AMERICAN EXPRESS CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2003

or

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

For the Transition Period from ________ to ________

Commission file number 1-7657

AMERICAN EXPRESS COMPANY
(Exact name of registrant as specified in its charter)

New York 13-4922250
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

World Financial Center, 200 Vesey Street, New York, NY 10285
- -------------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 640-2000
---------------------

None
- -----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.

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

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

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

Class Outstanding at October 31, 2003
- ------------------------------------------ ---------------------------------
Common Shares (par value $.20 per share) 1,286,284,267 shares

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)

See Notes to Consolidated Financial Statements.

1

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(millions, except per share amounts)
(Unaudited)

Nine Months Ended
September 30,
------------------------------
2003 2002
-------------- -------------

Revenues:
Discount revenue $ 6,349 $ 5,809
Interest and dividends, net 2,277 2,175
Management and distribution fees 1,692 1,757
Cardmember lending net finance charge revenue 1,400 1,240
Net card fees 1,368 1,291
Travel commissions and fees 1,062 1,039
Other commissions and fees 1,490 1,423
Insurance and annuity revenues 1,000 901
Securitization income, net 968 883
Other 1,192 1,093
-------------- -------------
Total 18,798 17,611
-------------- -------------

Expenses:
Human resources 4,625 4,346
Provisions for losses and benefits:
Annuities and investment certificates 976 881
Life insurance, international banking and other 775 777
Charge card 626 723
Cardmember lending 888 955
Marketing, promotion, rewards and cardmember services 2,735 2,297
Professional services 1,577 1,397
Occupancy and equipment 1,078 1,046
Interest 700 812
Communications 387 378
Restructuring charges (2) (21)
Disaster recovery charge - (7)
Other 1,276 1,249
-------------- -------------
Total 15,641 14,833
-------------- -------------

Pretax income 3,157 2,778
Income tax provision 933 790
-------------- -------------

Net income $ 2,224 $ 1,988
============== =============

Earnings per common share:
Basic $ 1.73 $ 1.50
============== =============
Diluted $ 1.71 $ 1.49
============== =============

Average common shares outstanding for earnings per common share:
Basic 1,287 1,324
============== =============
Diluted 1,298 1,334
============== =============

Cash dividends declared per common share $ 0.28 $ 0.24
============== =============

See Notes to Consolidated Financial Statements.

2

AMERICAN EXPRESS COMPANY
CONSOLIDATED BALANCE SHEETS
(millions, except share data)

See Notes to Consolidated Financial Statements.

3

AMERICAN EXPRESS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
(Unaudited)

See Notes to Consolidated Financial Statements.

4

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form 10-K
of American Express Company (the Company or American Express) for the year
ended December 31, 2002. Certain reclassifications of prior period amounts
have been made to conform to the current presentation.

The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of operations
reported for interim periods are not necessarily indicative of results for
the entire year.

Cardmember lending net finance charge revenue is presented net of interest
expense of $116 million and $124 million for the three months ended
September 30, 2003 and 2002, respectively, and $360 million and $378
million for the nine months ended September 30, 2003 and 2002,
respectively. Interest and dividends is presented net of interest expense
of $53 million and $65 million for the three months ended September 30,
2003 and 2002, respectively, and $172 million and $188 million for the nine
months ended September 30, 2003 and 2002, respectively, related primarily
to the Company's international banking operations.

At September 30, 2003 and December 31, 2002, cash and cash equivalents
included $1.2 billion and $1.1 billion, respectively, segregated in special
bank accounts for the benefit of customers.

At September 30, 2003 and December 31, 2002, accounts receivable and
accrued interest included $3.0 billion and $5.1 billion, respectively, of
cardmember receivables which have been securitized through the issuance of
trust certificates.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company
adopted the provisions of SFAS No. 143 on January 1, 2003; the impact on
the Company's financial statements was immaterial.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). In October 2003,
the FASB issued a statement delaying the effective date of the
consolidation provisions of FIN 46 from July 1, 2003 to December 31, 2003
for VIEs created prior to February 1, 2003. An entity is subject to
consolidation according to the provisions of FIN 46, if, by design, either
(i) the total equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties, or, (ii) as a group, the holders of the equity
investment at risk lack: (a) direct or indirect ability to make decisions
about an entity's activities; (b) the obligation to absorb the expected
losses of the entity if they occur; or (c) the right to receive the
expected residual returns of the entity if they occur. In general, FIN 46
requires a VIE to be consolidated when an enterprise has a variable
interest that will absorb a majority of the VIE's expected losses or
receive a majority of the VIE's expected residual return.

The variable interest entities primarily impacted by FIN 46 relate to
structured investments, including collateralized debt obligations (CDOs)
and secured loan trusts (SLTs), which are both managed and partially owned
in the Company's American Express Financial Advisors (AEFA) operating
segment. FIN 46 does not impact the accounting for qualified special
purpose entities as defined by SFAS No. 140, "Accounting for

5

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Transfers and Servicing of Financial Assets and Extinguishments of Debt,"
such as the Company's credit card securitizations, as well as the CDO
securitization trust established in 2001. That trust contains a majority of
the Company's rated CDOs whose retained interest in the trust had a
carrying value of $734 million at September 30, 2003, of which $551 million
is considered investment grade. Separately, FIN 46 is not expected to
impact the accounting for an additional $29 million in rated CDO tranches
or $27 million of minority-owned SLTs, both of which are managed by
third parties.

The CDO entities impacted by FIN 46 contain debt issued to investors which
is non-recourse to the Company and solely supported by portfolios of
high-yield bonds and loans. AEFA manages the portfolios of high-yield bonds
and loans for the benefit of CDO debt held by investors and often retains
an interest in the residual and rated debt tranches of the CDO structures.
The SLTs impacted by FIN 46 provide returns to investors primarily based
on the performance of an underlying portfolio of high-yield loans which are
managed by AEFA.

