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, 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 October 31, 2004
- ----------------------------------------- -------------------------------
Common Shares (par value $.20 per share) 1,255,187,918 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 $152 million and $116 million for the three months
ended September 30, 2004 and 2003, respectively, and $415 million and
$360 million for the nine months ended September 30, 2004 and 2003,
respectively. Net investment income is presented net of interest expense
of $57 million and $53 million for the three months ended September 30,
2004 and 2003, respectively, and $162 million and $172 million for the
nine months ended September 30, 2004 and 2003, respectively, related
primarily to the Company's international banking operations.

At September 30, 2004 and December 31, 2003, cash and cash equivalents
included $0.9 billion and $1.1 billion, respectively, in special bank
accounts for the benefit of customers.

The Company has securitized charge card receivables totaling $2.7 billion
and $3.0 billion at September 30, 2004 and December 31, 2003,
respectively, 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 investments accounted for in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and other cost method investments are other-than-temporarily
impaired. However, with the issuance of FASB Staff Position (FSP)
EITF 03-1-1, the provisions of the consensus relating to the measurement
and recognition of other-than-temporary impairments will be deferred
pending further clarification from the FASB. The remaining provisions of
this rule, which primarily relate to disclosure requirements, are
required to be applied prospectively to all current and future
investments accounted for in accordance with SFAS No. 115 and other cost
method investments. The Company will evaluate the potential impact of
EITF 03-1 after the FASB completes its reassessment.

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 FSP FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP FAS 106-2). The Company 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.

In October 2004, the FASB ratified EITF 04-08, "The Effect of
Contingently Convertible Instruments on Diluted Earnings per Share."
Certain debt instruments, commonly referred to as "Co-Cos", are
contingently convertible into the common shares of the issuer after the
common share price has exceeded a predetermined threshold for a specified
period of time. Under the EITF guidance, Co-Cos must be included in
diluted earnings per share calculations regardless of whether or not the
contingency threshold has been met. The impact of this EITF should be
retroactively applied to instruments outstanding as of December 31, 2004.

As of September 30, 2004, the Company has $2 billion principal
outstanding of 1.85% Convertible Senior Debentures due 2033 (the
Debentures) with a current base conversion price of $69.41 and a
contingent conversion threshold of $86.76 per share. Prior to the third
quarter of 2004, these Debentures were contingently convertible into cash
or common shares of the Company, at the Company's option. During the
third quarter of 2004, the Company notified the trustee and holders of
the Debentures that the Company was electing that, upon conversion of the
Debentures at any time after the date of such notice, the Company will be
required to deliver cash in an amount at least equal to the accreted
principal amount of the Debentures converted. The Company may not revoke
this election without the consent of holders of at least a majority of
the original principal amount of the Debentures.

As a result of this election, in accordance with EITF 04-08, there will
be no impact on the future dilutive earnings per share calculation
related to these Debentures unless the Company's common share price
exceeds the current base conversion price. In that scenario, the Company
would reflect the additional common shares in the calculation of diluted
earnings per share using the treasury share method.

6

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. STOCK-BASED COMPENSATION

At September 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 $13 million
and $7 million after-tax for the three months ended September 30, 2004
and 2003, respectively, and expensed $40 million and $17 million
after-tax for the nine months ended September 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-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 nine
months ended September 30, 2004 and 2003:

3. INVESTMENT SECURITIES

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

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 nine months ended September 30, 2004 and 2003:

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 $88 billion. The total amount of the
estimated liability recorded at September 30, 2004 for such programs was
$283 million. The reduction in the estimated liability
from the second quarter 2004 amount of $333 million resulted as the
Company reduced its merchant-related reserves by approximately $60
million during the third quarter of 2004, reflecting modifications in
certain merchant agreements to mitigate loss exposure and ongoing
favorable credit experience with merchants. The Company has no
collateral or other recourse provisions related to these guarantees.
Expenses relating to claims under these guarantees were approximately
$4 million and $15 million for the three and nine months ended
September 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 September
30, 2004, the Company held $772 million of collateral supporting these
guarantees. The following table provides information related to such
guarantees as of September 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

