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 June 30, 2004

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 July 23, 2004
- ---------------------------------------- ----------------------------
Common Shares (par value $.20 per share) 1,267,801,735 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)

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, 2003. 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 $136 million and $115 million for the three months
ended June 30, 2004 and 2003, respectively, and $263 million and $244
million for the six months ended June 30, 2004 and 2003, respectively.
Net investment income is presented net of interest expense of $51 million
and $58 million for the three months ended June 30, 2004 and 2003,
respectively, and $105 million and $119 million for the six months ended
June 30, 2004 and 2003, respectively, related primarily to the Company's
international banking operations.

At both June 30, 2004 and December 31, 2003, cash and cash equivalents
included $1.1 billion in special bank accounts for the benefit of
customers.

The Company has securitized charge card receivables totaling $3.0 billion
at both June 30, 2004 and December 31, 2003, which are included in
cardmember receivables on the Consolidated Balance Sheets as they do not
qualify for off-balance sheet treatment under Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities;"
likewise, an equal amount of debt is included in long-term debt.

RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 2004, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (SOP 03-1). SOP 03-1
provides guidance on: (i) the classification and valuation of
long-duration contract liabilities; (ii) the accounting for sales
inducements; and (iii) separate account presentation and valuation.

The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced 2004 results by $71 million
($109 million pretax). The cumulative effect of accounting change
consisted of: (i) $43 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits and from
considering these liabilities in valuing deferred acquisition costs (DAC)
and deferred sales inducement costs associated with those contracts and
(ii) $66 million pretax from establishing additional liabilities for
certain variable universal life and single pay universal life insurance
contracts under which contractual cost of insurance charges are expected
to be less than future death benefits and from considering these
liabilities in valuing DAC associated with those contracts. Prior to the
adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable. The Company's accounting for separate accounts was
already consistent with the provisions of SOP 03-1 and, therefore, there
was no impact related to this requirement.

In November 2003, the Financial Accounting Standards Board (FASB)
ratified a consensus on the disclosure provisions of Emerging Issues Task
Force (EITF) Issue 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments." The Company complied with
the disclosure provisions of this rule in Note 2 to the Consolidated
Financial Statements included in its Annual Report on

5

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Form 10-K for the year ended December 31, 2003. In March 2004, the FASB
reached a consensus regarding the application of a three-step impairment
model to determine whether cost method investments are
other-than-temporarily impaired. The provisions of this rule are required
to be applied prospectively to all current and future investments
accounted for in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and other cost method
investments for reporting periods beginning after June 15, 2004. Assuming
no market changes, the Company does not expect EITF 03-1 to have a
material impact on the Company's results of operations at the time of
adoption.

In December 2003, the FASB issued SFAS No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." This Statement amends the disclosure requirements of SFAS No.
87, "Employers' Accounting for Pensions," No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Statement requires
interim disclosure that is addressed in Note 7 but did not change the
recognition and measurement requirements of the amended Statements.

In May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS
106-2). FSP FAS 106-2 supersedes FSP FAS 106-1 and was issued in response
to the signing into law in December 2003 of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act). The Act
provides for a federal subsidy equal to 28% of prescription drug claims
for sponsors of retiree health care plans with drug benefits that are at
least actuarially equivalent to those to be offered under Medicare Part
D, beginning in 2006. Management has concluded that the benefits provided
to some of the Company's retirees are at least actuarially equivalent to
Medicare Part D.

FSP FAS 106-2 provides that: 1) the effect of the federal subsidy should
be accounted for as an actuarial gain; 2) since the federal subsidy is
exempt from federal taxes, any plan-related temporary income tax
difference should exclude the subsidy; and 3) the required effective date
is the first interim or annual period beginning after June 15, 2004 with
earlier application encouraged.

The Company has elected to early adopt the provisions of FSP FAS 106-2 on
a prospective basis as of April 1, 2004. As the annual measurement date
for the postretirement benefit plans is September 30, the Company's
postretirement benefit obligation was remeasured as of January 1, 2004
giving effect to the actuarially equivalent subsidy benefits. The
expected subsidy had the effect of reducing the Company's accumulated
postretirement benefit obligation (APBO) by $29 million, which was
recognized as a reduction in the unrecognized net actuarial loss. The
unrecognized net gain or loss outside a corridor equal to 10% of the APBO
is amortized over the average remaining service life of the Company's
employees eligible for postretirement benefits. The expected subsidy also
affects the service and interest cost of the plan, and reduced net
periodic postretirement benefit expense for the second quarter 2004 by
approximately $1 million. The expense amounts shown in Note 7 reflect the
effects of the early adoption of FSP FAS 106-2.

