AMERICAN EXPRESS CO - 10-Q Quarterly Report

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

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2004

or

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

For the Transition Period from ________ to ________

Commission file number 1-7657

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

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

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

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

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

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

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

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

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

AMERICAN EXPRESS COMPANY

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

See Notes to Consolidated Financial Statements.

1

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

See Notes to Consolidated Financial Statements.

2

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

See Notes to Consolidated Financial Statements.

3

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

See Notes to Consolidated Financial Statements.

4

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of American Express Company (the Company or American Express) for
the year ended December 31, 2003. Certain reclassifications of prior
period amounts have been made to conform to the current presentation.

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

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

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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

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

5

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

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

2. Stock-Based Compensation

At June 30, 2004, the Company has two stock-based employee compensation
plans, which are described more fully in Note 14 of the Company's 2003
Annual Report on Form 10-K. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," prospectively for all stock
options granted after December 31, 2002. The Company expensed $14 million
and $6 million after-tax for the three months ended June 30, 2004 and
2003, respectively, and expensed $27 million and $10 million after-tax
for the six months ended June 30, 2004 and 2003, respectively, related to
stock options granted January 1, 2003 or later.

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

6

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

based compensation accounted for under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The following table illustrates the
effect on net income and earnings per common share (EPS) assuming the
Company had followed the fair value recognition provisions of SFAS No.
123 for all outstanding and unvested stock options and other stock-based
compensation for the three and six months ended June 30, 2004 and 2003:

3. Investment Securities

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

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

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Guarantees

The Company, through its Travel Related Services' (TRS) operating
segment, provides cardmember protection plans that cover losses
associated with purchased products, as well as certain other guarantees
in the ordinary course of business that are within the scope of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). In the hypothetical scenario that all
claims occur within one year, the aggregate maximum amount of potential
future losses associated with such guarantees would not exceed $84
billion. The total amount of related liability accrued at June 30, 2004
for such programs was $333 million, which management believes to be
adequate based on actual experience. The Company has no collateral or
other recourse provisions related to these guarantees. Expenses relating
to claims under these guarantees were approximately $5 million and $11
million for the three and six months ended June 30, 2004, respectively.

The Company, through its American Express Bank (AEB) operating segment,
provides various guarantees to its customers in the ordinary course of
business that are also within the scope of FIN 45, including financial
letters of credit, performance guarantees and financial guarantees, among
others. Generally, guarantees range in term from three months to one
year. AEB receives a fee related to most of these guarantees, many of
which help to facilitate customer cross-border transactions. At June 30,
2004, the Company held $769 million of collateral supporting these
guarantees. The following table provides information related to such
guarantees as of June 30, 2004:

5. Variable Annuities and Sales Inducement Costs

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

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

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

6. Comprehensive Income

Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. It is the sum of net
income and changes in (i) unrealized gains or losses on
Available-for-Sale securities, (ii) unrealized gains or losses on
derivatives, (iii) foreign currency translation adjustments and (iv)
minimum pension liability adjustment. The components of comprehensive
income, net of related tax, for the three and six months ended June 30,
2004 and 2003 were as follows:

9

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

7. Retirement Plans

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

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

8. Taxes and Interest

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

9. Earnings per Common Share

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

10

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

10. Segment Information

The Company is principally engaged in providing travel-related, financial
advisory and international banking services throughout the world. TRS'
products and services include, among others, charge cards, cardmember
lending products, Travelers Cheques, and corporate and consumer travel
services. American Express Financial Advisors' (AEFA) services and
products include financial planning and advice, investment advisory
services and a variety of products, including insurance and annuities,
investment certificates and mutual funds. AEB's products and services
primarily include providing banking services to high net worth customers
and financial institutions; personal financial services and global
trading. The Company operates on a global basis, although the principal
market for financial advisory services is the United States.