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

* 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 $31.8
million as of September 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 using actuarial models to simulate various 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 life insurance and 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 $298 million
and $279 million as of September 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 $16 million and $11 million
during the three months ended September 30, 2004 and 2003, respectively,
and $53 million and $54 million during the nine months ended September
30, 2004 and 2003, respectively. The Company amortized $7 million and
$5 million during the three months ended September 30, 2004 and 2003,
respectively, and $24 million and $18 million during the nine months
ended September 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 nine months ended September
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 September 30, 2004 and 2003 was $9 million and $10 million,
respectively, and $29 million and $30 million for the nine months ended
September 30, 2004 and 2003, respectively.

8. TAXES AND INTEREST

Income taxes paid (net of refunds) during the nine months ended September
30, 2004 and 2003 were approximately $836 million and $811 million,
respectively. Interest paid during both the nine months ended September
30, 2004 and 2003 was approximately $1.2 billion.

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 nine months ended September 30, 2004 and
2003 are as follows:

10

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended September 30, 2004 and 2003, the dilutive
effect of stock options excludes 14 million and 37 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 nine months ended September 30,
2004 and 2003 was 12 million and 83 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. As discussed in Note 1,
EITF 04-08 will have no impact on the future dilutive earnings per share
calculations unless the Company's common share price exceeds the
conversion price, currently $69.41, of the Company's $2 billion
outstanding of 1.85% Convertible Senior Debentures due 2033.

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 nine months ended September 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) for
further information regarding the effect of securitizations on the
financial statements. TRS' third

11

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

quarter and year-to-date results reflect a reconciliation of
securitization-related lending receivable accounts, which resulted in a
charge to other provision of $115 million (net of $32 million of reserves
previously provided) for balances accumulated over the prior five year
period as a result of a computational error. The amount of the error was
immaterial to any of the quarters in which it occurred and, since the
identification of this error, the Company has performed a comprehensive
review and revised its procedures accordingly. 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 nine months ended September 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

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. SUBSEQUENT EVENTS

In October 2004, the Company announced an agreement to sell the leasing
product line in its small business financing unit, American Express
Business Financial Corporation (AEBF), with a loan portfolio of
approximately $1.5 billion. The Company does not expect the gain on the
sale of AEBF to have a material impact on fourth quarter net income as the
Company also expects to incur unrelated, newly anticipated costs
associated with global reengineering initiatives.

Additionally, the Company announced that it has signed agreements with
Delta Air Lines to extend its co-brand, Membership Rewards and merchant
partnerships. The agreements will extend these partnerships into the next
decade. As part of the agreements, American Express has committed to
prepay $500 million for the future purchase of Delta SkyMiles rewards
points. The Company has also committed to loan Delta up to $100 million
in connection with senior secured financing being arranged with Delta by
GE Commercial Finance. Both the prepayment and the loan will have a
three-year term, and both will be fully collateralized by a pool of
assets and are subject to certain conditions.

13

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 September 30, 2004 and the related consolidated
statements of income for the three and nine-month periods ended September 30,
2004 and 2003, and consolidated statements of cash flows for the nine-month
periods ended September 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
November 4, 2004

14

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 SEPTEMBER 30,
2004 AND 2003

The Company's consolidated net income for the three-month period ended
September 30, 2004 of $879 million rose 14 percent from $770 million in the
same period a year ago. Diluted earnings per share (EPS) of $0.69 increased 17
percent from $0.59. On a trailing 12-month basis, return on average
shareholders' equity was 21.5 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 September 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 September 30, 2004 were $7.2
billion, up 12 percent from $6.4 billion in the same period a year ago
reflecting 13 percent growth at TRS, 12 percent growth at AEFA and 3 percent
growth at AEB. As discussed in further detail below, the increase in the third
quarter was due primarily to

15

increases in discount revenue, management and distribution fees, cardmember
lending net finance charge revenue, travel and other commissions and fees, and
insurance and annuity revenues.

