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, 2002

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 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 31, 2002
- -------------------------------------------- -------------------------------
Common Shares (par value $.20 per share) 1,328,920,556 shares

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

PART I--FINANCIAL INFORMATION

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)
(Unaudited)

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 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, 2001. Certain reclassifications of prior period amounts
have been made to conform to the current presentation.

Cardmember lending net finance charge revenue is presented net of
interest expense of $127 million and $267 million for the second
quarters of 2002 and 2001, respectively, and $254 million and $544
million for the six months ended June 30, 2002 and 2001, respectively.
Interest and dividends is presented net of interest expense of $62
million and $121 million for the second quarters of 2002 and 2001,
respectively, and $123 and $260 million for the six months ended June
30, 2002 and 2001, respectively, related primarily to the company's
international banking operations.

At both June 30, 2002 and December 31, 2001, cash and cash equivalents
included $1.0 billion segregated in special bank accounts for the
benefit of customers.

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.

2. RESTRUCTURING CHARGE

During the third and fourth quarters of 2001, the company recorded
aggregate restructuring charges of $631 million ($411 million
after-tax). Excluding balance sheet charge-offs ($120 million) and cash
payments made during 2001 ($51 million), the company's liability at
December 31, 2001 was $460 million.

During the first quarter of 2002, the company adjusted the prior year's
aggregate restructuring charge liability by taking back into income a
net pretax amount of $13 million ($8 million after-tax). This includes
the reversal of severance and related benefits of $17 million, primarily
caused by voluntary attrition or redeployment into open jobs, of
approximately 1,700 employees whose jobs were eliminated. This was
offset in part by additional net exit costs of $4 million. These exit
costs include $12 million related to the exit of office facilities,
including the effect of the company's decision to exit its Jersey City,
New Jersey office space, reduced by a decreased liability of $8 million
due to revisions to plans relating to certain travel office locations.

During the second quarter of 2002, the company further adjusted the
aggregate restructuring charge liability by taking back into income a
net pretax amount of $6 million ($4 million after-tax). This includes
the reversal of severance and related benefits of $18 million, primarily
caused by voluntary attrition or redeployment into open jobs, of
approximately 1,100 employees whose jobs were eliminated plus savings
from the renegotiation of outplacement costs. This was offset in part by
additional exit and facility consolidation costs of $12 million (of
which $5 million related to charge-offs of building and related costs in
facilities affected by the restructuring plan). These exit and facility
consolidation costs include additional costs related to both domestic
and international office facilities.

5

All of the above activity was recorded in the Travel Related Services
(TRS) segment. As of June 30, 2002, other liabilities include $293
million for the expected future cash outlays related to aggregate
restructuring charges. In addition to employee attrition or
redeployment, approximately 7,600 employees have been terminated since
inception of the restructuring plan.

The following table summarizes the company's cash payments, additional
charges and liability reductions by category for the first two quarters
of 2002:

3. INVESTMENT SECURITIES

The following is a summary of investments at June 30, 2002 and December
31, 2001:

During the first and second quarters of 2001, the company recognized
pretax losses of $182 million and $826 million, respectively, from the
write down and sale of certain high yield securities. These losses are
included in "Interest and dividends" on the Consolidated Statements of
Income.

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," which established new accounting and
reporting standards for goodwill and other intangible assets. Under the
new rules, goodwill and other intangible assets deemed to have
indefinite lives are no longer amortized but are instead subject to
annual impairment tests. Management has completed goodwill impairment
tests as of the date of adoption; such tests did not indicate
impairment.

As of June 30, 2002, the company had acquired identifiable intangible
assets with definite lives of $142 million (net of accumulated
amortization of $37 million). These intangible assets have a
weighted-average remaining useful life of 6 years, and mainly reflect
purchased credit card relationships and certain automated teller machine
merchant contracts. The aggregate amortization expense for these
intangible assets during the six months ended June 30, 2002 was $12
million. Amortization expense associated with these intangible assets is
estimated to be approximately $23 million for each of the next five
years.

6

At both December 31, 2001 and June 30, 2002, the company had
approximately $1.2 billion of net goodwill on its consolidated balance
sheets. At both dates, this consisted of approximately $1.0 billion at
TRS and $0.2 billion at American Express Financial Advisors (AEFA).

The following table presents the impact to net income and earnings per
common share (EPS) of goodwill amortization for the three and six months
ended June 30, 2001:

THREE MONTHS ENDED JUNE 30, 2001:

SIX MONTHS ENDED JUNE 30, 2001:

5. COMPREHENSIVE INCOME

Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. For the company, 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 and (iii) foreign currency translation adjustments. The
components of comprehensive income, net of related tax, for the three
and six months ended June 30, 2002 and 2001 were as follows:

6. TAXES AND INTEREST

Net income taxes paid during the six months ended June 30, 2002 and 2001
were approximately $432 million and $377 million, respectively. Interest
paid during the six months ended June 30, 2002 and 2001 was
approximately $0.8 billion and $1.4 billion, respectively.

7

7. EARNINGS PER COMMON SHARE

The computations of basic and diluted earnings per common share (EPS)
for the three and six months ended June 30, 2002 and 2001 are as
follows:

8. SEGMENT INFORMATION

The following tables present three and six-month results for the
company's operating segments, based on management's internal reporting
structure. Net revenues (managed basis) exclude the effect of
securitizations at TRS, and include provisions for losses and benefits
for annuities, insurance and investment certificate products of AEFA.
AEFA's revenues for the first half of 2001 include the effect of $182
million and $826 million of losses from the write down and sale of
certain high-yield securities in the first and second quarters,
respectively.

9

INDEPENDENT ACCOUNTANTS' REVIEW REPORT

The Shareholders and Board of Directors
American Express Company

We have reviewed the accompanying consolidated balance sheet of American
Express Company (the "Company") as of June 30, 2002 and the related
consolidated statements of income for the three and six-month periods ended
June 30, 2002 and 2001 and the consolidated statements of cash flows for the
six month periods ended June 30, 2002 and 2001. These financial statements
are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States, which will be performed for the full year with the objective
of expressing an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of the Company
as of December 31, 2001, 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 28, 2002, 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, 2001 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
August 8, 2002

10

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This financial review is primarily presented in a format generally termed
"managed basis." This is the basis used by management to evaluate operations
and is consistent with general industry practice. It differs in two respects
from the accompanying financial statements, which are prepared in accordance
with U.S. Generally Accepted Accounting Principles (GAAP). First, results are
presented as if there had been no asset securitizations at Travel Related
Services (TRS). Second, revenues are shown net of American Express Financial
Advisors' (AEFA) provisions for annuities, insurance and investment
certificate products, which are essentially spread businesses.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002

The company's consolidated net income and diluted earnings per share (EPS) of
$683 million and $0.51 for the three-month period ended June 30, 2002 rose
significantly from $178 million and $0.13, respectively, in the same period a
year ago. The company's revenue and pretax income for the second quarter of
2002 included a $78 million investment loss ($50 million after-tax) related
to the company's WorldCom debt holdings, largely at AEFA. The company's 2001
revenues and pretax income include the effect of $826 million of losses ($537
million after-tax) from the write-down and sale of certain high-yield
securities at AEFA.