Detailed interpretations of FIN 46 continue to emerge and the FASB's
statement delaying its implementation indicated that the FASB intends to
issue further interpretations over the next few months. Accordingly, the
Company decided to delay its planned third quarter 2003 adoption of FIN 46
until the revised effective date of December 31, 2003. In July 2003, the
Company preliminarily estimated that the consolidation of FIN 46-related
entities could result in a cumulative effect of accounting change that
would reduce third quarter 2003 net income through a non-cash charge of
approximately $150 million ($230 million pretax) with the consolidation of
up to $2 billion of related assets. Based on the Company's current
interpretation of the rules and market factors as of September 30, 2003,
the charge would be lower than preliminarily estimated. However, the charge
upon adoption will be dependent upon further interpretations of FIN 46 and
market factors as of December 31, 2003. Taken together, over the lives of
the structures subject to FIN 46 through their maturity, the Company's
maximum cumulative exposure to pretax loss as a result of its investment in
these entities is represented by the carrying values at September 30, 2003.
Those carrying values include CDO residual tranches and the SLTs having an
adjusted cost basis of $18 million and $652 million, respectively.

The initial charge related to the application of FIN 46 for CDOs and SLTs
will have no cash flow effect on the Company. Ongoing valuation adjustments
specifically related to the application of FIN 46 to the CDOs are also
non-cash items and will be reflected in the Company's quarterly results
until their maturity. Subsequent to the December 31, 2003 FIN 46 adoption,
these ongoing valuation adjustments, which will be reflected in operating
results over the then remaining lives of the structures subject to FIN 46
and which will be dependent upon market factors during such time, will
result in periodic gains or losses. The Company expects, in the aggregate,
such gains or losses related to the CDOs, including the December 31, 2003
implementation charge, to reverse themselves over time as the structures
mature, because the debt issued to the investors in the CDOs is non-
recourse to the Company, and further reductions in the value of the related
assets will be absorbed by the third party investors. To the extent losses
are incurred in the SLT portfolio, further charges could be incurred which
may or may not be reversed.

In April 2003, the FASB issued Statement of Financial Accounting Standards
Board (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." The Statement amends and clarifies accounting for
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The adoption of this Statement did not have
a material impact on the Company's financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
The Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability; many of those
instruments were previously classified as equity. The adoption of this
Statement did not have a material impact on the Company's financial
statements.

6

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). The Company is currently evaluating its
impact, which, among other provisions, requires reserves related to
guaranteed minimum death benefits included within the majority of variable
annuity contracts offered by AEFA. SOP 03-1 is required to be adopted on
January 1, 2004 and any impact will be recognized as a cumulative effect
of change in accounting principle in the Company's March 31, 2004
Statement of Income.

2. STOCK-BASED COMPENSATION

At September 30, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note 14 of the
Company's 2002 Annual Report to Shareholders. Effective January 1, 2003,
the Company adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," prospectively for all stock
options granted after December 31, 2002. The fair value of each option is
estimated on the date of grant using a Black-Scholes option-pricing model.
Prior to 2003, the Company accounted for those plans under the recognition
and measurement provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related
Interpretations. Prior to the adoption of the fair value recognition
provisions of SFAS No. 123 in 2003, no employee compensation cost was
recorded in net income for stock options granted, since all options granted
under these plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. For the three and nine months
ended September 30, 2003, the Company expensed $7 million and $17 million
after-tax, respectively, related to stock options granted in 2003.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended APB Opinion 28,
"Interim Financial Reporting," to require disclosure about the pro forma
effects of SFAS No. 123 on reported net income of stock-based compensation
accounted for under APB Opinion No. 25. The following table illustrates the
effect on net income and earnings per common share (EPS) assuming the
Company had followed the fair value recognition provisions of SFAS No. 123
for all outstanding and unvested stock options and other stock-based
compensation for the three and nine-month periods ended September 30, 2003
and 2002:

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. INVESTMENT SECURITIES

The following is a summary of investments at September 30, 2003 and
December 31, 2002:

Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $41
million and $118 million for the three months ended September 30, 2003 and
2002, respectively, of which $32 million and $108 million, respectively,
related to AEFA. Gross realized losses on sales of securities classified as
Available-for-Sale were $37 million and $60 million for the same periods,
of which $37 million and $59 million, respectively, related to AEFA. The
Company also recognized other-than-temporary impairment losses on AEFA's
Available-for-Sale securities of $5 million and $52 million for the three
months ended September 30, 2003 and 2002, respectively.

Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $306
million and $233 million for the nine months ended September 30, 2003 and
2002, respectively, of which $281 million and $208 million, respectively,
related to AEFA. Gross realized losses on sales of securities classified as
Available-for-Sale were $100 million and $107 million for the same periods,
of which $99 million and $104 million, respectively, related to AEFA. The
Company also recognized other-than-temporary impairment losses on AEFA's
Available-for-Sale securities of $163 million and $169 million for the nine
months ended September 30, 2003 and 2002, respectively.

4. GUARANTEES

The Company, through its Travel Related Services (TRS) operating segment,
provides certain cardmember protection plans that cover losses associated
with purchased products, as well as certain other guarantees in the
ordinary course of business that fall within the scope of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"
(FIN 45). In the hypothetical scenario that all claims occur within one
year, the aggregate maximum amount of potential future losses associated
with such guarantees as of September 30, 2003 would not exceed $84 billion.
The total amount of related liability accrued at September 30, 2003 for
such programs was $424 million, which management believes to be adequate
based on historical experience. The Company has minimal collateral or other
recourse provisions related to these guarantees.