Discount revenue at TRS rose 14 percent as compared to a year ago as a result
of a 16 percent increase in worldwide billed business, reflecting higher
average cardmember spending and growth in cards-in-force, partially offset by
a lower discount rate. Net investment income increased 5 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 5 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 a $7 million benefit primarily reflecting lower than
expected losses resulting from management's first quarter decision to
liquidate a secured loan trust managed by AEFA.

Management and distribution fees increased 21 percent representing a 34
percent increase in management fees and a 7 percent increase in distribution
fees. The management fees increase resulted from higher average assets under
management, reflecting the impact from the September 30, 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 partially offset by
lower limited partnership and brokerage-related revenues.

Cardmember lending net finance charge revenue at TRS increased 18 percent,
reflecting the effects of 17 percent growth in the average balance of the
owned lending portfolio and a higher average yield. Net card fees increased 2
percent primarily reflecting 7 percent growth in cards-in-force. Travel
commissions and fees rose 22 percent as a result of a 23 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 18 percent
primarily due to greater volume-related foreign exchange conversion fees, card
fees and assessments at TRS. Insurance and annuity revenues increased 13
percent primarily due to strong property-casualty and higher life
insurance-related revenues at AEFA.

Net securitization income, which includes non-credit provision components of
the net gains and charges from securitization activities, excess spread
related to securitized loans, net finance charge revenue on retained interests
in securitized loans and servicing income, net of related discounts or fees,
decreased 2 percent primarily due to lower excess servicing income resulting
from lower finance charge yields on securitized loans.

Expenses
- --------
Consolidated expenses for the three months ended September 30, 2004 were $5.9
billion, up 11 percent from $5.4 billion for the same period in 2003
reflecting increases of 12 percent at both TRS and AEFA, while AEB expenses
decreased slightly. As discussed in further detail below, the increase in the
third quarter of 2004 was primarily driven by higher marketing, promotion,
rewards and cardmember services, human resources, professional services, and
occupancy and equipment expenses partially offset by lower provisions for
losses and benefits and interest expense.

Human resources expenses increased 15 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. The increase in human resources
expenses also reflects a $9 million decrease in favorable deferred acquisition
costs (DAC) adjustments this year versus last year at AEFA.

Marketing, promotion, rewards and cardmember services expenses increased 29
percent versus a year ago primarily due to a 29 percent increase at TRS
related to increased rewards costs, reflecting a higher redemption rate,
strong volume growth 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
cardmembers enrolled in rewards and co-brand programs yield higher spend,
better retention, stronger credit performance and greater profit for the
Company.

16

Total provisions for losses and benefits decreased 2 percent from last year,
primarily resulting from a combined 8 percent reduction in annuity and
investment certificate provisions at AEFA, a 3 percent reduction in charge
card provision at TRS and a 16 percent decrease in TRS cardmember lending
provision, partially offset by a 20 percent increase in life insurance,
international banking and other provisions. Annuity provisions at AEFA
decreased 9 percent primarily due to lower interest crediting rates and the
effect of depreciation in the S&P 500 on equity indexed annuities during the
current quarter versus appreciation in the same period a year ago, partially
offset by a higher average inforce level. Investment certificate provisions at
AEFA decreased 1 percent primarily due to the effect on the stock market
certificate product of depreciation in the S&P 500 during the current quarter
versus appreciation in the same period a year ago, partially offset by higher
average reserves and interest crediting rates.

The increase in life insurance, international banking and other provisions was
primarily driven by an increase in other provisions at TRS reflecting a
reconciliation of securitization-related lending receivable accounts, which
resulted in a charge of $115 million (net of $32 million of reserves
previously provided) for balances accumulated over the prior five-year period
as a result of a computational error. The amount of the error was immaterial
to any of the quarters in which it occurred and, since the identification of
this error, the Company has performed a comprehensive review and revised its
procedures accordingly.

Separately, other provisions at TRS were favorably impacted by a reduction in
merchant-related reserves of approximately $60 million that reflects
modifications in certain merchant agreements to mitigate loss exposure and
ongoing favorable credit experience with merchants.