Consolidated revenues on a GAAP basis rose 13 percent in the three months
ended June 30, 2002 compared to the prior year. Consolidated net revenues on
a managed basis rose 16 percent due to higher Cardmember lending spreads and
loan balances, greater insurance revenues, and higher revenues related to
AEFA's investment portfolio. These increases were partially offset by weaker
travel revenues and lower management and distribution fees. Excluding the
effect of the $826 million of high-yield losses on 2001 results, GAAP basis
consolidated revenues would have been down two percent and managed basis
consolidated net revenues would have been down one percent.

For the three-month period ended June 30, 2002, GAAP basis consolidated
expenses decreased three percent compared to a year ago. Consolidated
expenses on a managed basis decreased one percent due to lower charge card
funding costs, a decline in human resource expenses and the benefits of other
reengineering activities and expense control initiatives. These decreases
were partially offset by higher other operating expenses and increased
marketing and promotion costs as compared to a year ago.

In the second quarter of 2002, the company recognized a net benefit of $6
million ($4 million after-tax) to adjust the restructuring charge reserve
established during the second half of 2001. In addition, second quarter 2002
results also include a benefit of $7 million ($4 million after-tax) related
to third quarter of 2001 disaster recovery reserves to reflect lower than
anticipated insured loss claims at AEFA.

CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

The company's consolidated net income and EPS rose 82 percent and 83 percent,
respectively, in the six-month period ended June 30, 2002 as compared to a
year ago. The company's revenue and pretax income for the first half of 2002
included a $78 million investment loss ($50 million after-tax) related to the
company's WorldCom debt holdings, largely at AEFA. The company's 2001
revenues and pretax income include the effect of $1,008 million of losses
($669 million after-tax) from the write down and sale of certain high-yield
securities at AEFA. The company's return on equity was 15.4 percent.

On a GAAP basis, consolidated revenues rose seven percent in the six months
ended June 30, 2002 compared to the prior year. Consolidated net revenues on
a managed basis rose nine percent due to higher Cardmember lending spreads
and loan balances, greater insurance revenues, and higher revenues related to
AEFA's investment portfolio. Excluding the effect of the $1,008 million of
high-yield losses on 2001 results, GAAP basis consolidated revenues would
have been down two percent and managed basis consolidated net revenues would
have been down one percent.

11

For the six-month period ended June 30, 2002, consolidated expenses on a GAAP
basis declined two percent compared to the prior year. On a managed basis,
consolidated expenses were relatively unchanged reflecting lower charge card
funding costs, a decline in human resource expenses and the benefits of
other reengineering activities and expense control initiatives. This was
offset by increases in other operating expenses, higher provisions for losses
and increased marketing and promotion expenses.

In the first half of 2002, the company recognized a net benefit of $19
million ($12 million after-tax) to adjust the restructuring charge reserve
established during the second half of 2001. In addition, 2002 results also
include a benefit of $7 million ($4 million after-tax) related to third
quarter of 2001 disaster recovery reserves to reflect lower than anticipated
insured loss claims at AEFA. 2001 results included a first quarter $67
million expense increase due to an adjustment of Deferred Acquisition Costs
for variable insurance and annuity products.

Due to the adoption of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," in 2002, no goodwill
amortization occurred in the first half of 2002. 2001 results included
goodwill amortization of $25 million ($20 million after-tax) or $0.02 per
share and $50 million ($39 million after-tax) or $0.03 per share for the
three and six-month periods ended June 30, respectively.

As of June 30, 2002, the company has incurred costs of approximately $140
million related to the terrorist attacks of September 11th, which are
expected to be covered by insurance and, consequently, did not impact
results. These include the cost of duplicate facilities and equipment
associated with the relocation of the company's offices from lower Manhattan
and certain other business recovery expenses. Costs associated with the
damage to the company's offices, extra operating expenses and business
interruption losses continue to be evaluated. As of June 2002, approximately
$40 million of such costs relate to the company's portion of the repair of
its headquarters building and are included in the total costs incurred to
date. The company expects that a substantial portion of these losses will be
covered by insurance.

OUTLOOK

The company believes its full year EPS is unlikely to exceed $2.01,
which was the analyst consensus prior to its second quarter earnings
release, due to several factors. First, the continuing uncertainty in the
equity markets makes it difficult to provide a specific estimate. Second, the
diminishing benefit of lower interest rates throughout the remainder of the
year will be a factor. Third, based on current conditions, the company plans
to invest more in growth initiatives during the second half of the year.
Increased investment in growth initiatives are expected to come in part from
reengineering savings and improved spreads which otherwise would have flowed
through to earnings in the form of improved operating margins. For the full
year 2002, the company continues to expect to realize over $1 billion in
reengineering related benefits, including approximately $605 million of
savings from restructuring plans initiated in the second half of 2001.

EXPENSING OF STOCK OPTIONS

The company announced on August 12, 2002 that it will expense all stock
options the company grants, beginning with options granted in 2003. The
company will adopt the fair-value-based method of recording stock options
contained in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." All future employee stock
option grants beginning in 2003 will be expensed over the stock option
vesting period based on the fair value at the date the options are granted.
As previously stated at its Financial Community Meeting on July 31, 2002,
the company plans to reduce the level of new stock options it grants.
A comprehensive review of the company's compensation strategy is
currently underway. All elements of current compensation - cash, stock and
options - are being reviewed and evaluated. To ensure total compensation
remains competitive, industry benchmarking and market trends also are being
reviewed. The company plans to complete the compensation review over the
next several months, and make any resulting changes on a going-forward
basis. Had the company adopted SFAS No. 123 for all options granted in
2002, the impact to earnings would have been $0.07 per share.

