe success of our clients and the growth ofour company. Part of their commitment isrooted in a consistently respectful andrewarding work environment, which has as itsfoundation a set of values adhered to by asso-ciates at all levels. Commitment is also fosteredby the investment Alliance Data makes intraining and development – our 360 degreefeedback program, in-house LeadershipAcademy and a wide variety of training tools

help associates succeed both as team membersand as individuals.

Focused on being an “Employer of Choice,” wevalue our associates’ opinions and conduct anannual associate survey to learn how we canbest address the issues that affect their worklives. Confirming that we are on the right track,the Dallas Business Journal selected AllianceData as one of the best places to work in Dallasfor 2003 and 2004.

Alliance Data and its associates also recognizethat we are members of the greater communityin which we all live and work. As with ourclients, we are able to generate powerful resultsin our communities as well. By supportingcommunity groups through our Neighbor ofChoice program, we focus our corporate citi-zenship in a strategic manner that contributesto the educational, health and civic bettermentneeds of our communities.

Setting the Stage for Continued Powerful Results

We believe our achievements in 2003 representonly the most recent building blocks of ourlong-term growth strategy. Our innovative,effective suite of services is attractive to thegrowing number of competitively focusedcompanies leading the outsourcing trend. Byconsistently delivering programs and servicesthat enhance our clients’ businesses, webelieve that Alliance Data will continue toincrease the number and expand the depth ofits client relationships.

Thank you to our clients, stockholders andassociates for helping Alliance Data reach newheights this past year.

POWERFUL RESULTS

Sincerely,

J. Michael ParksChairman and CEO

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Alliance Data’s business model is straight-forward: We use transaction, credit and marketing services toprogressively strengthen the relationship between ourclients and their customers. The way we implementthis model is what sets us apart. Our strategy offorming deeply integrated, high-quality client relation-ships is unique in an industry known for focusing ontransaction volume. This approach makes Alliance Dataa valuable extension of its clients’ organizations, whichprompts most of our clients to sign long-term agree-ments for our services. In addition to obvious opera-tional advantages, these deep client relationships alsogive us outstanding financial visibility, which is evidentin our consistent track record of meeting our stronggrowth goals. In fact, Alliance Data has met orexceeded its financial targets every quarter sincebecoming a publicly traded company in 2001.

UNCOMMON CONSISTENCY

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Uncommon consistency in our approach yields somevery powerful results. During 2003, Alliance Datareached a number of historically important bench-marks. The continued double-digit growth of each ofour segments enabled us to earn record revenues.Our strong financial performance underscores thesuccess of our business model and the value andeffectiveness of our service offerings. To continueproviding the highest quality service to our growingand deepening client roster, the company increasedits associate ranks during 2003, crossing over the7,000 mark for the first time. We’ve also beengratified by the market’s recognition of our achieve-ments. By the end of 2003, Alliance Data’s marketcapitalization reached more than $2.3 billion.

POWERFUL RESULTS – OF OUR BUSINESS MODEL

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Whether it’s providing transaction services,credit services, marketing services or an inte-grated program from our suite of offerings,Alliance Data focuses on helping its clientsreach their full sales potential while cuttingtheir operating costs. While each of theseservice sectors alone delivers exceptionalresults for our clients, together their power ismultiplied. In fact, a growing number of ourclients expand their relationships with us toinclude integrated, custom-designed programsthat cut across multiple sales channels.

Managing approximately 95 million consumerrelationships for companies in a variety ofindustries, Alliance Data provides its clients’customers with the type of innovative pro-grams and friendly, efficient customer care thatinspires them to buy from our clients morefrequently and display greater loyalty to theirbusinesses. Our track record of providingclients with a competitive advantage leadsmany industry-leading companies to considerAlliance Data a valuable strategic partner, animportant extension of their organization and akey factor in their long-term success.

UNCOMMON CONSISTENCY

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TRANSACTION SERVICES

Alliance Data is a leader in providing value-added transaction services. We believe that eachinteraction with a customer is a powerful opportunity for our clients to increase customer loyaltyand sales. So all of our transaction services – account and cardholder processing, billing andpayment processing, customer care, point-of-sale services and more – are managed with speed,courtesy and accuracy to provide retail, utility and petroleum customers with a wholly positiveexperience. Though we process approximately two billion transactions and over 167 million state-ments per year, Alliance Data focuses more on the quality than on the volume of the transactionswe process.

CREDIT SERVICES

Alliance Data is able to finance and operate private label credit card programs more effectively thana typical retailer can operate a stand-alone program. This helps retailers and other consumer-based companies stay competitive without distracting them from core business concerns. We areable to fund receivables through our securitization program to achieve lower costs, and we havethe infrastructure to support and leverage a variety of portfolio types and a large number ofaccount holders. Our financial strength forms the basis for programs that help our clients enhancebrand awareness, increase incremental sales, lower borrowing costs, improve customer service andincrease customer loyalty.