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 decreased despite growth in average loans
outstanding primarily due to 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 13 percent versus the same period a year
ago primarily due to increased technology costs related 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 9 percent
primarily due to a 6 percent decrease in charge card interest expense at TRS,
reflecting the benefit of a lower effective cost of funds, partially offset by
higher average receivable balances. Other expenses were essentially flat as a
result of an 8 percent decrease at TRS, primarily resulting from the impact of
foreign currency translation gains, offset by a 27 percent increase at AEFA,
primarily due to increased costs related to securities industry regulatory and
legal matters, partially offset by a $31 million favorable benefit from DAC
adjustments this year versus last year.

The effective tax rate was 30 percent and 28 percent for the three-month
periods ended September 30, 2004 and 2003, respectively, reflecting the effect
of the $29 million reduction to tax expense in the third quarter 2003 related
to the finalization of the 2002 tax return filed during the third quarter and
the publication of favorable technical guidance related to the taxation of
dividend income.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 AND 2003

The Company's consolidated income before accounting change rose 18 percent to
$2.6 billion and diluted EPS before accounting change rose 19 percent to $2.03
in the nine-month period ended September 30, 2004 as compared to a year ago.
The Company's consolidated net income of $2.5 billion rose 15 percent from
$2.2 billion and diluted EPS of $1.98 increased 16 percent from $1.71. On a
trailing 12-month basis, return on average shareholders' equity was 21.5
percent.

Net income and EPS for the nine months ended September 30, 2004 reflect the
$71 million ($109 million pretax) or $0.05 per diluted share impact of the
Company's adoption of 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 requires insurance
enterprises to establish liabilities for benefits that may become payable

17

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 nine months ended September 30, 2004.

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

Revenues
- --------
Consolidated revenues for the nine months ended September 30, 2004 were $21.4
billion, up 14 percent from $18.8 billion in the same period a year ago
reflecting 13 percent growth at TRS, 17 percent growth at AEFA and 4 percent
growth at AEB. As discussed in further detail below, the increase in the first
nine months of 2004 was due primarily to increases in discount revenue,
management and distribution fees, travel and other commissions and fees,
cardmember lending net finance charge revenue, insurance and annuity revenues,
net card fees and other revenues.

Discount revenue at TRS rose 17 percent as compared to a year ago as a result
of an 18 percent increase in worldwide billed business, reflecting both growth
in cards-in-force and higher average cardmember spending, partially offset by
a lower discount rate. Net investment income was essentially flat as a 4
percent increase at AEFA was offset by lower interest income on investment and
liquidity pools held within card funding vehicles at TRS and lower net
interest income at AEB. The increase at AEFA is primarily due to the benefits
of slightly higher levels of invested assets and a slightly higher yield.
AEFA's net investment income for the nine months ended September 30, 2004 also
includes a net $24 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.

Management and distribution fees increased 34 percent representing a 41
percent increase in management fees and a 25 percent increase in distribution
fees. The management fees increase is primarily due to higher average assets
under management, reflecting the impact from the September 30, 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 partially
offset by lower limited partnership product sales.

Cardmember lending net finance charge revenue at TRS increased 10 percent as
the effects of 16 percent growth in the average balance of the owned lending
portfolio were partially offset by 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 29 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 17 percent primarily due to
greater volume-related foreign exchange conversion fees, 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 for the nine months ended September 30, 2004 was
essentially flat as compared to the same period in the prior year. The impact
of higher average securitized loan balances was offset by lower excess
servicing income resulting from lower finance charge yields on securitized
loans as well as lower net gains from securitization activities.

Expenses
- --------
Consolidated expenses for the nine months ended September 30, 2004 were $17.6
billion, up 13 percent from $15.6 billion for the same period in 2003
reflecting increases of 12 percent at TRS and 14 percent at AEFA, while AEB's
expenses decreased slightly. As discussed in further detail below, the
increase in the first nine months 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.