The following tables present the results for these operating segments,
based on management's evaluation and internal reporting structure, for
the three and six months ended June 30, 2004 and 2003. For certain income
statement items that are affected by asset securitizations at TRS, data
is provided on both a managed basis, which excludes the effect of
securitizations, as well as on a basis prepared in accordance with U.S.
generally accepted accounting principles (GAAP). Pretax income and net
income are the same under both a GAAP and managed basis. See TRS Results
of Operations section of Management's Discussion and Analysis (MD&A)

11

for further information regarding the effect of securitizations on the
financial statements. In addition, net revenues (managed basis) are
presented net of provisions for losses and benefits for annuities,
insurance and investment certificate products of AEFA, which are
essentially spread businesses as further discussed in the AEFA Results of
Operations section of MD&A.

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

12

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Directors
American Express Company

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

We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with the standards of the Public
Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31, 2003, and
the related consolidated statements of income, shareholders' equity, and
cash flows for the year then ended (not presented herein), and in our
report dated January 26, 2004, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet as of December
31, 2003 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

/s/Ernst & Young LLP

New York, New York
July 27, 2004

13

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

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

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

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

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

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

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

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

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

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

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

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

14

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

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

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

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

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

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

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

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

15

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

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

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

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

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

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

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

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

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

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

16

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

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

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

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

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

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

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

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

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

17

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

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

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

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

CAPITAL STRATEGY
The Company believes allocating capital to its growing businesses with a
return on risk-adjusted equity in excess of their cost of capital will
continue to build shareholder value. The Company's philosophy is to retain
earnings sufficient to enable it to meet its growth objectives, and, to the
extent capital exceeds investment opportunities, return excess capital to
shareholders. Assuming the Company achieves its financial objectives of 12 to
15 percent EPS growth, 18 to 20 percent return on equity and 8 percent revenue
growth, on average and over time, it will seek to return to shareholders an
average of 65 percent of capital generated, subject to business mix,
acquisitions and rating agency requirements. The Company paid dividends of
$257 million during the six months ended June 30, 2004.

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

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

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

18

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

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

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

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

SHARE REPURCHASES
The Company has in place a share repurchase program to return equity capital
in excess of its business needs to shareholders. Repurchases are made to both
offset the issuance of new shares as part of employee compensation plans and
to reduce shares outstanding. The Company repurchases its common shares
primarily by open market purchases using several brokers at competitive
commission and fee rates. In addition, common shares may also be purchased
from the Company-sponsored Incentive Savings Program (ISP) to facilitate the
ISP's required disposal of shares when employee-directed activity results in
an excess common share position. Such purchases are made at market price
without commissions or other fees. During the first half of 2004, the Company
repurchased 39 million common shares at an average price of $50.77. Since the
inception of the share repurchase program in September 1994, 465 million
shares have been acquired under total authorizations to repurchase up to 570
million shares, including purchases made under agreements with third parties.

PARENT COMPANY FUNDING
At June 30, 2004, the Parent Company had $1.3 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). In June 2004, the Parent Company
issued $500 million of 4.75% Senior Notes due June 2009 under the shelf
registrations to be used for general corporate purposes. In addition, TRS;
American Express Centurion Bank (Centurion Bank), a wholly-owned subsidiary of
TRS; American Express Credit Corporation (Credco), a wholly-owned subsidiary
of TRS; American Express Overseas Credit Corporation Limited, a wholly-owned
subsidiary of Credco; and AEB have established programs for the issuance,
outside the United States, of debt instruments to be listed on the Luxembourg
Stock Exchange. The maximum aggregate principal amount of debt instruments
outstanding at any one time under the program will not exceed $6.0 billion. At
June 30, 2004, $0.5 billion was outstanding under this program.

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

19

SUPPLEMENTAL INFORMATION - MANAGED NET REVENUES

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

Consolidated managed net revenues increased 15 percent for the three months
ended June 30, 2004 to $6.9 billion, compared with $6.0 billion for the same
period in 2003. For the six months ended June 30, 2004, consolidated managed
net revenues increased 15 percent to $13.6 billion, compared with $11.8
billion for the same period in 2003. For both periods, managed net revenues
rose due to higher discount revenue, management and distribution fees, travel
commissions and fees, other commissions and fees, insurance and annuity
revenues and other revenues.