2. Stock-Based Compensation

At June 30, 2004, the Company has two stock-based employee compensation
plans, which are described more fully in Note 14 of the Company's 2003
Annual Report on Form 10-K. 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 Company expensed $14 million
and $6 million after-tax for the three months ended June 30, 2004 and
2003, respectively, and expensed $27 million and $10 million after-tax
for the six months ended June 30, 2004 and 2003, respectively, related to
stock options granted January 1, 2003 or later.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amended
Accounting Principles Board (APB) Opinion No. 28, "Interim Financial
Reporting," to require disclosure about the pro forma effects of SFAS No.
123 on reported net income of stock-

6

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

based compensation accounted for under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." 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 six months ended June 30, 2004 and 2003:

3. Investment Securities

The following is a summary of investments at June 30, 2004 and December
31, 2003:

Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three and six months ended June 30, 2004 and 2003:

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Guarantees

The Company, through its Travel Related Services' (TRS) operating
segment, provides cardmember protection plans that cover losses
associated with purchased products, as well as certain other guarantees
in the ordinary course of business that are 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 would not exceed $84
billion. The total amount of related liability accrued at June 30, 2004
for such programs was $333 million, which management believes to be
adequate based on actual experience. The Company has no collateral or
other recourse provisions related to these guarantees. Expenses relating
to claims under these guarantees were approximately $5 million and $11
million for the three and six months ended June 30, 2004, respectively.

The Company, through its American Express Bank (AEB) operating segment,
provides various guarantees to its customers in the ordinary course of
business that are also within the scope of FIN 45, including financial
letters of credit, performance guarantees and financial guarantees, among
others. 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. At June 30,
2004, the Company held $769 million of collateral supporting these
guarantees. The following table provides information related to such
guarantees as of June 30, 2004:

5. Variable Annuities and Sales Inducement Costs

The majority of the variable annuity contracts offered by the Company
contain guaranteed minimum death benefit (GMDB) provisions. When market
values of the customer's accounts decline, the death benefit payable on a
contract with a GMDB may exceed the contract accumulation value. The
Company also offers variable annuities with death benefit provisions that
gross up the amount payable by a certain percentage of contract earnings;
these are referred to as gain gross-up benefits (GGU). In addition, the
Company offers contracts containing guaranteed minimum income benefit
(GMIB) provisions.

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

* Represents current death benefit less total contract value for GMDB,
amount of gross up for GGU and accumulated guaranteed minimum benefit
base less total contract value for GMIB and assumes the actuarially
remote scenario that all claims become payable on the same day.

The Company had variable annuity guarantee liabilities (which include
amounts related to GMDB, GGU and GMIB liabilities) of approximately
$31.2 million as of June 30, 2004 pertaining to the net amount at risk as
of such date.

The majority of the GMDB contracts provide for six year reset contract
values. In determining the additional liabilities for variable annuity
death benefit and GMIB, the Company projects these benefits and contract
assessments over 200 randomly generated equity market scenarios.
Significant assumptions made in projecting future benefits and
assessments relate to customer asset value growth rates, mortality,
persistency and investment margins and are consistent with those used for
DAC asset valuation for the same contracts.

Sales inducement costs consist of bonus interest credits and premium
credits added to certain annuity contract values. These benefits are
capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. Deferred
sales inducement costs were $296 million and $279 million as of June 30,
2004 and December 31, 2003, respectively, and are included in other
assets. These costs were previously included in DAC and were reclassified
to other assets as part of the adoption of SOP 03-1. The amounts
capitalized are amortized using the same methodology and assumptions used
to amortize deferred acquisition costs. The Company capitalized $17
million and $24 million during the three months ended June 30, 2004 and
2003, respectively, and $37 million and $43 million during the six months
ended June 30, 2004 and 2003, respectively. The Company amortized $9
million and $6 million during the three months ended June 30, 2004 and
2003, respectively, and $17 million and $13 million during the six months
ended June 30, 2004 and 2003, respectively.

6. 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 six months ended June 30,
2004 and 2003 were as follows:

9

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Retirement Plans

The components of the net pension cost for all defined benefit plans
accounted for under SFAS No. 87 are as follows:

The net periodic postretirement benefit expense recognized for the three
months ended June 30, 2004 and 2003 was $9 million and $10 million,
respectively, and $20 million for both the six months ended June 30, 2004
and 2003.

8. Taxes and Interest

Income taxes paid (net of refunds) during the six months ended June 30,
2004 and 2003 were approximately $472 million and $756 million,
respectively. Interest paid during the six months ended June 30, 2004 and
2003 was approximately $710 million and $827 million, respectively.