The Company, through its American Express Bank (AEB) operating segment,
provides various guarantees to its customers in the ordinary course of
business, including financial letters of credit, performance guarantees and
financial guarantees, among others that fall within the scope of FIN 45.
Generally, guarantees range in term from three months to one year. AEB
receives a fee related to most of these guarantees, many of which help to
facilitate customer cross-border transactions. Virtually all of these
guarantees are collateralized or supported by other types of recourse
provisions (i.e., pledged assets, primarily comprised of cash and time

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

deposits, and counter-guarantees). The following table provides information
related to such guarantees as of September 30, 2003:

5. COMPREHENSIVE INCOME

Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. It is the sum of net
income and changes in (i) unrealized gains or losses on Available-for-Sale
securities, (ii) unrealized gains or losses on derivatives, (iii) foreign
currency translation adjustments and (iv) minimum pension liability
adjustment. The components of comprehensive income, net of related tax, for
the three and nine months ended September 30, 2003 and 2002 were as
follows:

6. TAXES AND INTEREST

Net income taxes paid during the nine months ended September 30, 2003 and
2002 were approximately $811 million and $758 million, respectively.
Interest paid during the nine months ended September 30, 2003 and 2002 was
approximately $1.2 billion and $1.3 billion, respectively.

9

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. EARNINGS PER COMMON SHARE

The computations of basic and diluted EPS for the three and nine months
ended September 30, 2003 and 2002 are as follows:

Stock options having an exercise price greater than the average market
price of the Company's common shares for each period presented are excluded
from the computation of EPS, because the effect would be antidilutive. The
number of these excluded stock options for the three months ended September
30, 2003 and 2002 was 37 million and 123 million, respectively. The number
of these excluded stock options for the nine months ended September 30,
2003 and 2002 was 83 million and 102 million, respectively.

8. SEGMENT INFORMATION

The Company is principally engaged in providing travel related, financial
advisory and international banking services throughout the world. TRS'
products and services include, among others, charge cards, cardmember
lending products, Travelers Cheques, and corporate and consumer travel
services. AEFA's services and products include financial planning and
advice, investment advisory services and a variety of products, including
insurance and annuities, investment certificates and mutual funds. AEB's
products and services include providing private banking, personal financial
services and financial institution services, global trading and corporate
banking. The Company operates on a global basis, although the principal
market for financial advisory services is the United States.

The following tables present the results for these operating segments,
based on management's internal reporting structure, for the three and nine
months ended September 30, 2003 and 2002. For certain income statement
items that are affected by asset securitizations at TRS, data is provided
on both a managed basis, which excludes the effect of securitizations, as
well as on a GAAP basis. Pretax income and net income are the same under
both a GAAP and managed basis. See TRS Results of Operations section of
Management's Discussion and Analysis (MD&A) for further information
regarding the effect of securitizations on the financial statements. In
addition, net revenues (managed basis) are presented net of provisions
for losses and benefits for annuities, insurance and investment
certificate products of AEFA which are essentially spread businesses
as further discussed in the AEFA Results of Operations section of MD&A.

10

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Shareholders and Board of Directors
American Express Company

We have reviewed the accompanying consolidated balance sheet of American Express
Company (the "Company") as of September 30, 2003 and the related consolidated
statements of income for the three and nine-month periods ended September 30,
2003 and 2002 and the consolidated statements of cash flows for the nine-month
periods ended September 30, 2003 and 2002. These financial statements are the
responsibility of the Company's management.

We conducted our reviews 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 auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of the Company as
of December 31, 2002, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein), and in our report dated January 27, 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, 2002 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

/s/Ernst & Young LLP

New York, New York
November 12, 2003

12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

American Express Company (the Company) is primarily engaged in the business of
providing travel related services, financial advisory services and international
banking services throughout the world. The Company generates revenue from a
variety of sources including global payments such as charge and credit cards;
travel services including airline, hotel and rental car reservations; and a wide
range of retail financial service products.

The Company follows accounting principles generally accepted in the United
States (GAAP). In addition to information provided on a GAAP basis, the Company
discloses certain data on a "managed basis." These data, which should be read
only as a supplement to GAAP information, assume there have been no
securitization transactions at Travel Related Services (TRS), i.e., as if all
securitized cardmember loans and related income effects are reflected in the
Company's balance sheet and income statement. In addition, revenues are
considered net of American Express Financial Advisors' (AEFA) provisions for
losses and benefits for annuities, insurance and investment certificate
products, which are essentially spread businesses. See the TRS and AEFA Results
of Operations sections for further discussion of and reasons for this approach.
Certain reclassifications of prior period amounts have been made to conform to
the current presentation.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2003 AND 2002

The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.

The Company's consolidated net income rose 12 percent to $770 million for the
three-month period ended September 30, 2003 as compared to a year ago. Diluted
earnings per share (EPS) rose 13 percent to $0.59 compared to $0.52 a year ago.
On a trailing 12-month basis, return on average shareholders' equity (ROE) was
20.4 percent.

Consolidated revenues for the three months ended September 30, 2003 were $6.4
billion, up 9 percent from $5.9 billion in the same period a year ago reflecting
8 percent growth at TRS and 10 percent growth at AEFA, while revenues at
American Express Bank (AEB) were flat. As discussed in further detail below, the
increase in the third quarter was due primarily to increases in discount
revenue, cardmember lending net finance charge revenue, management and
distribution fees, insurance and annuity revenues, net securitization income and
other revenues. These increases were partially offset by lower interest and
dividend revenues. Translation of foreign currency revenues contributed
approximately 2 percent of the 9 percent revenue growth rate.

Discount revenue at TRS rose 13 percent compared to a year ago as a result of a
15 percent increase in billed business partially offset by a lower discount
rate. Interest and dividends decreased 4 percent primarily due to lower interest
income on investment and liquidity pools held within card funding vehicles and
lower Travelers Cheque investment income at TRS partially offset by higher
investment income at AEFA reflecting higher levels of invested assets.
Management and distribution fees increased 10 percent due to a 4 percent
increase in management fees and an 18 percent increase in distribution fees. The
management fees increase is primarily due to higher average assets under
management, reflecting improvement in equity market conditions, offset partially
by net outflows within both institutional and retail activities over the past
year. Distribution fees increased 18 percent due to greater limited partnership
product sales, increased brokerage-related activities and greater mutual fund
fees.