18

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 increase in human resources
expenses also reflects a $9 million third quarter decrease in favorable DAC
adjustments this year versus last year at AEFA. These increases were partially
offset by a first quarter $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 first quarter DAC valuation benefit of $66 million (including
the $22 million benefit in other expenses 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 32
percent versus a year ago primarily due to a 32 percent increase at TRS
related to increased rewards costs, reflecting a higher redemption rate,
strong volume growth 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 3 percent from last year,
primarily resulting from a combined 7 percent reduction in annuity and
investment certificate provisions at AEFA, a 5 percent reduction in charge
card provision at TRS and a 6 percent decrease in TRS cardmember lending
provision partially offset by a 5 percent increase in life insurance,
international banking and other reserves. Annuity provisions at AEFA decreased
7 percent primarily due to lower interest crediting rates and the effect on
equity indexed annuities of lower appreciation in the S&P 500 during the first
nine months of the year versus the same period a year ago, partially offset by
a higher average inforce level. Investment certificates provisions at AEFA
decreased 5 percent primarily due to lower interest crediting rates and the
effect on the stock market certificate product of lower appreciation in the
S&P 500 during the first nine months of the year versus the same period a year
ago, partially offset by higher average reserves.

The increase in life insurance, international banking and other provisions was
primarily driven by an increase in other provisions at TRS as previously
discussed in the three-month results of operations section. This increase was
partially offset by a significant decrease in international banking provisions
at AEB due to an improvement in bankruptcy-related write-offs in the consumer
lending portfolio in Hong Kong and lower Personal Financial Services loan
volumes.

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 decreased despite growth in average loans
outstanding primarily due to 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 10 percent versus the same period a year
ago primarily due to increased technology costs related 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 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 16 percent, including a 6 percent
increase at TRS, primarily resulting from the impact of the Threadneedle and
Rosenbluth acquisitions, the impact of foreign currency translation losses 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
a $31 million third quarter favorable benefit from DAC adjustments this year
versus last year at AEFA; the first quarter $22 million DAC valuation benefit
at AEFA and the benefit of reengineering initiatives and cost containment
efforts. See the AEFA Results of Operations section for further discussion of
DAC and related adjustments.

The effective tax rate was 30 percent for both the nine-month periods ended
September 30, 2004 and 2003.

19

Other Events
- ------------
In October 2004, the Company announced an agreement to sell the leasing
product line in its small business financing unit, American Express Business
Financial Corporation (AEBF), with a loan portfolio of approximately $1.5
billion. The Company does not expect the gain on the sale of AEBF to have a
material impact on fourth quarter net income as the Company also expects to
incur unrelated, newly anticipated costs associated with global reengineering
initiatives.

Additionally, the Company announced that it has signed agreements with Delta
Air Lines to extend its co-brand, Membership Rewards and merchant
partnerships. The agreements will extend these partnerships into the next
decade. As part of the agreements, American Express has committed to prepay
$500 million for the future purchase of Delta SkyMiles rewards points. The
Company has also committed to loan Delta up to $100 million in connection
with senior secured financing being arranged with Delta by GE Commercial
Finance. Both the prepayment and the loan will have a three-year term,
and both will be fully collateralized by a pool of assets and are subject
to certain conditions.

The Company's decision to participate in Delta's restructuring program
reflects its long-term partnership with the airline through its travel
business, co-branded cards and the Membership Rewards program. While American
Express' Delta SkyMiles Credit Card co-brand portfolio accounts for less than
10 percent of the Company's total worldwide billed business and less than 15
percent of managed worldwide lending receivables, it represents a very
attractive, high-spending, loyal cardmember base with excellent credit
quality. The Company continues to believe this portfolio represents an
attractive growth opportunity.

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
$383 million during the nine months ended September 30, 2004. In addition, in
keeping with the Company's objectives regarding the return of excess capital
to shareholders, the Board of Directors of the Company approved a 20 percent
increase in the quarterly dividend on the Company's common stock from $0.10 to
$0.12 per share for the dividend payable to shareholders on November 10, 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 nine months ended September 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. In addition, net cash was provided by fluctuations in other
operating assets and liabilities. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.

Net cash was provided by operating activities in amounts less than net income
for the nine months ended September 30, 2003 as net income and non-cash
expense items such as provisions for losses and depreciation were more than
offset by fluctuations in the Company's operating assets and liabilities,
primarily reflecting the purchase of securities in 2002, settled in 2003.