9. Earnings per Common Share

Basic EPS is computed using the average actual shares outstanding during
the period. Diluted EPS is basic EPS adjusted for the dilutive effect of
stock options, restricted stock awards and other financial instruments
that may be converted into common shares. The computations of basic and
diluted EPS for the three and six months ended June 30, 2004 and 2003 are
as follows:

10

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended June 30, 2004 and 2003, the dilutive effect of
stock options excludes 13 million and 103 million options, respectively,
from the computation of diluted EPS because to do so would have been
antidilutive for the periods presented. Similarly, the number of these
excluded stock options for the six months ended June 30, 2004 and 2003
was 12 million and 108 million, respectively. The convertible debentures
issued in November 2003 have been excluded from the computation of EPS
because none of the criteria by which this instrument becomes convertible
has been attained. While the Company has the ability to settle the
principal amount of the convertible debentures in either cash, common
stock or a combination, the Company intends to settle the principal
amount in cash and to settle the conversion spread (the excess conversion
value over the principal) in either cash or stock.

10. 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. American Express Financial Advisors' (AEFA) 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
primarily include providing banking services to high net worth customers
and financial institutions; personal financial services and global
trading. 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 evaluation and internal reporting structure, for
the three and six months ended June 30, 2004 and 2003. 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 basis prepared in accordance with U.S.
generally accepted accounting principles (GAAP). 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)

11

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.

* Results for the six months ended June 30, 2004 reflect a $109 million
non-cash pretax charge ($71 million after-tax) related to the January
1, 2004 adoption of SOP 03-1.

12

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors
American Express Company

We have reviewed the consolidated balance sheet of American Express
Company (the "Company") as of June 30, 2004 and the related consolidated
statements of income for the three and six-month periods ended June 30,
2004 and 2003, and consolidated statements of cash flows for the
six-month periods ended June 30, 2004 and 2003. These financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 the standards of the Public
Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31, 2003, 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 26, 2004, 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, 2003 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
July 27, 2004

13

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

American Express Company (the Company or American Express) is a global travel,
financial and network services provider. The Company has three operating
segments: Travel Related Services (TRS), American Express Financial Advisors
(AEFA) and American Express Bank (AEB).

TRS includes the Company's card, travel, merchant and network businesses, as
well as the Travelers Cheque and other prepaid products and services. Through
its TRS businesses, the Company offers consumers and small businesses a
variety of charge and credit cards, Travelers Cheques and other stored value
products. The Company's Corporate Card services help companies and
institutions manage their travel, entertainment and purchasing expenses. TRS'
global network services business focuses on partnering with third-party
financial institutions that issue American Express-branded cards accepted on
the Company's merchant network. As the world's largest travel agency, the
Company offers travel and related consulting services to individuals and
corporations around the world.

AEFA is one of the leading financial planning companies in the United States.
AEFA has approximately 12,000 financial advisors nationwide and offers a wide
array of products and services, including financial planning, brokerage
services, mutual funds, insurance and other investment products.

AEB provides banking and other financial products and services to wealthy
individuals, financial institutions and retail customers outside the United
States.

The Company follows United States generally accepted accounting principles
(GAAP). In addition to information provided on a GAAP basis, the Company
discloses certain data on a "managed basis." This information, which should be
read only as a supplement to GAAP information, assumes there have been no
securitization transactions at TRS, i.e., as if all securitized cardmember
loans and related income effects are reflected in the Company's balance sheet
and income statements. In addition, revenues are reported net of AEFA's
provision 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 this approach.
Certain reclassifications of prior period amounts have been made to conform to
the current presentation.

Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See the
"Forward-Looking Statements" section below.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
AND 2003

The Company's consolidated net income for the three-month period ended June
30, 2004 of $876 million rose 15 percent from $762 million in the same period
a year ago. Diluted earnings per share (EPS) of $0.68 also increased 15
percent from $0.59. On a trailing 12-month basis, return on average
shareholders' equity was 21.2 percent.

Both the Company's revenues and expenses are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate
changes increased both revenue and expense growth by approximately 1
percentage point for the three months ended June 30, 2004.

The following discussion is presented on a basis prepared in accordance with
GAAP unless otherwise noted.

REVENUES
Consolidated revenues for the three months ended June 30, 2004 were $7.3
billion, up 14 percent from $6.4 billion in the same period a year ago
reflecting 14 percent growth at TRS, 18 percent growth at AEFA and 2 percent
growth at AEB. As discussed in further detail below, the increase in the
second quarter was due primarily to increases in discount revenue, management
and distribution fees, travel and other commissions and fees,

14

cardmember lending net finance charge revenue, insurance and annuity revenues,
net card fees and other revenues, partially offset by lower net securitization
income.

Discount revenue at TRS rose 18 percent as compared to a year ago as a result
of a 19 percent increase in worldwide billed business, from both higher
average cardmember spending and growth in cards-in-force, partially offset by
a lower discount rate. Management and distribution fees increased 32 percent
representing a 42 percent increase in management fees and a 20 percent
increase in distribution fees. The management fees increase is primarily due
to higher average assets under management, reflecting the impact from the 2003
acquisition of Threadneedle Asset Management Holdings LTD (Threadneedle),
improvement in equity market valuations versus last year and net asset
inflows. Distribution fees increased as a result of greater mutual fund fees
and increased brokerage-related activities.