12

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

In August 1999 and March 2000, the company entered into agreements with a
financial institution under which an aggregate 29 million company common
shares at an average purchase price of $50.41 per share were purchased on
behalf of the financial institution. These agreements, which partially offset
the company's exposure to the effect on diluted earnings per share of
outstanding in-the-money stock options issued under the company's stock option
program, are separate from the company's previously authorized share
repurchase program. Each of the agreements terminates after five years, at
which time the company is required to deliver an amount equal to the original
purchase price for the shares. The company may elect to settle this amount (i)
physically, by paying cash against delivery of the shares held on behalf of
the financial institution or (ii) on a net cash or net share basis. During the
term of these agreements, the company, on a monthly basis, issues shares or
receives shares so that the value of the shares held on behalf of the
financial institution equals the original purchase price for the shares.
During the first six months of 2002, net settlements under the agreements
resulted in the company receiving 0.8 million shares. In addition, during the
term of the agreements, the company, on a monthly basis, is obligated to pay
interest, in cash or company shares, on the outstanding aggregate principal
amount. The company may also prepay outstanding amounts at any time prior to
the end of the five-year term. In the first quarter of 2001, the company
elected to prepay $350 million of the aggregate outstanding amount. To the
extent that the price of the company's common stock declines to levels
substantially lower than current levels for a sustained period of time,
thereby resulting in significant net issuances of shares under these
agreements, there could be an adverse impact on diluted earnings per share.
The maximum number of company common shares that could potentially be
distributed pursuant to the equity-forward agreements would not exceed 170
million shares as adjusted for shares delivered by the company and shares
delivered to the company.

On June 19, 2002, the company announced that it has resumed its share
repurchase program. The program had been suspended at the end of the second
quarter in 2001 as a result of the negative impact of the charges related to
AEFA's investment portfolio on book equity. For the period ended June 30,
2002, the company repurchased 2.5 million common shares at an average price
of $37.50. Since the inception of the repurchase programs in September 1994,
359.8 million common shares have been acquired under authorizations to
repurchase up to 420 million shares.

In light of the current market environment, and as part of the company's
ongoing funding activities, during the six months ended June 30, 2002,
American Express Credit Corporation (Credco), a wholly-owned subsidiary of
TRS, issued approximately $6.0 billion of medium-term notes at fixed and
floating rates with maturities of one to three years which reflects a change
in the company's approach toward managing liquidity by placing a higher
reliance on medium-term notes and a lesser reliance on commercial paper.
Proceeds from the sale of these securities have contributed toward an overall
reduction in Credco's commercial paper outstanding from $18 billion at
December 31, 2001 to $10 billion at June 30, 2002. In addition, TRS, American
Express Centurion Bank, a wholly-owned subsidiary of TRS, Credco, American
Express Overseas Credit Corporation Limited, a wholly-owned subsidiary of
Credco, and American Express Bank 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, 2002, $0.9 billion was outstanding under this program.

Subsequent to the terrorist attacks of September 11th, the company's A+ and
its subsidiaries' credit ratings were affirmed by Standard & Poor's and
Fitch, two credit rating agencies. At the same time, however, each agency
revised its respective rating outlook on the company and its subsidiaries
from stable to negative in light of the ensuing weak climate for business and
consumer travel and spending and weaker capital markets. On April 19, 2002,
Fitch affirmed the company's A+ and its subsidiaries' credit ratings and
revised its ratings outlook to stable from negative citing the company's
diversified financial services franchise, steady operating cash flows,
recurring profitability, good capitalization, and strong balance sheet
liquidity.

In April 2002, the company and two subsidiaries, American Express Centurion
Bank and Credco, renegotiated their committed credit line facilities. As of
June 30, 2002, total available credit lines were $11.45 billion, including
$1.5 billion allocated to the company and $9.35 billion allocated to Credco.
As a result of an internal change in allocations on July 25, 2002, credit
lines were reallocated to include $1.60 billion allocated to the company
and $9.42 billion allocated to Credco. As of July 31, 2002, Credco's
allocated committed bank line coverage of its net short-term debt was 111%.
Credco has the right to borrow up to a maximum amount of $11.02 billion,
with a commensurate reduction in the amount available to the company.
Based on this maximum amount of available borrowing, Credco's committed
bank line coverage of its net short-term debt would have been 130% as of
July 31, 2002. These facilities expire in increments from 2003 through 2007.

13

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

STATEMENTS OF INCOME
(Unaudited, Managed Basis)

Management views the gains from securitizations as discretionary benefits to be
used for card acquisition expenses, which are reflected in both marketing and
promotion and other operating expenses. Consequently, the above managed
Statements of Income for the three months ended June 30, 2002 and 2001 assume
that gains of $85 million and $84 million, respectively, from lending
securitizations were offset by higher marketing and promotion expense of $51
million and $51 million, respectively, and other operating expense of $34
million and $33 million, respectively. Accordingly, the incremental
expenses, as well as the gains, have been eliminated. Similarly, the above
managed Statements of Income for the six months ended June 30, 2002 and 2001
assume that gains of $127 million and $126 million, respectively, from
lending securitizations were offset by higher marketing and promotion expense
of $76 million and $76 million, respectively, and other operating expense of
$51 million and $50 million, respectively. Accordingly, the incremental
expenses, as well as the gains, have been eliminated.

14

TRAVEL RELATED SERVICES

SELECTED STATISTICAL INFORMATION
(Unaudited)

(Amounts in billions, except percentages and where indicated)

(A) Includes proprietary cards and cards issued under network partnership
agreements.
(B) Computed from proprietary card activities only.
(C) This data relates to Visa and Eurocards issued in connection with joint
venture activities.
(D) Computed from information provided herein.

15

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002

Travel Related Services' (TRS) net income increased nine percent in the
second quarter of 2002 as compared to a year ago. Excluding the benefit of
the elimination of goodwill amortization and the restructuring reserve
write-back, net income increased four percent. Net revenues on a GAAP basis
declined one percent reflecting the impact of the securitization of U.S.
receivables on lending net finance charge revenue. Net revenues on a managed
basis were up slightly as lower travel commissions and fees, reflecting
continued weakness in the economy, particularly within the Corporate travel
sector, and a decline in other revenues, were offset by growth in lending net
finance charge revenues.

Discount revenue declined slightly compared to a year ago as a result of a
one percent increase in billed business which was offset by a lower discount
rate. The one percent increase in billed business resulted from a three
percent growth in cards in force, which was partially offset by relatively
flat spending per basic Cardmember worldwide.

U.S. billed business was flat for the three-month period as compared to the
prior year reflecting four percent growth within the consumer card business
on eight percent higher transaction volume, slightly lower small business
services volume and a seven percent decline within Corporate Services. U.S.
non-T&E related volume categories, representing approximately 61 percent of
second quarter 2002 U.S. billed business, increased six percent over the
prior year. U.S. T&E volumes declined seven percent.

U.S. cards in force increased one percent reflecting the impact of more
selective consumer card and small business acquisition activities during the
past year in light of weakening economic conditions. Outside the U.S., cards
in force rose more than seven percent on continued proprietary and network
card growth. Net finance charge revenue rose 22 percent on five percent
growth in average worldwide lending balances. The yield on the U.S. portfolio
increased significantly versus the prior year reflecting the continued
benefit of lower funding costs and a decrease in the proportion of the
portfolio on introductory rates, which were partially offset by the evolving
mix of products toward more lower-rate offerings. Travel commissions and fees
declined 14 percent on a 14 percent contraction in travel sales due to the
continued effects of the weak corporate travel environment. Other revenues
decreased 10 percent as larger insurance premiums were offset by
significantly lower interest income on investment and liquidity pools held
within card funding vehicles.