MARKETING SERVICES

Alliance Data’s marketing programs help businesses target and acquire new customers and boostcustomer loyalty. At the heart of our marketing services offering is our AIR MILES Reward Program.The AIR MILES Reward Program is Canada’s premier coalition loyalty program. More than 69percent of Canadian households actively collect AIR MILES reward miles at more than 100 leadingbrand-name sponsors representing over 14,000 retail and service locations across Canada. AIRMILES reward miles can be redeemed for more than 500 different rewards, such as movie passes,family attractions, CDs and DVDs, electronic merchandise, sports and recreation, travel and more.This proven program drives traffic, sales and loyalty to our clients, the program sponsors.

POWERFUL RESULTS – OF OUR SERVICES

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Our ability to generate powerful results forour clients is underscored by the strength of our transaction, credit and marketing serv-ices and the dedication of the Alliance Dataassociates who deliver them.

Whether dealing directly or indirectly withour clients’ customers, Alliance Data seizesevery opportunity to strengthen their rela-tionship, increase loyalty and boost sales.

“In only a short time, Alliance Data has become astrategic partner in our business, and they’ve been agreat team to work with – straightforward, responsive,supportive and action-oriented. Our customers getconsistency dealing with Alliance Data because thecompany reflects Eddie Bauer’s core values includingproviding the highest level of service.”

Lisa Benzaoui – Director of Customer Relationship Marketing, Eddie Bauer

“Alliance Data has demonstrated significant flexibilityin adapting to Ann Taylor’s clientele and respondingto their needs. With the private label credit cardprogram, our clients can get quick credit while theyare still in the store. In addition, Alliance Data’s billingcapabilities allow us to send individualized messagesto our clients on their statement.”

James Smith, Chief Financial Officer, Ann Taylor

POWERFUL RESULTS – FOR OUR CLIENTS

UNCOMMON CONSISTENCY

The relationship between Alliance Data and premium retailer Eddie Bauer, a merchant division of The Spiegel Group, is an ongoing success story of two companies working together to achieve powerful results quickly. In May2003, Eddie Bauer began the process of replacing its private label credit cardprogram with a new one managed by Alliance Data and designed to supportall three Eddie Bauer sales channels – retail, catalog and e-commerce.Bringing the new credit card program up to speed in record time, Alliance Dataand Eddie Bauer teamed to use strategic customer acquisition tools and opena significant number of new accounts, with purchase activity on those accountsexceeding the retailer’s expectations and historical industry benchmarks. In addition, Alliance Data used its Quick Credit product to launch an in-storecustomer acquisition program for the private label card that has generatedimpressive new account volume – nearly double the norm for such a program.Alliance Data’s direct mail efforts, aimed at the acquisition of new cardholdersfrom among catalog customers, have also exceeded expectations.

Alliance Data provides Ann Taylor – one of the country’s leading women’sspecialty retailers – with private label credit card services, billing services,marketing services and customer care. Ann Taylor chose Alliance Data for its knowledge of the specialty store retail environment, track record of customer service, expertise in the acquisition and management of creditaccounts and the economic value of its services. Since the relationship beganin 2002, Alliance Data has generated powerful results for Ann Taylor. The volume of new account applications rose 85 percent in 2003, and creditsales as a percentage of Ann Taylor’s total sales increased nearly 27 percent.Indeed, the program has been so successful that it was featured in STORESmagazine as a model for outsourced private label programs.

A POWERFUL DRAW FOR POWERFUL CLIENTS

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Alliance Data demonstrates uncommon consis-tency in its efforts to enhance the satisfactionand increase the loyalty of its clients’ customers.From the beginning of the relationship with eachof our clients, we make an effort to thoroughlyunderstand their businesses, their current needsand future goals. And, acting in a manner that

best serves those objectives, we deliver ourservices with expertise, efficiency, profession-alism and integrity. This effort helps to ensurelong and successful relationships with ourclients – relationships that over time oftenexpand to include multiple services.

“Working closely with Alliance Data toward commongoals, OUC looks forward to providing its customerswith better customer service and a more positiveoverall experience of interacting with our company. At the same time, we’ll be working with Alliance Data to improve OUC business processes and minimize thecosts associated with running our billing operations.”

Tom Washburn – Chief Information Officer, Orlando Utilities Commission

“Our company is very happy with the AIR MILES RewardProgram. Our initial results from the program areclearly positive and the enthusiasm of the AIR MILESreward miles collectors – especially in response to ourin-store promotions – makes them more involved andmotivates them to make greater purchases. Our franchisees in New Brunswick are looking forward tooffering the program as we expand there from Quebec,and we look forward to continued benefits for ourcustomers and our company.”