Net investment income increased 1 percent as lower interest income on
investment and liquidity pools held within card funding vehicles at TRS and
lower net interest income at AEB were more than offset by a 6 percent increase
at AEFA. The increase at AEFA is primarily due to net investment gains in the
current period versus net investment losses a year ago and the benefits of
slightly higher levels of invested assets. The net investment gains include an
$18 million benefit reflecting lower than expected losses resulting from
management's first quarter decision to liquidate a secured loan trust managed
by AEFA. Cardmember lending net finance charge revenue at TRS increased 16
percent as the 18 percent increase in the average balance of the owned lending
portfolio more than offset the effect of a lower average yield. Net card fees
increased 4 percent primarily reflecting 7 percent growth in cards-in-force.

Travel commissions and fees rose 26 percent as a result of a 34 percent
increase in travel sales, which includes the benefit from the acquisition of
Rosenbluth International (Rosenbluth) in the fourth quarter of 2003 and
improvement in the travel environment. Other commissions and fees increased 21
percent primarily due to volume-related foreign exchange conversion fees and
higher card fees and assessments at TRS. Insurance and annuity revenues
increased 11 percent primarily due to strong property-casualty and higher life
insurance-related revenues at AEFA.

Net securitization income, which includes net gains and charges from
securitization activity, net finance charge revenue on retained interests in
securitized loans and servicing income, net of related discounts or fees,
decreased 6 percent primarily due to lower net gains from securitization
activities. For the quarter ended June 30, 2004, net securitization income
includes a $9 million net gain from securitization activity versus an $81
million net gain in the same period a year ago. Other revenues increased
7 percent primarily due to higher publishing and merchant-related revenues
at TRS and higher financial planning and advice services fees at AEFA.

EXPENSES
Consolidated expenses for the three months ended June 30, 2004 were $6.0
billion, up 14 percent from $5.3 billion for the same period in 2003
reflecting increases of 13 percent at TRS and 17 percent at AEFA, while AEB
expenses were essentially flat. As discussed in further detail below, the
increase in the second quarter of 2004 was primarily driven by higher
marketing, promotion, rewards and cardmember services, human resources,
professional services, occupancy and equipment and other expenses partially
offset by lower interest expense and the benefits of reengineering activities
and expense control initiatives.

Human resources expenses increased 17 percent versus last year due to the
impact of the acquisitions of Rosenbluth and Threadneedle in late 2003,
increased costs related to management incentives, including the impact of an
additional incremental year of higher stock-based compensation expenses, merit
increases and employee benefit expenses. The higher stock-based compensation
expense reflects the Company's decision to expense stock options beginning in
2003 and to modify compensation practices and use restricted stock awards in
place of stock options for middle management.

Marketing, promotion, rewards and cardmember services expenses increased 33
percent versus a year ago primarily due to a 33 percent increase at TRS
related to increased rewards costs, reflecting strong volume growth, a higher
redemption rate and the continued increase in cardmember loyalty program
participation, as well as the Company's continued focus on business building
activities. Management believes, based on historical experience, that

15

cardmembers enrolled in rewards and co-brand programs yield higher spend,
better retention, stronger credit performance and greater profit for the
Company.

Total provisions for losses and benefits were essentially unchanged from last
year, primarily resulting from a combined 7 percent reduction in annuity and
investment certificate provisions at AEFA and a 7 percent reduction in charge
card provision at TRS offset by a 13 percent increase in TRS cardmember
lending provision. Annuity provisions at AEFA decreased 5 percent primarily
due to lower crediting rates and the effect of lower appreciation in the S&P
500 on equity indexed annuities during the current quarter versus the same
period a year ago, partially offset by a higher average inforce level.
Investment certificate provisions at AEFA decreased 17 percent primarily due
to the effect on the stock market certificate product of lower appreciation
in the S&P 500 during the current quarter versus the same period a year ago
and lower crediting rates, partially offset by higher average reserves.
The charge card provision at TRS decreased, despite higher volume, due to
strong credit quality as reflected in past due percentages and net loss
ratios. The lending provision at TRS increased 13 percent primarily due to 18
percent growth in average loans outstanding partially offset by the benefits
of well-controlled credit. Reserve coverage ratios, which were in excess of
100 percent of past due balances, remained strong.

Professional services expense rose 9 percent versus the same period a year ago
primarily due to higher business and service-related volumes at TRS and
increased legal fees at AEFA. Occupancy and equipment expense increased 6
percent primarily due to increased equipment-related technology costs at TRS.
Interest expense declined 9 percent primarily due to a 14 percent decrease in
charge card interest expense at TRS, reflecting the benefit of a lower
effective cost of funds, partially offset by increased interest expense at the
corporate level on long-term debt issued in late 2003. Other expenses rose 28
percent, including an 11 percent increase at TRS, primarily resulting from the
impact of the Threadneedle and Rosenbluth acquisitions, the impact of foreign
currency translation at TRS and costs related to various industry regulatory
and legal matters at AEFA. These increases were partially offset by the
benefit of reengineering initiatives and cost containment efforts.