Marketing and promotion expense increased 17 percent for the three-month
period compared to the prior year on the continuation of the new brand
advertising campaign, more loyalty marketing and a step up in selected card
acquisition activities. The provision for losses on charge card products
declined 12 percent on lower volume and improved past due levels. The
provision for losses on the lending portfolio grew one percent over last year
due to growth in outstanding loans partially offset by improving credit
trends. Other provisions for losses increased 48 percent primarily due to
higher travel-related insurance claims and additional reserves related to
credit exposures to travel industry service establishments. Charge Card
interest expense was down 34 percent as a result of a lower effective cost of
funds and lower billed business volumes. Human resources expense decreased
over 16 percent as a result of a lower number of employees, outsourcing and
other cost containment efforts. Other operating expenses increased 16 percent
due in part to the recognition of losses, primarily on internet-related
strategic investments of $48 million in the second quarter of 2002, compared
with gains of $46 million in the same portfolio a year ago. Higher costs
related to Cardmember loyalty programs as well as the impact of the company's
technology outsourcing agreement with IBM also contributed to the increase in
other operating expenses. These increases were partially offset by
reengineering initiatives and cost containment efforts. In addition, 2002
results include a net benefit of $6 million ($4 million after-tax) to adjust
the restructuring charge reserve established during the second half of 2001.

16

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

Travel Related Services' (TRS) net income decreased one percent for the six
months ended June 30, 2002 compared to a year ago. Excluding the benefit of
the elimination of goodwill amortization and the restructuring reserve
write-back, net income decreased six percent. Net revenues on a GAAP basis
declined two percent compared to the prior year reflecting the impact of the
securitization of U.S. receivables on lending net finance charge revenue. Net
revenues on a managed basis were relatively unchanged as lower travel
commissions and fees, reflecting continued weakness in the economy,
particularly within the Corporate travel sector, lower discount revenues and
a decline in other revenues, were offset by growth in lending net finance
charge revenues.

Discount revenue declined two percent due to a lower discount rate and a one
percent decline in billed business versus the same period a year ago. The one
percent decline in billed business resulted from a three percent growth in
cards in force which was more than offset by a three percent decline in
average spending per basic Cardmember worldwide.

For the six-month period ended June 30, 2002, U.S. billed business declined
one percent reflecting four percent growth within the consumer card business
on nine percent higher transaction volume, a one percent decline in small
business services volume and a 12 percent decline within Corporate Services.
U.S. non-T&E related volume categories, representing approximately 61 percent
of 2002 U.S. billed business for the six month period ended June 30, 2002,
increased seven percent over the prior year. U.S. T&E volumes declined 10
percent.

Net finance charge revenue rose 25 percent on eight percent growth in average
worldwide lending balances for the six-month period ended June 30, 2002. The
yield on the U.S. portfolio increased significantly reflecting the continued
benefit of lower funding costs and a decrease in the proportion of the
portfolio on introductory rates, which were partially offset by the evolving
mix of products toward more lower-rate offerings. Travel commissions and fees
declined 18 percent on a 20 percent contraction in travel sales due to the
continued effects of the weak corporate travel environment. Other revenues
decreased seven percent as somewhat higher card-related fees and larger
insurance premiums were offset by significantly lower interest income on
investment and liquidity pools held within card funding vehicles.

Marketing and promotion expense increased nine percent for the six-month
period compared to the prior year on the launch and continuation of the new
brand advertising campaign, more loyalty marketing and a step up in selected
card acquisition activities. The provision for losses on charge card products
declined 12 percent on lower volume and generally stable credit trends. The
provision for losses on the lending portfolio grew fourteen percent on growth
in outstanding loans and a generally weaker but improving credit environment.
Other provisions for losses increased 74 percent primarily due to higher
travel-related insurance claims and additional reserves related to credit
exposures to travel industry service establishments. Charge Card interest
expense was down over 36 percent as a result of a lower effective cost of
funds and lower billed business volumes. Human resources expense decreased 15
percent as a result of a lower number of employees, outsourcing and other
cost containment efforts. Other operating expenses increased 17 percent due
to higher Cardmember loyalty program costs, recognition of investment losses
(primarily on internet-related strategic investments) of $45 million in the
first six months of 2002 compared with gains of $83 million in the same
portfolio last year, as well as the impact of the company's technology
outsourcing agreement with IBM. These increases were partially offset by
reengineering initiatives and cost containment efforts. In addition, 2002
results include a net benefit of $19 million ($12 million after-tax) to
adjust the restructuring charge reserve established during the second half of
2001.

17

TRAVEL RELATED SERVICES

EFFECT OF SECURITIZATIONS

The preceding statements of income and related discussion present TRS results
on a managed basis, as if there had been no securitization transactions. On a
GAAP reporting basis, TRS' results included Cardmember lending securitization
gains of $85 million and $84 million for the second quarters of 2002 and
2001, respectively, and $127 million and $126 million for the six months
ended June 30, 2002 and 2001, respectively. Management views the gains from
securitizations as discretionary benefits to be used for card acquisition
expenses, which are reflected in both marketing and promotion and other
operating expenses. Consequently, the managed basis statements of income for
the three months ended June 30, 2002 and 2001 assume that gains were offset
by higher marketing and promotion expense of $51 million and $51 million,
respectively, and other operating expense of $34 million and $33 million,
respectively. Accordingly, the incremental expenses, as well as the
gains, have been eliminated. Similarly, the managed basis statements of
income for the six months ended June 30, 2002 and 2001 assume that gains were
offset by higher marketing and promotion expense of $76 million and $76
million, respectively, and other operating expense of $51 million and $50
million, respectively. Accordingly, the incremental expenses, as well as
the gains, have been eliminated. The following tables reconcile TRS' income
statements from a managed basis to a GAAP basis. These tables are not
complete statements of income, as they include only those items that are
effected by securitizations. Additionally, beginning in 2002, TRS revised its
GAAP reporting of revenues to include a separate securitization income line
item.

18

TRAVEL RELATED SERVICES

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION
(Unaudited, GAAP Basis)

(Dollars in billions, except percentages)

# - Denotes a variance of more than 100%.

* Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to the extent that they directly affect Shareholder's
Equity.
** Computed on a trailing 12-month basis excluding the effect on total
assets of unrealized gains or losses related to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to the extent that they directly affect Shareholder's
Equity.