Cardmember lending net finance charge revenue at TRS increased 18 percent due to
growth in the cardmember lending portfolio, partially offset by a lower yield.
Net card fees increased 5 percent reflecting growth in cards-in-force and the
benefit of selected annual fee increases. The average annual fee per proprietary
card-in-force was $35 in 2003 versus $34 for the same period in 2002. Travel
commissions and fees increased 2 percent primarily due to a 2 percent increase
in travel sales, reflecting modest improvement within the travel environment.
Other commissions and fees increased 5 percent partially due to higher
commissions, fees and foreign exchange revenues

13

at AEB. Insurance and annuity revenues increased 14 percent versus the same
period a year ago primarily due to higher property-casualty and life
insurance-related revenues at AEFA. Net securitization income at TRS rose 10
percent as a result of a higher average balance of cardmember lending
securitizations. Other revenues increased 10 percent versus the same period a
year ago primarily due to higher card-related revenues at TRS and higher
financial planning and advice service fees at AEFA.

Consolidated expenses for the three months ended September 30, 2003 were $5.4
billion, up 8 percent from $4.9 billion for the same period in 2002 reflecting
increases of 7 percent at TRS and 10 percent at AEFA and a 1 percent decrease at
AEB. As discussed in further detail below, the increase in the third quarter of
2003 was primarily driven by higher marketing, promotion, rewards and cardmember
services, human resources, professional fees and other expenses offset by lower
interest expense and the benefits of reengineering activities and expense
control initiatives. Translation of foreign currency expenses contributed
approximately 2 percent of the 8 percent expense growth rate.

Human resources expenses increased 10 percent versus last year due to merit
increases, higher employee benefit expenses and increased management incentive
costs, including higher stock-based compensation costs from both stock options
and increased levels of restricted stock awards. This reflected the Company's
decisions to modify its compensation practices, expense stock options beginning
in January 2003 and eliminate the awarding of stock options for middle
management and increase levels of restricted stock awards in their place. These
increases were partially offset by lower staffing levels and a net $21 million
favorable change in deferred acquisition costs (DAC) adjustments this year
versus last year at AEFA.

Total provisions for losses and benefits increased 1 percent compared to last
year, primarily driven by a 13 percent decline in the lending provision
partially offset by an 11 percent increase in the charge card provision, both at
TRS. The decrease in the lending provision at TRS was primarily due to strong
credit quality as reflected in improved past due and write-off rates. Even so,
reserve coverage ratios were maintained at the high end of historical levels.
The increase in the provision on charge card products is primarily due to higher
volumes. The net decrease at TRS was partially offset by a 6 percent net
increase in annuity and investment certificates provisions at AEFA. Annuity
provisions increased 7 percent primarily due to higher average inforce levels
and the effect of appreciation in the S&P 500 on equity indexed annuities this
period versus depreciation in the same period a year ago, partially offset by
lower crediting rates. Investment certificates provisions were essentially flat
as the effect on the stock market certificate product of appreciation in the S&P
500 this period versus depreciation in the year ago period and higher average
reserves were offset by lower crediting rates.

Marketing, promotion, rewards and cardmember services expenses increased 26
percent versus a year ago primarily due to a 25 percent increase at TRS related
to the continuation of brand advertising activities, a step-up in selected
card acquisition activities and an increase in cardmember rewards and services
expenses reflecting a continued increase in cardmember loyalty program
participation and penetration. Increases in rewards expenses are anticipated
to continue in the future as a result of such factors. Management believes,
based on historical experience, that cardmembers enrolled in rewards and
co-brand programs yield higher spend, better retention, stronger credit
performance and greater profit for the Company. Professional services expense
rose 6 percent versus the same period a year ago primarily due to greater
business and service volume-related costs at TRS. Occupancy and equipment
expense increased 4 percent primarily due to increased amortization of
capitalized computer software costs versus the prior year. Interest expense
declined 10 percent including a 25 percent decrease in charge card interest
expense at TRS primarily due to the benefit of a lower effective cost of funds,
partially offset by a higher average receivable balance. Other expenses
increased 7 percent primarily due to increased legal costs at AEFA.

In the third quarters of 2003 and 2002, the Company recognized a net benefit of
$2 million ($1 million after-tax) from adjustments to restructuring reserves
established in 2002 and 2001, respectively, at AEB.

14

CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 AND 2002

The following discussion is presented on a basis consistent with GAAP unless
otherwise noted.

The Company's consolidated net income rose 12 percent to $2.2 billion for the
nine-month period ended September 30, 2003 as compared to $2.0 billion in the
same period a year ago. Diluted EPS rose 15 percent to $1.71 compared to $1.49 a
year ago. On a trailing 12-month basis, ROE was 20.4 percent.

Consolidated revenues for the nine months ended September 30, 2003 were $18.8
billion, up 7 percent from $17.6 billion in the same period a year ago
reflecting 7 percent growth at TRS, 6 percent growth at AEFA and 7 percent
growth at AEB. As discussed in further detail below, the increase in 2003 was
due primarily to increases in discount revenue, cardmember lending net finance
charge revenue, interest and dividend revenues, insurance and annuity revenues,
other revenues and securitization income. These increases were partially offset
by lower management and distribution fees. Translation of foreign currency
revenues contributed approximately 2 percent of the 7 percent revenue growth
rate.

Discount revenue at TRS rose 9 percent compared to a year ago primarily as a
result of a 12 percent increase in billed business partially offset by a lower
discount rate. Interest and dividends increased 5 percent primarily due to
higher invested assets and the effect of a 2002 $78 million investment loss
related to the Company's WorldCom debt holdings, largely at AEFA, partially
offset by lower average yields. Management and distribution fees declined 4
percent primarily due to lower average assets under management partially offset
by higher distribution fees. Distribution fees increased due to greater limited
partnership product sales and increased brokerage related activities which were
partially offset by lower mutual fund sales.