The effective tax rate was 31 percent for both the three-month periods ended
June 30, 2004 and 2003.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND
2003

The Company's consolidated income before accounting change rose 20 percent to
$1.7 billion and diluted EPS before accounting change also rose 20 percent to
$1.34 in the six-month period ended June 30, 2004 as compared to a year ago.
The Company's consolidated net income of $1.7 billion rose 15 percent from
$1.5 billion and diluted EPS of $1.29 also increased 15 percent from $1.12. On
a trailing 12-month basis, return on average shareholders' equity was 21.2
percent.

Net income and EPS for the six months ended June 30, 2004 reflect the $71
million ($109 million pretax) or $0.05 per diluted share impact of the
Company's adoption of SOP 03-1. SOP 03-1 requires insurance enterprises to
establish liabilities for benefits that may become payable under variable
annuity death benefit guarantees or other insurance or annuity contract
provisions. Prior to the adoption of SOP 03-1, these costs were expensed when
payable.

Both the Company's revenues and expenses are affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. The currency rate
changes increased both revenue and expense growth by approximately 2
percentage points for the six months ended June 30, 2004.

The following discussion is presented on a basis prepared in accordance with
GAAP unless otherwise noted.

REVENUES
Consolidated revenues for the six months ended June 30, 2004 were $14.2
billion, up 14 percent from $12.4 billion in the same period a year ago
reflecting 13 percent growth at TRS, 20 percent growth at AEFA and 4 percent
growth at AEB. As discussed in further detail below, the increase in the first
half of 2004 was due primarily to increases in discount revenue, management
and distribution fees, travel and other commissions and fees, insurance

16

and annuity revenues, cardmember lending net finance charge revenue, net card
fees and other revenues. These increases were partially offset by lower net
investment income.

Discount revenue at TRS rose 19 percent as compared to a year ago as a result
of a 20 percent increase in worldwide billed business, from both growth in
cards-in-force and higher average cardmember spending, partially offset by a
lower discount rate. Management and distribution fees increased 40 percent
representing a 44 percent increase in management fees and a 35 percent
increase in distribution fees. The management fees increase is primarily due
to higher average assets under management, reflecting the impact from the 2003
acquisition of Threadneedle, improvement in equity market valuations versus
last year and net asset inflows. Distribution fees increased as a result of
greater mutual fund fees and increased brokerage-related activities.

Net investment income decreased 1 percent primarily due to lower interest
income on investment and liquidity pools held within card funding vehicles at
TRS and lower net interest income at AEB, partially offset by a 3 percent
increase at AEFA. The increase at AEFA is primarily due to the benefits of
slightly higher levels of invested assets and a slightly higher yield. AEFA's
2004 net investment income also includes a net $31 million charge resulting
from management's decision to further improve the investment portfolio's risk
profile through the early liquidation of a secured loan trust managed by AEFA.
Cardmember lending net finance charge revenue at TRS increased 6 percent as
the increase in the average balance of the owned lending portfolio more than
offset the effect of a lower average yield. Net card fees increased 4 percent
primarily reflecting 7 percent growth in cards-in-force.

Travel commissions and fees rose 24 percent as a result of a 32 percent
increase in travel sales, which includes the benefit from the acquisition of
Rosenbluth in the fourth quarter of 2003 and improvement in the travel
environment. Other commissions and fees increased 16 percent primarily due to
greater volume-related foreign exchange conversion fees and higher card fees
and assessments at TRS. Insurance and annuity revenues increased 13 percent
due to strong property-casualty and higher life insurance-related revenues at
AEFA.

Net securitization income was essentially flat versus the prior year primarily
due to lower net gains from securitization activities. For the six months
ended June 30, 2004, net securitization income includes a $17 million net gain
from securitization activity versus a $124 million net gain in the same period
a year ago. Other revenues increased 10 percent primarily due to higher
publishing and merchant-related revenues at TRS, higher financial planning and
advice services fees at AEFA and higher foreign exchange and related income at
AEB.

EXPENSES
Consolidated expenses for the six months ended June 30, 2004 were $11.7
billion, up 13 percent from $10.3 billion for the same period in 2003
reflecting increases of 13 percent at TRS and 15 percent at AEFA and a 2
percent decline at AEB. As discussed in further detail below, the increase in
the first half of 2004 was primarily driven by higher marketing, promotion,
rewards and cardmember services, human resources, professional fees, occupancy
and equipment related costs and other expenses partially offset by lower
provisions for losses and interest expense.