In light of the current market environment, and as part of the company's
ongoing funding activities, during the six months ended June 30, 2002,
American Express Credit Corporation (Credco), a wholly-owned subsidiary of
TRS, issued approximately $6.0 billion of medium-term notes at fixed and
floating rates with maturities of one to three years. Proceeds from the sale
of these securities have contributed toward an overall reduction in total
commercial paper outstanding from $18 billion at December 31, 2001 to $10
billion at June 30, 2002. As of June 30, 2002, Credco had the ability to
issue approximately $4.0 billion of debt securities and warrants to purchase
debt securities available for issuance under a shelf registration statement
filed with the Securities and Exchange Commission. In addition, American
Express Centurion Bank, a wholly-owned subsidiary of TRS, issued
approximately $340 million of medium term notes at floating rates during the
first half of 2002.

In the first and second quarters of 2002, the American Express Credit Account
Master Trust (the Trust) securitized $0.9 billion and $1.9 billion of loans,
respectively, through the public issuance of investor certificates. The
securitized assets consist primarily of loans arising in a portfolio of
Credit and Sign & Travel/Extended Payment Option revolving credit accounts or
features and, in the future, may include other charge or credit accounts or
features or products. In July 2002, the Trust securitized an additional
$1.1 billion of loans, while $0.5 billion matured. The Trust expects to
securitize an additional $720 million of loans in August 2002, while $0.5
billion will mature.

In the first and second quarters of 2002, the American Express Master Trust
(the Master Trust) securitized $0.8 billion and $1.0 billion of Charge Card
receivables, respectively, which remain on the balance sheet.

Accounts Receivable decreased from prior periods due to improved customer
paydowns.

Travelers Cheque Investments increased over the prior year partially due to
unrealized appreciation as a result of declining interest rates.

19

Short-term debt declined from June 30, 2001 and December 31, 2001, mainly
reflecting the issuance of medium-term notes, as previously discussed.

20

AMERICAN EXPRESS FINANCIAL ADVISORS

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

STATEMENTS OF OPERATIONS
(Unaudited)

# - Denotes a variance of more than 100%.

Note: 2002 investment income includes a $78 million investment loss related
to WorldCom debt holdings, $71 million of which impacted AEFA's pretax
income ($46 million after-tax) and $7 million of which accrued to
American Express Bank (AEB) through its share of the premium deposit
joint venture. 2001 investment income includes charges of $1,008 million
pretax ($669 million after-tax), of which $826 million pretax ($537
million after-tax) was recognized in the second quarter, reflecting
losses associated with high-yield securities. 2001 results also include
a first quarter $67 million expense increase due to an adjustment of
deferred acquisition costs (DAC) for variable insurance and annuity
products. DACs are the costs of acquiring new business, which are
deferred and amortized according to a schedule that reflects a number
of factors, the most significant of which are the anticipated profits
and persistency of the product. The amortization schedule must be
adjusted periodically to reflect changes in those factors.

21

AMERICAN EXPRESS FINANCIAL ADVISORS

SELECTED STATISTICAL INFORMATION
(Unaudited)

(Amounts in millions, except percentages and where indicated)

22

AMERICAN EXPRESS FINANCIAL ADVISORS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002

American Express Financial Advisors' (AEFA) reported net income of $145
million for the three-month period ended June 30, 2002 compared with a net
loss of $307 million for the same period a year ago. Net revenues of $893
million are up substantially from $162 million a year ago. Net revenues
increased primarily due to higher investment income, which reflects the
effect on 2001 of the $826 million pretax loss ($537 million after-tax) from
the write-down and sale of certain high-yield securities, lower provisions,
higher distribution fees from higher sales levels and higher insurance
premiums, partially offset by reduced management fees from lower average
managed asset levels.

Investment income increased substantially due to the effect of the investment
portfolio losses on 2001, as discussed above. Excluding this effect,
investment income declined as higher invested assets were more than offset by
the investment loss of $78 million on WorldCom debt ($71 million of which
impacted AEFA's pretax income and $7 million of which accrued to AEB through
its share of the premium deposit joint venture), a lower average yield and
the effect of higher depreciation this year in the S&P 500 on the value of
options used by AEFA to hedge outstanding stock market certificates and
equity indexed annuities issued to customers and linked to the S&P 500, which
was offset in the related provisions.

Management and distribution fees decreased two percent in the three-month
period ended June 30, 2002 as compared to the prior year. These decreases
were primarily the result of lower average assets under management,
reflecting the negative impact of weak equity market conditions, partially
offset by higher distribution fees due to higher sales levels. The decline in
managed assets during the second quarter reflects market depreciation as well
as net outflows within both the retail channel and the institutional
business. Total gross cash sales were up six percent as sales improvement in
the retail channel offset weaker institutional sales levels. Other revenues
increased six percent primarily due to higher life and property-casualty
insurance premiums and charges and slightly higher financial planning and
advice services fees.

Annuity product provisions decreased four percent in the three-month period,
as the impact of a higher inforce level was more than offset by lower accrual
rates and the effect described above of depreciation in the S&P 500 on equity
indexed annuities. Insurance provisions increased 19 percent due to higher
inforce levels, partially offset by lower accrual rates. Certificate
provisions decreased 67 percent as higher inforce levels were more than
offset by significantly lower accrual rates and the effect on the stock
market certificate product of depreciation in the current year in the S&P
500.

Total expenses increased $21 million (or three percent) for the three-month
period as compared to a year ago. Human resource expenses declined one
percent as higher field force compensation-related costs due to higher sales
volumes were more than offset by reengineering, cost containment, and
outsourcing initiatives within the home office. Other operating expenses
increased 18 percent in the three-month period due to a higher level of
investment activities related to various strategic, reengineering, technology
and product development projects, the impact of the technology outsourcing
agreement with IBM, and a higher minority interest related to a premium
deposits joint venture (with AEB). Second quarter 2002 results also include a
pretax benefit of $7 million ($4 million after-tax) related to third quarter
2001 disaster recovery reserves to reflect lower than anticipated insured
loss claims.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

AEFA reported net income of $327 million for the six-month period ended June
30, 2002 compared with a net loss of $256 million for the same period a year
ago. Net revenues were $1,857 million, up 92 percent over the prior year. Net
revenues increased primarily due to higher investment income, which reflects
the effect on 2001 of the $1,008 million pretax loss ($669 million after-tax)
from the write-down and sale of certain high-yield securities, lower
provisions, and higher life and property-casualty insurance premiums and
charges. These

23

increases were partially offset by lower investment income on investment
portfolio products, reflecting the impact of portfolio repositioning activities,
and reduced management fees from lower average managed asset levels.