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

20

TRAVEL RELATED SERVICES

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

STATEMENTS OF INCOME
(Unaudited)

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

The following management discussion includes information on both a GAAP basis
and managed basis. The managed basis presentation assumes there have been no
securitization transactions, i.e., all securitized cardmember loans and
related income effects are reflected in the Company's balance sheet and income
statement, respectively. The Company presents TRS information on a managed
basis because that is the way the Company's management views and manages the
business. Management believes that a full picture of trends in the Company's
cardmember lending business can only be derived by evaluating the performance
of both securitized and non-securitized cardmember loans. Asset securitization
is just one of several ways for the Company to fund cardmember loans. Use of a
managed basis presentation, including non-securitized and securitized
cardmember loans,

21

presents a more accurate picture of the key dynamics of the cardmember lending
business, avoiding distortions due to the mix of funding sources at any
particular point in time. For example, irrespective of the mix, it is
important for management and investors to see metrics, such as changes in
delinquencies and write-off rates, for the entire cardmember lending portfolio
because it is more representative of the economics of the aggregate cardmember
relationships and ongoing business performance and trends over time. It is
also important for investors to see the overall growth of cardmember loans and
related revenue and changes in market share, which are significant metrics in
evaluating the Company's performance and which can only be properly assessed
when all non-securitized and securitized cardmember loans are viewed together
on a managed basis.

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

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

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

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

22

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

THREE MONTHS ENDED JUNE 30, (Dollars in millions)

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

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

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

23

of stronger average growth in the lower rate retail and other "everyday spend"
merchant categories (e.g., supermarkets, discounters, etc.). As previously
indicated, based on the Company's business strategy, it expects to see
continued changes in the mix of business. This, along with volume-related
pricing discounts and selective repricing initiatives, will probably continue
to result in some average rate erosion over time. The 19 percent increase in
billed business in the second quarter resulted from a 14 percent increase in
spending per basic cardmember worldwide and 7 percent growth in
cards-in-force. U.S. cards-in-force rose 6 percent reflecting the benefit of
continued strong card acquisition spending and an improved average customer
retention level. International cards-in-force increased 10 percent due to
growth in both proprietary and network partnership cards. U.S. billed business
rose 17 percent reflecting 17 percent growth within the consumer card
business, 22 percent growth in small business services volume and a 15 percent
increase within Corporate Services. U.S. non-T&E related volume categories,
which represented approximately 66 percent of U.S. billed business during the
second quarter of 2004, increased 20 percent over the same period a year ago
while U.S. T&E volumes rose 13 percent reflecting general spending strength
across all T&E industries during the quarter. Total billed business outside
the United States, excluding the impact of foreign exchange translation, was
up 18 percent reflecting strong double-digit growth in all regions. Worldwide
airline related volumes, which represented 13 percent of total billed business
volumes during the quarter, rose 19 percent as a result of 15 percent growth
in transaction volume and a 4 percent increase in the average airline charge.

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

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

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

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

24

SIX MONTHS ENDED JUNE 30, (Dollars in millions)

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

TRS' net revenues were up 12 percent primarily due to higher discount revenue,
travel commissions and fees, other commissions and fees and net card fees.

Discount revenue rose 19 percent compared to a year ago as a result of a 20
percent increase in billed business partially offset by a lower discount rate.
The decrease in the discount rate primarily reflects the cumulative impact of
stronger average growth in the lower rate retail and other "everyday spend"
merchant categories (e.g.,