Human resources expenses increased 18 percent versus last year due to the
impact of the acquisitions of Rosenbluth and Threadneedle in late 2003,
increased costs related to management incentives, including the impact of an
additional incremental year of higher stock-based compensation expenses, merit
increases and employee benefit expenses. These increases were partially offset
by a $44 million DAC valuation benefit at AEFA reflecting a portion of the
benefit of the lengthening of amortization periods for certain insurance and
annuity products in conjunction with the adoption of SOP 03-1. The total DAC
valuation benefit of $66 million (including the $22 million benefit noted
below) and the impact of the adoption of SOP 03-1 are discussed in the AEFA
Results of Operations section.

Marketing, promotion, rewards and cardmember services expenses increased 34
percent versus a year ago primarily due to a 34 percent increase at TRS
related to increased rewards costs, reflecting strong volume growth, a higher
redemption rate and the continued increase in cardmember loyalty program
participation, as well as the Company's continued focus on business building
activities.

Total provisions for losses and benefits declined 4 percent from last year,
primarily resulting from a combined 6 percent reduction in annuity and
investment certificate provisions at AEFA, a 6 percent reduction in the charge
card

17

provision at TRS and a 71 percent reduction in international banking
provisions at AEB. Annuity provisions at AEFA decreased 6 percent primarily
due to lower crediting rates, partially offset by a higher average inforce
level. Investment certificates provisions at AEFA decreased 7 percent
primarily due to lower crediting rates and the effect on the stock market
certificate product of lower appreciation in the S&P 500 during the first
half of the year versus the same period a year ago, partially offset by
higher average reserves. Life insurance, international banking and other
provisions decreased 2 percent primarily due to an improvement in
bankruptcy-related write-offs in the consumer lending portfolio in Hong
Kong and lower Personal Financial Services loan volumes at AEB partially
offset by increased insurance provisions at AEFA, which was primarily due
to higher average inforce levels. The charge card provision at TRS
decreased, despite higher volume, due to strong credit quality as
reflected in past due percentages and net loss ratios.

Professional services expense rose 9 percent versus the same period a year ago
primarily due to higher business and service-related volumes at TRS and
increased legal fees at AEFA. Occupancy and equipment expense increased 10
percent primarily due to increased equipment-related technology costs at TRS.
Interest expense declined 10 percent primarily due to a 17 percent decrease in
charge card interest expense at TRS, reflecting the benefit of a lower
effective cost of funds, partially offset by increased interest expense at the
corporate level on long-term debt issued in late 2003. Other expenses rose 24
percent, including a 12 percent increase at TRS, primarily resulting from the
impact of the Threadneedle and Rosenbluth acquisitions, the impact of foreign
currency translation at TRS, costs related to various industry regulatory and
legal matters at AEFA and costs incurred at AEB reflecting the decision to
further rationalize certain New York and Asia activities. These increases were
partially offset by the benefit of reengineering initiatives and cost
containment efforts and the $22 million DAC valuation benefit at AEFA
discussed further in the AEFA Results of Operations section.

The effective tax rate was 31 percent for both the six-month periods ended
June 30, 2004 and 2003.

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

CAPITAL STRATEGY
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. Assuming the Company achieves its financial objectives of 12 to
15 percent EPS growth, 18 to 20 percent return on equity and 8 percent revenue
growth, on average and over time, it will seek to return to shareholders an
average of 65 percent of capital generated, subject to business mix,
acquisitions and rating agency requirements. The Company paid dividends of
$257 million during the six months ended June 30, 2004.

CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
The Company generated net cash provided by operating activities in amounts
greater than net income for the six months ended June 30, 2004, primarily due
to provisions for losses and benefits, which represent expenses in the
Consolidated Statements of Income but do not require cash at the time of
provision. Similarly, depreciation and amortization represent non-cash
expenses.

Net cash was used in operating activities for the six months ended June 30,
2003 as net income was more than offset by fluctuations in the Company's
operating assets and liabilities, primarily reflecting the purchase of
securities in 2002, settled in 2003. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.

Management believes cash flows from operations, available cash balances and
short-term borrowings will be sufficient to fund the Company's operating
liquidity needs.

18

CASH FLOWS FROM INVESTING ACTIVITIES
The Company's investing activities primarily include funding TRS' cardmember
loans and receivables and AEFA's Available-for-Sale investment portfolio.

For the six months ended June 30, 2004, net cash used in investing activities
increased over last year primarily due to net maturities of cardmember loans
to TRS' securitization trusts in 2004 compared to net issuances in 2003,
offset by cardmember receivables redeemed from TRS' securitization trusts in
2003 and a decrease in investment purchases net of sales and redemptions at
AEFA in 2004.

CASH FLOWS FROM FINANCING ACTIVITIES
The Company's financing activities primarily include the issuance of debt and
AEFA's sale of annuities and investment certificates, in addition to taking
customer deposits. The Company also regularly repurchases its common shares.

Net cash was provided by financing activities for the six months ended June
30, 2004 compared to net cash used in financing activities in the same period
in 2003 due to a net increase in total debt compared to a net decrease last
year, partially offset by a decrease in net sales of annuities and investment
certificates and an increase in share repurchases in 2004.