Excluding the effect of the 2001 high-yield related losses, investment income
declined as higher invested assets were more than offset by the investment
loss of $78 million on WorldCom debt ($71 million of which impacted AEFA's
pretax income and $7 million of which accrued to AEB through its share of the
premium deposit joint venture) and a lower average yield, mostly due to
repositioning of the portfolio. Also included is the effect of higher
depreciation this year in the S&P 500 on the value of options used by AEFA to
hedge outstanding stock market certificates and equity indexed annuities
issued to customers and linked to the S&P 500, which was offset in the
related provisions.

Management and distribution fees decreased four percent in the six-month
period ended June 30, 2002 as compared to the prior year. This decrease was
primarily the result of lower average assets under management, reflecting the
negative impact of weak equity market conditions. Assets managed for both
individuals and institutions declined 14 percent from prior year levels. The
decline reflects market depreciation and net outflows. The year-over-year
comparison reflects net inflows within the retail channel, which were more
than offset by net outflows in the institutional business. Total gross cash
sales were down seven percent as generally weak sales conditions in the first
quarter of 2002 more than offset the sales increases in the second quarter.
Other revenues increased nine percent primarily due to higher life and
property-casualty insurance premiums and charges and greater financial
planning and advice services fees.

Annuity product provisions were essentially the same for the six-month period
as compared to the prior year as the impact of a higher inforce level was
offset by lower accrual rates. Also included is the effect described above of
depreciation in the S&P 500 on equity indexed annuities. Insurance provisions
increased 14 percent due to higher inforce levels, partially offset by lower
accrual rates. Certificate provisions decreased 53 percent as higher inforce
levels were more than offset by significantly lower accrual rates and the
effect on the stock market certificate product of depreciation in the current
year in the S&P 500.

For the six months ended June 30, 2002, total expenses declined slightly
versus the same period a year ago. Included in 2001 results is a first
quarter $67 million expense increase due to an adjustment to the factors
used in the amortization of DAC for variable insurance and annuity products
due to a decline in equity markets. Human resource expenses declined five
percent. This decrease is primarily due to the 2001 DAC adjustment of which
$39 million is included in human resource expenses. In addition, higher
incentive compensation expenses were more than offset by the benefits of
reengineering, cost containment, and outsourcing initiatives within the
home office where the average number of employees was down 15 percent. Other
operating expenses increased 16 percent due to a higher level of investment
activities related to various strategic, reengineering, technology and
product development projects, the impact of the technology outsourcing
agreement with IBM, and a higher minority interest related to a premium
deposits joint venture (with AEB). Prior year other operating expenses
include $28 million of the DAC adjustment. 2002 results also include a pretax
benefit of $7 million ($4 million after-tax) related to third quarter 2001
disaster recovery reserves to reflect lower than anticipated insured loss
claims.

IMPACT OF RECENT MARKET VOLATILITY ON RESULTS OF OPERATIONS

Various aspects of AEFA's business are impacted by equity market levels and
other market-based events. Two areas in particular involve DAC and
structured investments. Each quarter management evaluates various factors,
and makes certain assumptions based on those factors, to determine the
proper amortization schedule for AEFA's DAC, including mortality rates,
product persistency rates, maintenance expense levels, interest margins,
and market performance with respect to variable products. Changes in these
factors can affect management's assumptions in various ways. Depending on
the direction and magnitude of the changes they can increase or decrease
DAC expense levels and results of operations in any particular quarter.
Similarly, the value of AEFA's structured investment portfolio is impacted
by various market factors. These investments include collateralized

24

debt obligations and structured loan trusts (backed by high-yield bonds and
bank loans, respectively), which are held by AEFA through interests in
special purpose entities. The carrying value of these investments is based
on cash flow projections, which are affected by factors such as default
rates, persistency of defaults, recovery rates and interest rates, among
others. The valuation of these investments assumes high levels of defaults
through 2002, relative to historical default rates. Persistency or increases
in these default rates could result in negative adjustments to the market
values of these investments in the future, which would adversely impact
results of operations. Conversely, a decline in the default rates would
benefit future results of operations.

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION
(Unaudited)

(Dollars in billions, except percentages)

* Excludes cash, derivatives, short term and other investments.
** Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."

Investments increased compared to June 30, 2001 primarily as a result of
positive net cash flows and in part due to unrealized appreciation.
High-yield investments are six percent of the portfolio, up from four percent
at December 31, 2001 but down from eight percent at June 30, 2001. Going
forward, AEFA continues to target a high-yield level of approximately seven
percent.

Separate account assets decreased from prior year as well as from December
31, 2001 mainly due to market depreciation.

25

AMERICAN EXPRESS BANK

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

STATEMENTS OF INCOME
(Unaudited)

# Denotes variance of more than 100%.

SELECTED STATISTICAL INFORMATION
(Unaudited)

* Includes assets managed by American Express Financial Advisors.

American Express Bank (AEB) reported net income of $18 million and $31
million for the three and six months ended June 30, 2002, respectively,
compared with net income of $12 million and $21 million for the same periods
a year ago. Net revenues increased 13% in both periods primarily due to lower
funding costs. Results for both periods reflect lower human resources and
other operating expenses due to a lower employee level and reduced costs due
to reengineering activities. These benefits were offset by higher provisions
for losses, which were primarily due to higher write-offs in the consumer
lending portfolio in Hong Kong.

26

AMERICAN EXPRESS BANK

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION
(Unaudited)

(A) Computed on a trailing 12-month basis excluding the effect on
Shareholder's Equity of unrealized gains or losses related to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
(B) Computed on a trailing 12-month basis excluding the effect on total
assets of unrealized gains or losses related to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to the extent they directly affect Shareholder's Equity.
(C) AEB defines non-performing loans as loans (other than smaller-balance
homogeneous loans which may include, but are not limited to, consumer
installment and residential mortgage loans) on which the accrual of
interest is discontinued because the contractual payment of principal or
interest has become 90 days past due or if, in management's opinion, the
borrower is unlikely to meet its contractual obligations. For
smaller-balance consumer loans, management establishes reserves it
believes to be adequate to absorb credit losses inherent in the
portfolio. Generally, these loans are written off in full when an
impairment is determined or when a loan becomes 120 or 180 days past
due, depending on loan type.
(D) Allocation (millions):

AEB had loans outstanding of $5.6 billion at June 30, 2002, up from $5.3
billion at December 31, 2001 and $5.5 billion at June 30, 2001. The increase
since the second quarter of 2001 resulted from a $850 million decrease in
corporate banking loans which was more than offset by a $150 million increase
in financial institution loans and a $800 million increase in consumer and
private banking loans. Since December 31, 2001, corporate banking loans
decreased by $400 million, financial institution loans increased $200 million
and consumer and private banking loans increased by $500 million. As of June
30, 2002, consumer and private banking loans comprised 66% of total loans
versus 60% at December 31, 2001 and 53% at June 30, 2001.