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

20

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 nine months ended September 30, 2004, net cash used in investing
activities decreased from last year primarily due to decreases in cash used
for loan operations at AEB and an acquisition at AEFA in 2003 partially
offset by net increases in cash used in funding cardmember loans and
receivables at TRS.

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 used in financing activities for the nine months ended September 30,
2004 was relatively flat compared to the same period in 2003 due to a decrease
in net sales and redemptions of annuities and investment certificates and
higher share repurchase activity offset by a net increase in total debt
compared to a net decrease last year.

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 nine months ended September 30,
2004, the Company repurchased 54.4 million common shares at an average price
of $50.60. Since the inception of the share repurchase program in September
1994, 480.5 million shares have been acquired under total authorizations to
repurchase up to 570.0 million shares, including purchases made under
agreements with third parties.

Parent Company Funding
- ----------------------
In July 2004, the Parent Company filed a registration statement with the
Securities and Exchange Commission (SEC) for an additional $3 billion
aggregate amount of debt securities, common and preferred equity securities
and warrants, which was declared effective on August 19, 2004. At September
30, 2004, the Parent Company had $4.3 billion of debt or equity securities
available for issuance under shelf registrations filed with the 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 a
program 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, 2004, $2.7 billion was outstanding
under this program, including (Pounds Sterling)1.25 billion (approximately
$2.2 billion) issued by Credco during the third quarter. Subsequently, in
October 2004, Credco issued (Euro)375 million (approximately $461 million)
under the 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 September 30, 2004, including $1.96 billion allocated to the Parent Company
and $6.7 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.

21

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 12 percent for the three months
ended September 30, 2004 to $6.9 billion, compared with $6.1 billion for the
same period in 2003. For the nine months ended September 30, 2004,
consolidated managed net revenues increased 14 percent to $20.5 billion,
compared with $18.0 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 and
insurance and annuity 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.

22

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003

Statements of Income
--------------------
(Unaudited)

# - Denotes a variance of more than 100%

TRS reported net income of $726 million for the three-month period ended
September 30, 2004, a 20 percent increase from $606 million for the same
period a year ago. For the nine-month period ended September 30, 2004, TRS
reported net income of $2.1 billion, a 16 percent increase from $1.8 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, presents a more

23

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 non-credit provision
components of the net gains and charges from securitization activities (as
discussed below), excess spread related to securitized loans, net finance
charge revenue on retained interests in securitized loans and servicing
income, net of related discounts or fees. Net securitization income decreased
2 percent for the three-month period ended September 30, 2004 versus the same
period a year ago primarily due to lower excess servicing income resulting
from lower finance charge yields on securitized loans. For the nine-month
period ended September 30, 2004, net securitization income was relatively flat
as the impact of higher average securitized loan balances was offset by
lower excess servicing income resulting from lower finance charge yields on
securitized loans as well as lower net gains from securitization activities.
See Selected Statistical Information below for data relating to TRS' owned
portfolio.

During the three months ended September 30, 2004, TRS recognized net gains of
$9 million ($6 million after-tax) related to net securitization activities.
The net gains consist of $72 million from the securitization of $2.1 billion
of U.S. lending receivables and charges of $63 million related to the maturity
of $0.5 billion of securitizations, interest-only strip (I/O strip) factors
and a reconciliation adjustment to lending receivable accounts. There were no
incremental securitizations during the three months ended September 30, 2003.

During the nine months ended September 30, 2004 and 2003, TRS recognized net
gains of $26 million ($17 million after-tax) and $124 million ($81 million
after-tax), respectively, from net securitization activities. For the nine
months ended September 30, 2004, the net gains consist of $230 million of
income from securitization of $3.9 billion of U.S. lending receivables and the
sale of $1.4 billion of certain retained interests from previous
securitization activities, primarily offset by $204 million of charges related
to the maturity of $3.0 billion of securitizations changes in I/O strip
assumptions and other factors. For the nine months ended Septemb