SHARE REPURCHASES
The Company has in place a share repurchase program to return equity capital
in excess of its business needs to shareholders. Repurchases are made to both
offset 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. During the first half of 2004, the Company
repurchased 39 million common shares at an average price of $50.77. Since the
inception of the share repurchase program in September 1994, 465 million
shares have been acquired under total authorizations to repurchase up to 570
million shares, including purchases made under agreements with third parties.

PARENT COMPANY FUNDING
At June 30, 2004, the Parent Company had $1.3 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In June 2004, the Parent Company
issued $500 million of 4.75% Senior Notes due June 2009 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
June 30, 2004, $0.5 billion was outstanding under this program.

The Parent Company and three subsidiaries, Credco, Centurion Bank and American
Express Bank, FSB (FSB), a wholly-owned subsidiary of TRS, maintain bank
credit facilities of $10.75 billion, of which $9.28 billion was available as
of June 30, 2004, including $1.96 billion allocated to the Parent Company and
$6.70 billion allocated to Credco. As contemplated, in June 2004, Credco
borrowed $1.47 billion under these facilities as part of a change in local
funding strategy for business in Canada. Credco has the right to borrow a
maximum amount of $10.1 billion (including amounts outstanding) under these
facilities, with a commensurate reduction in the amount available to the
Parent Company. These facilities expire as follows (billions): 2005, $3.75;
2006, $2.20; 2007, $1.05 and 2009, $3.75. At June 30, 2004, Credco's bank line
coverage of net short-term debt was 109%.

19

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
accompanying financial statements, which are prepared in accordance with GAAP.
First, revenues are presented as if there had been no asset lending
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 15 percent for the three months
ended June 30, 2004 to $6.9 billion, compared with $6.0 billion for the same
period in 2003. For the six months ended June 30, 2004, consolidated managed
net revenues increased 15 percent to $13.6 billion, compared with $11.8
billion for the same period in 2003. For both periods, managed net revenues
rose due to higher discount revenue, management and distribution fees, travel
commissions and fees, other commissions and fees, insurance and annuity
revenues and other revenues.

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.

20

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

STATEMENTS OF INCOME
(Unaudited)

TRS reported net income of $732 million for the three month period ended June
30, 2004, a 16 percent increase from $634 million for the same period a year
ago. For the six month period ended June 30, 2004, TRS reported net income of
$1.4 billion, a 15 percent increase from $1.2 billion for the same period a
year ago.

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 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,

21

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 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 net finance charge revenue on the owned
portfolio, comprised of unsecuritized cardmember and other loans. Revenues
relating to the Company's retained interests in securitized loan receivables
are shown in net securitization income, which includes net gains and charges
from securitization activity (as discussed below), net finance charge revenue
on retained interests in securitized loans and servicing income, net of
related discounts or fees. Net securitization income decreased 6 percent and
was essentially flat for the three and six month periods ended June 30, 2004,
respectively, versus the same periods a year ago primarily as a result of
lower net gains from securitization activities. See Selected Statistical
Information below for data relating to TRS' owned portfolio.

During the three months ended June 30, 2004 and 2003, TRS recognized net gains
of $9 million ($6 million after-tax) and $81 million ($53 million after-tax),
respectively, from net securitization activity of U.S. cardmember lending
receivables. For the three months ended June 30, 2004, the net gains consist
of $119 million of gains from the securitization of $1.0 billion of U.S.
lending receivables and the sale of $1.4 billion of certain retained interests
from previous securitization activities, offset by $110 million of charges
related to the maturity of $2.5 billion of securitizations and changes in
interest-only strip (I/O strip) assumption factors, including paydown rates
and yields. For the three months ended June 30, 2003, the net gains consist of
$122 million of gains from the securitization of $2.5 billion of U.S. lending
receivables, offset by $41 million of charges related to the maturity of $1.0
billion of securitizations.

During the six months ended June 30, 2004 and 2003, TRS recognized net gains
of $17 million ($11 million after-tax) and $124 million ($81 million
after-tax), respectively, from net securitization activity of U.S. cardmember
lending receivables. For the six months ended June 30, 2004, the net gains
consist of $158 million of gains from the securitization of $1.8 billion of
U.S. lending receivables and the sale of $1.4 billion of certain retained
interests from previous securitization activities, offset by $141 million of
charges related to the maturity of $2.5 billion of securitizations and changes
in I/O strip assumption factors, including paydown rates and yields. For the
six months ended June 30, 2003, the net gains consist of $165 million of gains
from the securitization of $3.5 billion of U.S. lending receivables, offset by
$41 million of charges related to the maturity of $1.0 billion of
securitizations.