Total non-performing loans of $121 million at June 30, 2002 decreased from
$123 million at December 31, 2001 and $159 million at June 30, 2001. The
decrease from prior year is primarily due to loan payments and write-offs,
mainly in Indonesia and India, partially offset by net downgrades of the risk
status of various loans. During the first half of 2002, loan payments and
write-offs were also partially offset by downgrades.

Other banking activities, such as securities, unrealized gains on foreign
exchange and derivatives contracts, various contingencies and market
placements added approximately $7.4 and $7.6 billion to AEB's credit

27

exposures at June 30, 2002 and 2001, respectively. In December 2001 and
January 2002, the Argentine government mandated the conversion of dollar
denominated assets into pesos and simultaneously devalued the peso. AEB's
credit exposures to Argentina at June 30, 2002 were $42 million, which
includes loans of $28 million.

CORPORATE AND OTHER

Corporate and Other reported net expenses of $45 million and $89 million for
the three and six months ended June 30, 2002, respectively, compared with net
expenses of $46 million and $90 million in the same periods a year ago. The
six-month results for both years include a preferred stock dividend based on
earnings from Lehman Brothers, which was offset by expenses related to
business building initiatives in both years. The final dividend under the
terms of this security of $23 million ($20 million after-tax) was received in
July 2002 and will be reflected in income in the third quarter of 2002.

ACCOUNTING DEVELOPMENTS

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Generally, SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized as incurred,
whereas EITF Issue No. 94-3 required such a liability to be recognized at the
time that an entity committed to an exit plan. The company is currently
evaluating the provisions of the new rule, which is effective for exit or
disposal activities that are initiated after December 31, 2002. The new rule
will primarily affect the company if and when management commits to future
exit or disposal plans.

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements, which are subject to risks
and uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "likely," and similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date on which they are made. The company
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to: the company's
ability to successfully implement a business model that allows for
significant earnings growth based on revenue growth that is lower than
historical levels, including the ability to improve its operating expense to
revenue ratio both in the short-term and over time, which will depend in part
on the effectiveness of reengineering and other cost control initiatives, as
well as factors impacting the company's revenues; the company's ability to
grow its business and meet or exceed its return on equity target by
reinvesting approximately 35% of annually-generated capital, and returning
approximately 65% of such capital to shareholders, over time, which will
depend on the company's ability to manage its capital needs and the effect of
business mix, acquisitions and rating agency requirements; the ability to
increase investment spending in the second half of 2002, which will depend in
part on the equity markets and other factors effecting revenues, and the
ability to capitalize on such investments to improve business metrics;
fluctuation in the equity markets, which can affect the amount and types of
investment products sold by AEFA, the market value of its managed assets,
management and distribution fees received based on those assets, and the
amount of amortization of DAC; potential deterioration in AEFA's high-yield
and other investments, which could result in further losses in AEFA's
investment portfolio; the ability of AEFA to sell certain high-yield
investments at expected values and within anticipated timeframes and to
maintain its high-yield portfolio at certain levels in the future;
developments relating to AEFA's platform structure for financial advisors,
including the ability to increase advisor

28

productivity, increase the growth of productive new advisors and create
efficiencies in the infrastructure; AEFA's ability to roll out new and
attractive products in a timely manner and effectively manage the economics
in selling a growing volume of non-proprietary products; investment
performance in AEFA's businesses; the success, timeliness and financial
impact, including costs, cost savings and other benefits, of reengineering
initiatives being implemented or considered by the company, including cost
management, structural and strategic measures such as vendor, process,
facilities and operations consolidation, outsourcing (including, among
others, technologies operations), relocating certain functions to lower cost
overseas locations, moving internal and external functions to the Internet to
save costs, the scale-back of corporate lending in certain regions, and
planned staff reductions relating to certain of such reengineering actions;
the ability to control and manage operating, infrastructure, advertising and
promotion and other expenses as business expands or changes, including
balancing the need for longer-term investment spending; the impact on the
company's businesses and uncertainty created by the September 11th terrorist
attacks, and the potential negative effect on the company of any such attacks
in the future; the company's ability to recover under its insurance policies
for losses resulting from the September 11th terrorist attacks; consumer and
business spending on the company's travel related services products,
particularly credit and charge cards and growth in card lending balances,
which depend in part on the ability to issue new and enhanced card products
and increase revenues from such products, attract new Cardholders, capture a
greater share of existing Cardholders' spending, sustain premium discount
rates, increase merchant coverage, retain Cardmembers after low introductory
lending rates have expired, and expand the global network services business;
the ability to execute the company's global corporate services strategy,
including greater penetration of middle market companies, increasing capture
of non-T&E spending through greater use of the company's purchasing card and
other means, and further globalizing business capabilities; the ability to
manage and expand Cardmember benefits, including Membership Rewards-Registered
Trademark-, in a cost effective manner; the triggering of obligations to make
payments to certain co-brand partners and merchants under contractual
arrangements with such parties under certain circumstances; successfully
expanding the company's on-line and off-line distribution channels and
cross-selling financial, travel, card and other products and services to its
customer base, both in the U.S. and abroad; effectively leveraging the
company's assets, such as its brand, customers and international presence, in
the Internet environment; investing in and competing at the leading edge of
technology across all businesses; a downturn in the company's businesses
and/or negative changes in the company's and its subsidiaries' credit ratings,
which could result in contingent payments under contracts, decreased liquidity
and higher borrowing costs; increasing competition in all of the company's
major businesses; fluctuations in interest rates, which impact the company's
borrowing costs, return on lending products and spreads in the investment and
insurance businesses; credit trends and the rate of bankruptcies, which can
affect spending on card products, debt payments by individual and corporate
customers and businesses that accept the company's card products and returns
on the company's investment portfolios; foreign currency exchange rates;
political or economic instability in certain regions or countries, which could
affect lending activities, among other businesses; legal and regulatory
developments, such as in the areas of consumer privacy and data protection;
acquisitions; the outcome of accounting proposals related to the consolidation
of special purpose entities, including those involving collateralized debt
obligations and structured loan trusts the company manages and/or invests in,
which could impact both the company's balance sheet and results of operations;
and outcomes in litigation. A further description of these and other risks and
uncertainties can be found in the company's Annual Report on Form 10-K for the
year ended December 31, 2001, and its other reports filed with the SEC.