Cardmember lending net finance charge revenue at TRS increased 13 percent due to
growth in the cardmember lending portfolio partially offset by lower yields. Net
card fees increased 6 percent reflecting 6 percent growth in cards-in-force as
well as a shift in the mix of products. The average annual fee per proprietary
card-in-force was $35 in 2003 and $34 in 2002. Travel commissions and fees
increased 2 percent as higher revenue earned per dollar of sales was partially
offset by a 3 percent decline in travel sales reflecting the weaker travel
environment during 2003. Other commissions and fees increased 5 percent
primarily due to higher card-related fees and assessments at TRS and higher
commissions, fees and foreign exchange revenues at AEB. Insurance and annuity
revenues increased 11 percent versus the same period a year ago primarily due to
higher property-casualty and life insurance-related revenues at AEFA. Net
securitization income at TRS rose 10 percent as a result of a higher average
balance of cardmember lending securitizations. Other revenues increased 9
percent versus the same period a year ago primarily due to higher card-related
revenues at TRS and higher financial planning and advice service fees at AEFA.

Consolidated expenses for the nine months ended September 30, 2003 were $15.6
billion, up 5 percent from $14.8 billion for the same period in 2002
reflecting increases of 5 percent at TRS, 9 percent at AEFA and 3 percent at
AEB. As discussed in further detail below, the increase in 2003 was primarily
driven by higher marketing, promotion, rewards and cardmember services,
professional services and human resources expenses partially offset by lower
interest expense and provision for losses. Translation of foreign currency
expenses contributed approximately 2 percent of the 5 percent expense growth
rate.

Human resources expense increased 6 percent versus last year due to increased
costs related to merit increases, employee benefit expenses and management
incentive costs, including higher stock-based compensation costs from both stock
options and increased levels of restricted stock awards. This reflected the
Company's decisions to modify its compensation practices, expense stock options
beginning in January 2003 and eliminate the awarding of stock options for middle
management and increase levels of restricted stock awards in their place. These
increases were partially offset by lower staffing levels, a net $21 million
favorable change in DAC adjustments this year versus last year at AEFA and the
benefits of outsourcing which had the effect of moving certain technology
related costs from human resources expense to professional services expense.

15

Total provisions for losses and benefits declined 2 percent compared to last
year, primarily driven by a 13 percent decline in the charge card provision and
a 7 percent decline in the lending provision, both at TRS. The decrease in the
provisions at TRS was primarily due to strong credit quality as reflected in an
improved past due and write-off rates, despite strengthening of reserve coverage
ratios. These decreases were partially offset by an 11 percent net increase in
annuity and investment certificates provisions at AEFA. Annuity provisions
increased primarily due to higher inforce levels, the effect of appreciation in
the S&P 500 on equity indexed annuities this year versus depreciation last year
and increased costs related to guaranteed minimum death benefits, partially
offset by lower crediting rates. Investment certificate provisions increased due
to the effect on the stock market certificate product of appreciation in the S&P
500 this year versus depreciation last year and higher average reserve levels,
partially offset by lower crediting rates.

Marketing, promotion, rewards and cardmember services expenses increased 19
percent versus a year ago primarily due to a 20 percent increase at TRS
related to the continuation of brand advertising, new product advertising,
an increase in selected card acquisition activities and higher cardmember
rewards and services expenses reflecting higher volumes and greater program
participation and penetration. Professional services expense rose 13 percent
versus the same period a year ago primarily due to greater business and
service volume-related costs and the impact of technology and service-related
outsourcing agreements. Occupancy and equipment expense increased 3 percent
as higher amortization of capitalized computer software costs was partially
offset by the benefits of reengineering activities. Interest expense declined
14 percent including a 20 percent decrease in charge card interest expense
at TRS primarily due to the benefit of a lower effective cost of funds.
Other expenses increased 2 percent as the impact of fewer capitalized deferred
acquisition costs at AEFA during the first six months of 2002 was partially
offset by reengineering benefits.

In 2002, the Company recognized a net benefit of $21 million ($14 million
after-tax) to adjust the restructuring reserves. In addition, 2002 results also
included a benefit of $7 million ($4 million after-tax) related to third quarter
2001 disaster recovery reserves to reflect lower than anticipated insured loss
claims at AEFA.

OUTLOOK

The Company met all three of its long-term financial targets noted below during
the third quarter while increasing the level of investment spending designed to
generate both short- and long-term growth. The Company continues to expect that
reengineering initiatives will deliver an estimated benefit of approximately
$1.0 billion in 2003, including significant carry-over benefits from certain
initiatives begun in prior periods. Revenue-related reengineering activities are
driving a growing portion of the total benefits, including approximately 25
percent of the benefits expected to be delivered in 2003. The Company plans to
continue a higher level of investment spending through the remainder of 2003.
Based on the momentum built from its investment spending over the past year
and the recent strengthening in the economy, the Company believes that 2003
EPS before the impact of accounting changes will be at the higher end of its
previous guidance of $2.26 to $2.29.

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

The Company believes allocating capital to its growing businesses with a return
on risk-adjusted equity in excess of their cost of capital will continue to
build shareholder value. The Company's philosophy is to retain earnings
sufficient to enable it to meet its growth objectives, and, to the extent
capital exceeds investment opportunities, return excess capital to shareholders.
As previously reported, the Company has indicated that its financial objectives
are 12-to-15% EPS growth, 18-to-20% return on equity and 8% revenue growth, on
average and over time, assuming 6-to-10% growth in billed business and 8%
appreciation in the equity markets. Assuming it achieves these objectives, the
Company will seek to return to shareholders an average of 65 percent of capital
generated, subject to business mix, acquisitions and rating agency requirements.
During the first nine months of 2003, the Company returned to shareholders
through dividends and share repurchases approximately 62 percent of capital
generated.

16

On September 30, 2003, the Company, through its AEFA segment, completed its
acquisition of Threadneedle Asset Management Holdings LTD, one of the premier
asset management organizations in the United Kingdom, for (Pounds Sterling)
340 million (approximately $565 million at September 30, 2003 exchange rates).
As a result, $3.6 billion of owned assets and $81.1 billion of assets under
management have been consolidated into the Company's period-end balance sheet
and statistical information, respectively. The results of operations for the
nine months ended September 30, 2003 were not affected. Additionally, on
October 7, 2003, the Company announced the completion of the acquisition of
Rosenbluth International, a leading global travel management company with
more than $3 billion of travel volume. Both of these transactions are not
expected to have a material impact on the Company's EPS in 2003 but are
expected to be slightly accretive to EPS in 2004 with additional benefits
in future years.