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 and other operating expenses.
Consequently, the managed basis presentation for the three months ended June
30, 2004 and 2003 assumes that the impact of this net activity was offset by
higher marketing, promotion, rewards and cardmember services expenses of $6
million and $48 million, respectively, and other operating expenses of $3
million and $33 million, respectively. Similarly, the managed basis
presentation for the six months ended June 30, 2004 and 2003 assumes that the
impact of this net activity was offset by higher marketing, promotion, rewards
and cardmember services expenses of $10 million and $74 million, respectively,
and other operating expenses of $7 million and $50 million, respectively.
Accordingly, the incremental expenses, as well as the impact of this net
activity, have been eliminated. The following tables reconcile the GAAP basis
for certain TRS income statement line items to the managed basis information,
where different.

22

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

THREE MONTHS ENDED JUNE 30, (Dollars in millions)

The following discussion of TRS' results of operations for the three months
ended June 30, 2004 and 2003 is presented on a managed basis.

TRS' net revenues were up 13 percent primarily due to higher discount revenue,
travel commissions and fees, other commissions and fees and net card fees.

Discount revenue rose 18 percent compared to a year ago as a result of a 19
percent increase in billed business partially offset by a lower discount rate.
The decrease in the discount rate primarily reflects the cumulative impact

23

of stronger average growth in the lower rate retail and other "everyday spend"
merchant categories (e.g., supermarkets, discounters, etc.). As previously
indicated, 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 average rate erosion over time. The 19 percent increase in
billed business in the second quarter resulted from a 14 percent increase in
spending per basic cardmember worldwide and 7 percent growth in
cards-in-force. U.S. cards-in-force rose 6 percent reflecting the benefit of
continued strong card acquisition spending and an improved average customer
retention level. International cards-in-force increased 10 percent due to
growth in both proprietary and network partnership cards. U.S. billed business
rose 17 percent reflecting 17 percent growth within the consumer card
business, 22 percent growth in small business services volume and a 15 percent
increase within Corporate Services. U.S. non-T&E related volume categories,
which represented approximately 66 percent of U.S. billed business during the
second quarter of 2004, increased 20 percent over the same period a year ago
while U.S. T&E volumes rose 13 percent reflecting general spending strength
across all T&E industries during the quarter. Total billed business outside
the United States, excluding the impact of foreign exchange translation, was
up 18 percent reflecting strong double-digit growth in all regions. Worldwide
airline related volumes, which represented 13 percent of total billed business
volumes during the quarter, rose 19 percent as a result of 15 percent growth
in transaction volume and a 4 percent increase in the average airline charge.

Cardmember lending net finance charge revenue increased 4 percent as the
benefits from 9 percent growth in average worldwide lending balances were
partially offset by a decline in the portfolio yield. The net interest yield
on the worldwide lending portfolio decreased compared to the prior year
reflecting an increase in the proportion of the portfolio on introductory or
promotional rates, a decrease in the rates on those balances, higher paydown
rates and improved credit quality, which reduces the proportion of the
portfolio at default interest rates, partially offset by lower funding costs.
Net card fees increased 4 percent versus a year ago, reflecting the growth in
cards-in-force. The average fee per proprietary card-in-force was $34 for both
of the three-month periods ended June 30, 2004 and 2003.

Travel commissions and fees rose 26 percent due to a 34 percent increase in
travel sales, reflecting the Rosenbluth acquisition and improvement within the
travel environment. Other commissions and fees increased 20 percent on greater
volume-related foreign exchange conversion fees and higher card fees and
assessments. Other revenues decreased 1 percent due to lower interest income
on investment and liquidity pools held within card funding vehicles and lower
ATM revenues, partially offset by higher publishing revenues, larger insurance
premiums and greater merchant-related revenues.

Marketing, promotion, rewards and cardmember services expenses increased 40
percent compared to the prior year on increased rewards costs, reflecting
strong volume growth, a higher redemption rate and the continued increase in
cardmember loyalty program participation, as well as the Company's continued
focus on business building activities. The provision for losses on charge card
products decreased 7 percent, despite higher volume, primarily due to strong
credit quality as reflected in improved past due percentages and net loss
ratios. The provision for losses on the worldwide lending portfolio decreased
10 percent despite growth in loans outstanding due to well-controlled credit.
Reserve coverage ratios, which were in excess of 100 percent of past due
balances, remained strong. Charge card interest expense declined 14 percent
due to a lower effective cost of funds, partially offset by a higher average
receivables balance.

Human resources expenses increased 12 percent versus the second quarter last
year due to increased costs related to management incentives and employee
benefits, merit increases and the impact of the 2003 acquisition of
Rosenbluth. Other operating expenses increased 10 percent reflecting, in part,
the impact of greater business and service volume-related costs, higher
equipment-related technology costs, the Rosenbluth acquisition and the impact
of foreign currency translation. These increases were partially offset by the
benefits of reengineering initiatives and other cost containment efforts.

24

SIX MONTHS ENDED JUNE 30, (Dollars in millions)