25

supermarkets, discounters, etc.). The 20 percent increase in billed business
in the first half of 2004 resulted from a 15 percent increase in spending per
basic cardmember worldwide and 7 percent growth in cards-in-force. U.S.
cards-in-force rose 6 percent reflecting the benefit of continued strong card
acquisition spending and an improved average customer retention level.
International cards-in-force increased 10 percent due to growth in both
proprietary and network partnership cards. U.S. billed business rose 18
percent reflecting 18 percent growth within the consumer card business, 22
percent growth in small business services volume and a 15 percent increase
within Corporate Services. U.S. non-T&E related volume categories, which
represented approximately 65 percent of U.S. billed business during the first
half of 2004, increased 21 percent over the same period a year ago while U.S.
T&E volumes rose 14 percent reflecting continued improvement in all T&E
industries during the six months. Total billed business outside the United
States, excluding the impact of foreign exchange translation, was up 15
percent reflecting strong double-digit growth in all regions. Worldwide
airline related volumes, which represented 13 percent of total billed business
volumes during the six months, rose 19 percent as a result of 15 percent
growth in transaction volume and a 4 percent increase in the average airline
charge.

Cardmember lending net finance charge revenue rose 3 percent as 11 percent
growth in the average worldwide lending balances was partially offset by a
decline in the net interest yield. The net interest yield on the worldwide
portfolio decreased compared to the prior year reflecting an increase in the
proportion of the portfolio on introductory or promotional rates, a decrease
in the rates on those balances, higher paydown rates and improved credit
quality, which reduces the proportion of the portfolio at default interest
rates. Net card fees increased 4 percent versus a year ago, reflecting the
growth in cards-in-force. The average fee per proprietary card-in-force was
$34 for both of the six-month periods ended June 30, 2004 and 2003.

Travel commissions and fees rose 24 percent due to a 32 percent increase in
travel sales, reflecting the Rosenbluth acquisition and improvement within the
travel environment. Other commissions and fees increased 15 percent on greater
volume-related foreign exchange conversion fees and higher card fees and
assessments. Other revenues increased 2 percent due to higher publishing
revenues, larger insurance premiums and greater merchant-related revenues,
partially offset by lower interest income on investment and liquidity pools
held within card funding vehicles and lower ATM revenues.

Marketing, promotion, rewards and cardmember services expenses increased 39
percent compared to the prior year on increased rewards costs, reflecting
strong volume growth, a higher redemption rate and the continued increase in
cardmember loyalty program participation, as well as the Company's continued
focus on business building activities. The provision for losses on charge card
products decreased 6 percent, despite higher volume, primarily due to strong
credit quality as reflected in past due percentages and net loss ratios. The
provision for losses on the worldwide lending portfolio decreased 10 percent
despite growth in loans outstanding due to well-controlled credit. Reserve
coverage ratios, which were in excess of 100 percent of past due balances,
remained strong. Charge card interest expense declined 17 percent due to a
lower effective cost of funds, partially offset by a higher average
receivables balance.

Human resources expenses increased 14 percent versus last year due to
increased costs related to merit increases, management incentives and employee
benefits and the impact of the 2003 acquisition of Rosenbluth. Other
operating expenses increased 12 percent reflecting, in part, the impact of
greater business and service volume-related costs, higher equipment-related
technology costs, the Rosenbluth acquisition and the impact of foreign
currency translation. These increases were partially offset by the benefits of
reengineering initiatives and other cost containment efforts.

26

SELECTED STATISTICAL INFORMATION
(Unaudited)

(Amounts in billions, except percentages and where indicated)

* Cards-in-force include proprietary cards and cards issued under network
partnership agreements outside the United States. Average discount rate,
average basic cardmember spending and average fee per card are computed
from proprietary card activities only.

** These data relate to Visa and Eurocards issued in connection with joint
venture activities.

27

SELECTED STATISTICAL INFORMATION (CONTINUED)
(Unaudited)

(Amounts in billions, except percentages and where indicated)

# - Denotes a variance of more than 100%.

TRS' owned portfolio is primarily comprised of cardmember receivables
generated by the Company's charge card products, unsecuritized U.S. cardmember
loans, international cardmember loans and unsecuritized equipment leasing
receivables.

As discussed more fully in the TRS Liquidity and Capital Resources section
below, the Company securitizes U.S. cardmember loans as part of its financing
strategy; consequently, the level of unsecuritized U.S. cardmember loans is
primarily a function of the Company's financing requirements. As a portfolio,
unsecuritized U.S. cardmember loans tend to be less seasoned than securitized
loans, primarily because of the lead time required to designate and securitize
each loan. The Company does not currently securitize international loans.
Trends in delinquency,

28

reserve coverage and net write-off rates have historically been generally
comparable on both an owned and managed basis.