The Company has in place a share repurchase program both to offset in whole or
in part the issuance of new shares as part of employee compensation plans and to
reduce shares outstanding. The Company repurchases its common shares primarily
by open market purchases using several brokers at competitive commission and fee
rates. In addition, common shares may also be purchased from the
Company-sponsored Incentive Savings Program (ISP) to facilitate the ISP's
required disposal of shares when employee-directed activity results in an excess
common share position. Such purchases are made at market price without
commissions or other fees. Repurchases were also accomplished by cash
prepayments in connection with third party agreements under which a financial
institution purchased the Company's common shares and the Company was required
to deliver an amount equal to the original purchase price of the shares. During
the first nine months of 2003, the Company repurchased 32.6 million common
shares at an average price of $37.61, including 14.8 million shares returned to
the Company under the third party agreements which were terminated in May 2003.
Since the inception of the current share repurchase program, 422.5 million
shares have been acquired under authorizations to repurchase up to 570
million shares, including purchases made under the agreements with third
parties.

At September 30, 2003, the Parent Company had $1.8 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In July 2003, the Parent Company
issued $1 billion of fixed rate, 10-year Senior Notes under the shelf
registrations to be used for general corporate purposes. In addition, TRS;
American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of
TRS; American Express Credit Corporation (Credco), a wholly-owned subsidiary of
TRS; American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and AEB have established programs for the issuance,
outside the United States, of debt instruments to be listed on the Luxembourg
Stock Exchange. The maximum aggregate principal amount of debt instruments
outstanding at any one time under the program will not exceed $6.0 billion. At
September 30, 2003, $0.5 billion was outstanding under this program.

As of September 30, 2003, the Parent Company and two subsidiaries, Credco and
Centurion Bank, had total available credit lines of $10.85 billion, including
$2.0 billion allocated to the Parent Company and $8.5 billion allocated to
Credco. Credco has the right to borrow a maximum amount of $10.5 billion, with a
commensurate reduction in the amount available to the Parent Company. These
lines expire in increments from 2004 through 2007. At September 30, 2003,
Credco's bank line coverage of net short-term debt was 106%.

On October 20, 2003, Standard & Poor's rating services affirmed the Company's A+
and its subsidiaries credit ratings and revised its ratings outlook for the
Company and its subsidiaries to stable from negative citing the Company's
diversified businesses and geographic markets, strong brand recognition, solid
capitalization and strong capital generation.

On July 16, 2003, the Company exercised a call option on the Junior Subordinated
Deferrable Interest Debentures issued by the Company, which resulted in the
redemption of 20 million shares of 7.0% Cumulative Quarterly Income Preferred
Shares Series I (QUIPS).

The Company funds the costs of the American Express Retirement Plan (the Plan),
which covers eligible U.S. employees, in compliance with the applicable funding
requirements specified by the Employee Retirement Income Security Act of 1974,
as amended (ERISA). In March 2003, the Company elected to make a $350 million
contribution to the Plan, including approximately $25 million of minimum
required funding per ERISA.

17

SUPPLEMENTAL INFORMATION - MANAGED NET REVENUES

The following supplemental information is presented on the basis used by
management to evaluate operations. It differs in two respects from the
Consolidated Statements of Income contained in this report, which are prepared
in accordance with GAAP. First, revenues are presented as if there had been no
asset securitizations at TRS. This format is generally termed on a managed
basis, as further discussed in the TRS Results of Operations section of
Management's Discussion and Analysis (MD&A). Second, revenues are considered net
of AEFA's provisions for losses and benefits for annuities, insurance and
investment certificate products, which are essentially spread businesses, as
further discussed in the AEFA Results of Operations section of MD&A. A
reconciliation of consolidated revenues from a GAAP to a net managed basis is as
follows:

Consolidated managed net revenues increased 8 percent for the three months ended
September 30, 2003 to $6.1 billion, compared with $5.7 billion for the same
period in 2002. For the nine months ended September 30, 2003, consolidated
managed net revenues increased 6 percent to $18.0 billion, compared with $16.9
billion for the same period in 2002. For both periods, managed net revenues rose
due to greater discount revenues, higher cardmember loan balances, larger
interest and dividend revenues and higher other revenues. Translation of foreign
currency revenues contributed approximately 2 percent to both the 8 percent and
the 6 percent managed net revenue growth rates for the three and nine months
ended September 30, 2003, respectively.

See TRS and AEFA segments for a discussion of why a managed basis presentation
at TRS and net revenues at AEFA is used by management and is important to
investors.

18

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
AND 2002

STATEMENTS OF INCOME
(Unaudited)

TRS reported net income of $606 million for the three month period ended
September 30, 2003, a 10 percent increase from $553 million for the same period
a year ago. For the nine-month period ended September 30, 2003, TRS reported net
income of $1.8 billion, a 15 percent increase over $1.6 billion in the same
period in 2002. Certain reclassifications of prior period amounts have been made
to conform to the current presentation.

The following management discussion includes information on both a GAAP basis
and managed basis. The managed basis presentation assumes there have been no
securitization transactions, i.e., all securitized cardmember loans and related
income effects are reflected as if they were in the Company's balance sheet and
income statement, respectively. The Company presents TRS information on a
managed basis because that is the way the Company's management views and manages
the business. Management believes that a full picture of trends in the Company's
cardmember lending business can only be derived by evaluating the performance of
both securitized and non-securitized cardmember loans. Asset securitization is
just one of several ways for the Company to fund cardmember loans. Use of a
managed basis presentation, including non-securitized and securitized cardmember
loans, presents a more accurate picture of the key dynamics of the cardmember
lending business, avoiding distortions due to the mix of funding sources at any
particular point in time. For example, irrespective of the mix, it is important
for management and investors to see metrics, such as changes in delinquencies
and write-off rates, for

19

the entire cardmember lending portfolio because it is more representative of the
economics of the aggregate cardmember relationships and ongoing business
performance and trends over time. It is also important for investors to see the
overall growth of cardmember loans and related revenue and changes in market
share, which are significant metrics in evaluating the Company's performance and
which can only be properly assessed when all non-securitized and securitized
cardmember loans are viewed together on a managed basis.