Alain Lafortune – Vice President: Purchasing, Merchandising, Advertising, The Jean Coutu Group

POWERFUL RESULTS – FOR OUR CLIENTS

UNCOMMON CONSISTENCY

With nearly 50 utility clients, Alliance Data Systems is the largest NorthAmerican provider of outsourced billing and customer care services to theutility industry. In late 2003, the company expanded its penetration of thismarket by entering the publicly owned municipal utility space via a long-term agreement with the Orlando Utilities Commission (OUC). As one of the largest municipal utilities in the United States, OUC chose AllianceData to provide a customer information system solution and handle relatedbilling processes. OUC selected Alliance Data because of its outsourcingexperience, operational scale and customer service expertise. By turning toAlliance Data, OUC can better focus on its core business concerns – providingmore than 200,000 Florida residents with high-quality drinking water and electricity – while improving its overall processes and service capabilities.

During the second quarter of 2003, The Jean Coutu Group, Quebec’sleading pharmacy retailer, signed a multi-year agreement to become asponsor in Alliance Data’s Canadian AIR MILES Reward Program for a number of fundamental reasons:

The highly credible and recognized AIR MILES brand and currency

An established collector base

The coalition of brand-name sponsors in the Jean Coutu marketplaceand the renewal rate of those sponsors.

Results of Jean Coutu’s participation in the program were immediate. Withinthe first six months, more than one million collectors accumulated AIR MILESreward miles at Jean Coutu stores – with a significant impact on averagepurchase size.

Committed to providing its customers with value-added benefits thatstrengthen customer loyalty while contributing to the chain’s long-termgrowth opportunities, Jean Coutu has only just begun to tap into the powerof Alliance Data’s AIR MILES Reward Program. Building on favorable initialresults and enthusiasm among its franchisees, Jean Coutu will be expandingits participation in the program to include New Brunswick in 2004.

A POWERFUL DRAW FOR POWERFUL CLIENTS

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Alliance Data views its 7,500 associates aspeople with goals and ambitions, whoseprofessional contributions of hard work, inno-vative ideas and dedication deserve to bevalued and recognized. Every day, our asso-ciates demonstrate uncommon consistency byproviding our clients and their customers withthe highest level of service. Every day, theyprove that they are committed to the successof our company.

Alliance Data is committed to its associates as well. We listen to them, foster their profes-sional and personal growth, recognize theirindividual and group achievements andembrace them as valued members of our team.A variety of internal programs underscores ourdedication to associates and contributes to anuncommonly consistent corporate culture thatmakes Alliance Data a great place to work,maximizes the effectiveness of our relation-ships with clients and their customers, andsignificantly differentiates our culture fromother companies in the industry.

UNCOMMON CONSISTENCY

The Alliance Data values are the cornerstone of our companyand a constant reminder of the benefits of cooperation andteamwork, trust and respect, knowledge and ideas, participationand passion.

OUR VALUES

Work Together

Build Trusting Relationships

Communicate Openly

Innovate and Create

Teach and Learn

Participate in Our Communities and Industries

Have Fun!

THE LEADERSHIP ACADEMY

Alliance Data’s in-house Leadership Academy fosters individuallearning and growth, and enhances organizational performanceand innovation. In addition, the Academy instills consistency interms of leadership and business approach to ensure that all ofour managers and supervisors perform effectively and in accor-dance with our company culture. In 2003, thousands of associatesparticipated in the Alliance Data Leadership Academy and otherinternal training programs, further strengthening our strategicadvantage, the depth of our corporate culture and the leadershipabilities of our people.

POWERFUL RESULTS – FOR OUR ASSOCIATES

AssociateSatisfaction

Client Retention and Loyalty

Value Creationand Delivery

Profitabilityand Growth

ASSOCIATE SATISFACTION

As part of our ongoing effort to make Alliance Data among the bestplaces to work, we conduct an annual associate survey. Since beginningthe survey in 2000, we have gained great insight into what we aredoing right and made consistent efforts to respond with positive actionto areas requiring change. As a result, associate satisfaction has showncontinuous improvement over the past three years (up over 20percent), an increase that we believe will continue as we work to makea great place to work even better.

ALLIANCE BALANCED SCORECARD

The Balanced Scorecard serves as a framework for achieving balance ineverything we do. The four elements of the scorecard, over time, mustremain in balance with each other. In many ways, it is like anecosystem – with each element fueling the others.

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“Our relationship with Alliance Data is a model company-school partnership.The people are just stellar, and we benefitgreatly from their generosity and involve-ment. Their donation of time, money andschool supplies benefits every child in the school. Because of Alliance Data’ssupport, we’ve been able to provide ourchildren with many more opportunitiesand learning experiences than they wouldotherwise be able to have.”