29

PART II. OTHER INFORMATION

AMERICAN EXPRESS COMPANY

Item 1. Legal Proceedings

Three putative class action lawsuits were filed in the United
States District Court for the Southern District of New York. The
first two lawsuits, ADAM CRAIG SLAYTON AND ANDREW KEITH SLAYTON V.
AMERICAN EXPRESS COMPANY, KENNETH I. CHENAULT, HARVEY GOLUB, DAVID R.
HUBERS AND JAMES M. CRACCHIOLO, and THE BROWN FAMILY TRUST V.
AMERICAN EXPRESS COMPANY, KENNETH I. CHENAULT, HARVEY GOLUB, DAVID R.
HUBERS AND JAMES M. CRACCHIOLO were filed on July 17, 2002. The third
lawsuit, ATLAS EQUITIES V. AMERICAN EXPRESS COMPANY, KENNETH I.
CHENAULT, HARVEY GOLUB, DAVID R. HUBERS AND JAMES M. CRACCHIOLO was
filed July 23, 2002. These three lawsuits allege violations of the
federal securities laws and the common law in connection with alleged
misstatements regarding certain investments in high-yield bonds and
write downs in the 2000-2001 time frame. The actions seek unspecified
compensatory damages as well as disgorgement, punitive damages,
attorneys fees and costs, and interest. The company believes that it
has meritorious defenses to this suit and intends to defend this case
vigorously.

In June 2002, British Airways filed an action in the United
States District Court for the Southern District of New York
captioned BRITISH AIRWAYS PLC V. AMERICAN EXPRESS TRAVEL RELATED
SERVICES COMPANY, INC. The action arose over British Airways'
decision not to accept any credit or charge cards (including the
American Express card) in the United Kingdom for payment of
"corporate net fares", which are privately negotiated fares with
corporations. British Airways' decision has the effect of requiring
corporate customers who wish to use credit or charge cards for UK
corporate net fares to purchase tickets through travel agents and
pay a surcharge. The company believes that British Airways' action
is a material breach of its Merchant Agreement with the company.
British Airways' complaint asks the court for a declaration of
whether its conduct is proper. British Airways' complaint also seeks
unspecified monetary damages, interest, costs and attorney's fees.
American Express has filed an Answer and Counterclaim to the British
Airways' complaint seeking unspecified monetary damages, interest,
punitive damages, costs, attorney's fees, and injunctive relief. The
company believes that it has meritorious defenses to this suit and
intends to defend the case vigorously.

The matter described below was previously reported in the company's
Form 10-K for the year ended December 31, 2001.

Beginning in October 1999, sixteen former and current female
financial advisors at American Express Financial Advisors ("AEFA")
filed charges with the Equal Employment Opportunity Commission
("EEOC"), including class claims on behalf of all women advisors at
AEFA, alleging that they and other women were discriminated against
in hiring, assignment of work, distribution of leads, training and
promotions. All of the charges were consolidated with the EEOC in
Minnesota. Although AEFA felt it had meritorious defenses to all the
claims, the prospect of a long and protracted litigation and the
attendant publicity led it to conclude that settlement was a more
prudent course of action. After two years of negotiation, AEFA
entered into a settlement agreement with plaintiffs' counsel to
settle all the claims. Under the proposed settlement, AEFA will pay
$31,000,000 into a fund for distribution to a potential class
consisting of approximately 4,000 current and former advisors. AEFA
has also agreed to certain affirmative relief such as appointing an
internal diversity officer, changing its process for assigning
client accounts and leads, and diversity training.

30

In order to have a binding settlement on all potential class
members, plaintiffs' counsel filed a Class Action Complaint in
Federal Court in Washington D.C., in January 2002. The proposed
settlement agreement was filed with the court shortly thereafter. In
June 2002, the Court gave final approval to the settlement and the
matter is now resolved.

Item 2. Changes in Securities and use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) In August 1999 and March 2000, the company entered into
agreements with a financial institution under which an aggregate
29 million company common shares were purchased on behalf of the
financial institution at an average purchase price of $50.41 per
share. Each of the agreements terminates after five years, at
which time the company is required to deliver an amount equal
to the original purchase price for the shares. The company may
elect to settle this amount (i) physically, by paying cash
against delivery of the shares held on behalf of the financial
institution, or (ii) on a net cash or net share basis. During
the term of these agreements, the company, on a monthly basis,
issues shares or receives shares so that the value of the shares
held on behalf of the financial institution equals the original
purchase price for the shares. The company may prepay outstanding
amounts at any time prior to the end of the five-year term. In
the first quarter of 2001, the company elected to prepay $350
million of the aggregate outstanding amount.

In connection with these agreements, the company issued, during
the second quarter of 2002, 43,753 common shares on May 3, 2002
and 4,258,030 common shares on July 3, 2002. In addition, in
May 2002, 1,211,953 shares were returned to the company,
resulting in a net issuance of 3,089,830 common shares during
the second quarter. The issuances of common shares were exempt
from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof, as a transaction not involving a
public offering.

(d) Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

For information relating to the matters voted upon at the company's
annual meeting for shareholders held on April 22, 2002, see Item 4
on page 25 of the company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, which is incorporated herein by
reference.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

See Exhibit Index on page E-1 hereof.

(b) Reports on Form 8-K:

Form 8-K, dated April 18, 2002, Items 5 and 7, 1) reporting the
company's earnings for the quarter ended March 31, 2002 and
including a First Quarter Earnings Supplement and 2) reporting
restated financial information relating to the years 1999, 2000
and 2001, for the company and its Travel

31

Related Services (TRS) segment revising its GAAP reporting of
revenues to include a separate Securitization Income line item.

Form 8-K, dated April 23, 2002, Item 5, announcing the
company's (and two of its subsidiaries') renegotiation of their
committed credit line facilities.

Form 8-K, dated June 19, 2002, Item 5, announcing the resumption
of the company's share repurchase program.

Form 8-K, dated June 27, 2002, Item 5, announcing a write down
of WorldCom, Inc. securities held by the company and the
company's expectations relating to earnings for the quarter
ended June 30, 2002.

Form 8-K, dated July 22, 2002, Items 5 and 7, reporting the
company's earnings for the quarter ended June 30, 2002 and
including a Second Quarter Earnings Supplement.

Form 8-K, dated July 22, 2002, Item 5, announcing the election
of Robert D. Walter to its Board of Directors.

Form 8-K, dated July 31, 2002, Item 9, reporting certain
information from presentations to the financial community on
July 31, 2002 by Ken Chenault, Chairman and Chief Executive
Officer of the company, and Gary Crittenden, Executive Vice
President and Chief Financial Officer of the company.

32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

AMERICAN EXPRESS COMPANY
(Registrant)

Date: August 12, 2002 By /s/ Gary L. Crittenden
----------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer

Date: August 12, 2002 By /s/ Thomas A. Iseghohi
-----------------------------
Thomas A. Iseghohi
Senior Vice President and
Comptroller
(Principal Accounting Officer)

33

EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report:

Exhibit Description
- ------- -----------
12 Computation in Support of Ratio of Earnings to Fixed Charges.

15 Letter re Unaudited Interim Financial Information.

99.1 Certification of Kenneth I. Chenault pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Certification of Gary L. Crittenden pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

E-1