On a GAAP basis, results reflect only net finance charge revenue on the owned
portfolio, comprised of unsecuritized cardmember and other loans. Revenues
relating to the Company's retained interest in securitized loan receivables are
shown in net securitization income, which includes gains on securitizations (as
discussed below), net finance charge revenue on retained interests in
securitized loans and servicing income net of related discounts. Net
securitization income increased 10 percent for both the three and nine-month
periods ended September 30, 2003 versus the same periods a year ago as a result
of a higher average balance of cardmember lending securitizations. See Selected
Statistical Information below for data relating to TRS' U.S. owned portfolio.

TRS' results for the three months ended September 30, 2002 included net
cardmember lending securitization gains of $9 million ($6 million after-tax).
Management views the gains from securitizations as discretionary benefits to be
used for card acquisition expenses, which are reflected in both marketing,
promotion, rewards and cardmember services expenses and other operating
expenses. Consequently, the managed basis presentation for the three months
ended September 30, 2002 assumes that lending securitization gains were offset
by higher marketing, promotion, rewards and cardmember services expenses of $5
million and other operating expenses of $4 million. Accordingly, the incremental
expenses, as well as the gains, have been eliminated.

Similarly, TRS' results for the nine months ended September 30, 2003 and 2002
included net cardmember lending securitization gains of $124 million ($81
million after-tax) and $136 million ($88 million after-tax), respectively.
Therefore, the managed basis presentation for the nine months ended September
30, 2003 and 2002 assumes that lending securitization gains were offset by
higher marketing, promotion, rewards and cardmember services expenses of $74
million and $81 million, respectively, and other operating expenses of $50
million and $55 million, respectively. Accordingly, the incremental expenses, as
well as the gains, have been eliminated. The following tables reconcile the GAAP
basis for certain TRS income statement line items to the managed basis
information, where different.

20

GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS
(Unaudited)

The following discussion of TRS' results is presented on a managed basis.

For the three months ended September 30, 2003, TRS' net revenues were up 7
percent primarily due to higher discount revenue, cardmember lending net finance
charge revenue and net card fees. Translation of foreign currency revenues
contributed approximately 3 percent of the 7 percent revenue growth rate.

21

Discount revenue rose 13 percent compared to a year ago as a result of a 15
percent increase in billed business partially offset by a lower discount rate
primarily due to the cumulative impact of stronger than average growth in the
lower rate retail and other everyday spend merchant categories. Based on the
Company's business strategy, it expects to see continued changes in the mix of
business. This, along with volume-related pricing discounts and selective
repricing initiatives, will probably continue to result in some rate erosion
over time. The 15 percent increase in billed business in the third quarter
resulted from a 10 percent increase in spending per basic cardmember worldwide
and 6 percent growth in cards-in-force. U.S. cards-in-force rose 4 percent
reflecting the continued benefit of increased acquisition spending within the
consumer and small business segments. International cards-in-force increased 9
percent due to growth in both proprietary and network partnership cards. U.S.
billed business rose 14 percent reflecting 15 percent growth within the consumer
card business on 12 percent higher transaction volume, 20 percent growth in
small business services volume and a 7 percent increase within Corporate
Services. U.S. non-T&E related volume categories which represented approximately
65 percent of U.S. billed business during the third quarter of 2003 increased 18
percent over the same period a year ago while U.S. T&E volumes rose 8 percent
reflecting improvement in all T&E industries during the quarter. Total billed
business outside the U.S., excluding the impact of foreign exchange translation,
was up 7 percent reflecting mid double-digit improvement in Latin America, high
single-digit increases in Asia and Canada, and a mid single-digit increase in
Europe. Worldwide airline related volumes, which represented 13 percent of total
billed business volumes during the quarter, rose 10 percent as a result of 5
percent growth in transaction volumes and a 5 percent increase in the average
airline charge.

Net card fees increased 5 percent versus a year ago, reflecting growth in
cards-in-force and the benefit of selected annual fee increases. The average
annual fee per proprietary card-in-force was $35 for the three months ended
September 30, 2003 versus $34 for the same period in 2002. Cardmember lending
net finance charge revenue rose 8 percent on 15 percent growth in average
worldwide lending balances. The net interest yield on the U.S. portfolio
decreased compared to the prior year reflecting an increase in the proportion of
the portfolio on introductory rates and the evolving mix of products toward more
lower-rate offerings, partially offset by lower funding costs. Travel
commissions and fees rose 2 percent primarily due to a 2 percent increase in
travel sales reflecting modest improvement within the travel environment. The
revenue earned per dollar of sales was relatively flat versus the prior year.
Other commissions and fees decreased 1 percent as lower foreign exchange fees
were partially offset by higher card-related fees and assessments. Travelers
Cheque investment income decreased 7 percent due to a decline in the pretax
yield, partially offset by higher average investments. Other revenues decreased
2 percent primarily due to lower interest income on investment and liquidity
pools held within card funding vehicles and lower ATM revenues partially
offset by larger insurance premiums.

For the three months ended September 30, 2003, TRS' expenses were up 6 percent
primarily due to increased marketing, promotion, rewards and cardmember
services, human resources and other operating expenses partially offset by lower
provisions for losses and charge card interest expense. Translation of foreign
currency expenses contributed approximately 3 percent of the 6 percent expense
growth rate.

Marketing, promotion, rewards and cardmember services expenses increased 26
percent compared to the prior year on the continuation of brand advertising
activities, an increase in selected card acquisition activities, and higher
cardmember rewards and services expenses reflecting a continued increase in
cardmember loyalty program participation and penetration. The provision
for losses on charge card products increased 11 percent due to higher
receivable volumes. The provision for losses on the worldwide lending
portfolio was down 12 percent compared to the prior year despite growth in
outstanding loans and increased reserve coverage levels due to well-controlled
credit practices and improving economic trends. Other provisions for losses
and claims decreased 18 percent as lower insurance claims were partially
offset by higher merchant-related reserves. Charge card interest expense
declined 24 percent due to a lower effective cost of funds, partially
offset by a higher average receivable balance.