Dr. Deborah Copeland – Principal, Olde Orchard Elementary School

Since its inception, Alliance Data has been consis-tent in its efforts to give back to the communitiesin which it operates. At all of its locations, thecompany has an active “Neighbor of Choice”program through which Alliance Data and itsassociates channel monetary, volunteer and otherefforts in a manner that demonstrates our civic

responsibility. We believe so strongly in thisresponsibility that community involvement is oneof the company’s seven core values. In 2003,almost every one of our associates engaged inone or more of Alliance Data’s community efforts.

UNCOMMON CONSISTENCY

POWERFUL RESULTS – FOR OUR COMMUNITIES

For the past eight years, associates from Alliance Data Systems havebeen mentoring disadvantaged children at Olde Orchard ElementarySchool in Columbus, Ohio. Matched by personality, background, inter-ests and hobbies, these Alliance Data mentors and their mentees oftenform deep bonds that strengthen – and in some cases define – thechild’s support system. As a testament to the success of the program,the demand for mentors exceeds the availability, despite the fact thatthe number of Alliance Data volunteer mentors has doubled since theprogram began.

Over the years, the company has expanded its support of the school bysponsoring additional educational programs, workshops and holidaygift-giving events. During “Job Shadow Day,” for instance, the childrengo to an Alliance Data office with their mentors, where they can seefirst-hand the relevance of education while beginning to explore careeroptions. The relationship between Alliance Data and Olde OrchardElementary School is a great example of how caring and involvementcan generate some of the most powerful results of all.

OLDE ORCHARD SCHOOL

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Executive Officers

Pictured above, left to right:

J. Michael Parks – Chairman and Chief Executive OfficerMichael A. Beltz – Executive Vice President and President, Utility ServicesEdward J. Heffernan – Executive Vice President and Chief Financial OfficerJohn W. Scullion – Executive Vice President and President, The Loyalty GroupIvan M. Szeftel – Executive Vice President and President, Retail Credit ServicesDwayne H. Tucker – Executive Vice President and President, Transaction ServicesAlan M. Utay – Executive Vice President, Chief Administrative Officer and General Counsel

Board of Directors

J. Michael Parks – Chairman Of The Board, Alliance Data Systems CorporationBruce K. Anderson – Partner, Co-Founder, Welsh, Carson, Anderson & StoweRoger H. Ballou – Chief Executive Officer, CDI CorporationAnthony J. de Nicola – Partner, Welsh, Carson, Anderson & StoweDaniel P. Finkelman – Senior Vice President, Limited Brands, Inc.Kenneth R. Jensen – Senior Executive Vice President, Fiserv, Inc.Robert A. Minicucci – Partner, Welsh, Carson, Anderson & StoweBruce A. Soll – Senior Vice President, Limited Brands, Inc.

CORPORATE INFORMATION

POWERFUL RESULTS

Corporate HeadquartersAlliance Data Systems Corporation17655 Waterview Parkway, Dallas, Texas 75252 (972) 348-5100

Common StockThe Company’s Common Stock is listed on the NYSE under the Ticker Symbol “ADS”.

Form 10-KVisit us online at www.AllianceDataSystems.com for more information about Alliance Data. The Company’s Form 10-K for 2003 as filed with The Securities and Exchange Commission is available at Alliance Data’s web site.

Electronic AccessStockholders of record may register at the following web site for electronic access to future Annual Reportsand Proxy materials, rather than receiving mailed copies: http://www.econsent.com/ads. Your registration isrevocable until each year’s record date for the Annual Meeting. Beneficial stockholders may be able torequest electronic access by contacting their broker or bank.

Investor RelationsFinancial Dynamics – Wall Street Plaza, 88 Pine Street, New York, New York 10005 (212) 850-5600

Legal CounselAkin Gump Strauss Hauer & Feld LLP – 1700 Pacific Avenue, Suite 4100, Dallas, Texas 75201 (214) 969-2800

Independent AuditorsDeloitte & Touche LLP – 2200 Ross Avenue, Suite 1600, Dallas, Texas 75201 (214) 840-7000

Transfer Agent And RegistrarEquiserve Trust Company N.A. – 150 Royalle Street, Canton, Massachusetts 02021 (781) 575-3400

Statements contained in these documents that are not historical facts may be forward-looking statements within the meaning of the PrivateLitigation Reform Act. Such statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relateto Alliance Data Systems or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using informa-tion currently available to us. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these forward-looking statements aresubject to risks, uncertainties and assumptions including the risks discussed in our filings with the Securities and Exchange Commission. If one or more of these risks materi-alize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements contained in thesedocuments reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results ofoperations, growth strategy and liquidity. We have no intention, and disclaim any obligation, to update or revise any forward-looking statements, whether as a result of newinformation, future results or otherwise.

Safe Harbor Statement

Alliance Data Systems Corporation17655 Waterview Parkway, Dallas, Texas 75252 (972) 348-5100

www.AllianceDataSystems.com