Human resources expense increased 8 percent as employee merit increases, higher
employee benefit expenses and increased management incentive costs were
partially offset by the benefits of reengineering efforts. Other operating
expenses increased 9 percent primarily due to the impact of greater business
and service volume-related costs. These increases were partially offset by the
benefits of reengineering initiatives and other cost containment efforts.

22

In September 2003, the U.S. Court of Appeals for the Second Circuit affirmed
the decision of the U.S. District Court for the Southern District of New York
in favor of the U.S. government in its antitrust lawsuit against Visa and
MasterCard. Although Visa and MasterCard have said they plan to appeal the
ruling, the Company believes that the ruling by the appellate court effectively
ended the legal arguments on the merits of the case. Based on the Company's
assessment, the appeals process is expected to run its course by no later than
mid-2004. In the meantime, the Company plans to renew its discussions with
banks about establishing network partnership agreements in the U.S., where the
Company believes there is strong interest among banks to partner with it. The
Company expects to have its first U.S. bank agreements signed no later than
the second half of 2004. In addition, as the Company has previously disclosed,
it continues to consider the possibility of bringing private legal action
against Visa and MasterCard.

23

GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS
(Unaudited)

The following discussion of TRS' results is presented on a managed basis.

For the nine months ended September 30, 2003, TRS' net revenues were up 7
percent primarily due to higher discount revenue, cardmember lending net finance
charge revenue, net card fees, other commissions and fees and

24

other revenues. Translation of foreign currency revenues contributed
approximately 3 percent of the 7 percent revenue growth rate.

Discount revenue rose 9 percent compared to a year ago as a result of a 12
percent increase in billed business partially offset by a lower discount rate
primarily due to the cumulative impact of stronger than average growth in the
lower rate retail and other everyday spend merchant categories. Based on the
Company's business strategy, it expects to see continued changes in the mix of
business. This, along with volume-related pricing discounts and selective
repricing initiatives, will probably continue to result in some rate erosion
over time. The 12 percent increase in billed business in the first nine months
of the year resulted from 6 percent growth in cards-in-force and an 8 percent
increase in spending per basic cardmember worldwide. U.S. billed business rose
11 percent reflecting 12 percent growth within the consumer card business on 13
percent higher transaction volume, 15 percent growth in small business services
volume and a 2 percent increase within Corporate Services. U.S. non-T&E related
volume categories which represented approximately 64 percent of U.S. billed
business during the first nine months of 2003 increased 16 percent over the same
period a year ago while U.S. T&E volumes rose less than 3 percent, reflecting
the continued weak T&E environment during the first nine months of the year.
Total billed business outside the U.S., excluding the impact of foreign exchange
translation, was up 4 percent reflecting low double-digit improvement in Latin
America and mid to high single-digit growth in both Canada and Asia while billed
business in Europe was flat. Worldwide airline related volumes, which
represented 13 percent of total volumes during the first nine months of the
year, increased 2 percent as a result of a 4 percent growth in transaction
volumes partially offset by a 2 percent decrease in the average airline charge.

Net card fees increased 6 percent versus a year ago, reflecting growth in
cards-in-force and a shift in the mix of products. The average annual fee per
proprietary card-in-force was $35 for the nine months ended September 30, 2003
versus $34 for the same period in 2002. Cardmember lending net finance charge
revenue rose 9 percent on 13 percent growth in average worldwide lending
balances. The net interest yield on the U.S. portfolio decreased compared to the
prior year reflecting an increase in the proportion of the portfolio on
introductory rates and the evolving mix of products toward more lower-rate
offerings, partially offset by lower funding costs. Travel commissions and fees
rose 2 percent as revenue earned per dollar of sales was up versus the prior
year. This was partially offset by a 3 percent contraction in travel sales
reflecting the weak travel environment. Other commissions and fees increased 2
percent primarily due to higher card-related fees and assessments. Other
revenues increased 2 percent primarily due to higher card-related revenues and
larger insurance premiums partially offset by significantly lower interest
income on investment and liquidity pools held within card funding vehicles.

For the nine months ended September 30, 2003, TRS' expenses were up 5 percent
primarily due to increased marketing, promotion, rewards and cardmember
services, human resources and other expenses partially offset by lower
provisions for losses and charge card interest expense. Translation of foreign
currency expenses contributed approximately 3 percent of the 5 percent expense
growth rate.

Marketing, promotion, rewards and cardmember services expenses increased 21
percent compared to the prior year on the continuation of brand advertising
activities, new product advertising, an increase in selected card acquisition
activities and higher cardmember rewards and services expenses reflecting
higher volumes and greater program participation and penetration. The
provision for losses on charge card products decreased 13 percent on
strong credit quality reflected in an improved past due percentage and loss
ratio. The provision for losses on the worldwide lending portfolio decreased
4 percent versus last year despite growth in outstanding loans and increased
reserve coverage levels due to well-controlled credit practices and improving
economic trends. Charge card interest expense declined 19 percent due to a
lower effective cost of funds, partially offset by a higher average receivable
balance.

Human resources expense increased 6 percent as employee merit increases, higher
employee benefit expenses and increased management incentive costs were
partially offset by the benefits from reengineering efforts, including the
impact of technology and service-related outsourcing activities. Other operating
expenses increased 7 percent primarily due to the impact of outsourcing
activities, which transferred costs from human resources expense, although
at a lower level. This increase was partially offset by the benefits of
reengineering initiatives and other

25

cost containment efforts. In addition, 2002 results included a net benefit of
$19 million ($12 million after-tax) to adjust the restructuring charge reserves
established in 2001.

SELECTED STATISTICAL INFORMATION
(Unaudited)

(Amounts in billions, except percentages and where indicated)

(A) Cards-in-force include proprietary cards and cards is