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION
(GAAP Basis)

(Dollars in billions, except percentages)

* Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.
** Computed on a trailing 12-month basis using total assets as included in
the Consolidated Financial Statements prepared in accordance with GAAP.

Net accounts receivable and worldwide cardmember loans increased as compared
to June 30, 2003 primarily as a result of higher average cardmember spending
and an increase in the number of cards-in-force.

Total debt increased as compared to June 30, 2003 primarily as a result of
increased funding requirements due to increases in charge card receivables and
cardmember loan balances as noted above. New long-term borrowing activity
during 2004 is described below.

TRS funds its charge card receivables and cardmember loans using various
funding sources, such as long- and short-term debt, medium-term notes,
commercial paper and asset securitizations. As part of the Company's ongoing
funding activities, during the six months ended June 30, 2004, Credco issued
approximately $2.6 billion of floating rate medium-term notes with maturities
of one to three years. As of June 30, 2004, Credco had the ability to issue
approximately $7.2 billion of debt securities under shelf registration
statements filed with the SEC. As part of its receivables funding activities,
Credco regularly reviews funding sources and strategies in international
markets. As noted earlier, in June 2004, Credco borrowed $1.5 billion under
its bank credit facilities as part of a change in local funding strategy
for business in Canada. In July 2004, Credco entered into a 5-year multi-
bank credit facility for AUD $3.25 billion (approximately U.S. $2.3 billion),
which may be used to provide a potential alternate funding source for
business in Australia.

In the fourth quarter of 2003, the Company began a program to develop a
liquidity portfolio to provide back-up liquidity, primarily for the commercial
paper program at Credco, and also flexibility for other short-term funding
programs at Centurion Bank. These funds are invested in two to three year U.S.
Treasury securities. At June 30, 2004, the Company held $4.0 billion in U.S.
Treasury notes under this program.

The American Express Credit Account Master Trust (the Master Trust)
securitizes assets consisting of loans arising in a portfolio of designated
consumer American Express Credit Card, Optima Line of Credit and Sign &
Travel/Extended Payment Option revolving credit accounts or features owned by
Centurion Bank and FSB and, in the future, may include other charge or credit
accounts, features or products. AECB and FSB sell the assets to be securitized
to special purpose, bankruptcy remote subsidiaries, which in turn transfer the
assets to the Master Trust. The Master Trust securitized $1.8 billion of loans
during the first half of 2004 through the public and private

29

issuance of investor certificates. In addition, in June 2004, the Company
sold $1.4 billion of certain retained interests previously issued by the
Master Trust. In the six months ended June 30, 2004, $2.5 billion of investor
certificates previously issued by the Master Trust matured. During the next
12 months, $3.7 billion of investor certificates that were previously issued
by the Master Trust are scheduled to mature. When investor certificates mature,
principal collections received from the Master Trust assets are used to redeem
the certificates. As of June 30, 2004, $18.5 billion of U.S. Cardmember loans
had been sold, net of retained subordinated interest of $0.2 billion, for a
total amount securitized of $18.7 billion.

The American Express Master Trust (the Trust) securitizes charge card
receivables through the issuance of trust certificates that remain on the
Consolidated Balance Sheets. During the next 12 months, the total $3.0 billion
of accounts receivable trust certificates that were previously issued by the
Trust are scheduled to mature. At the time of these maturities, alternate
sources of funding for the net outstanding balance of $2.8 billion will be
provided by the Company's funding programs.

AMERICAN EXPRESS FINANCIAL ADVISORS

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

STATEMENTS OF INCOME
(Unaudited)

* Reflects a $109 million non-cash pretax charge ($71 million after-tax)
related to the January 1, 2004 adoption of SOP 03-1. Reclassifications of
prior period amounts to conform to AEFA's current period presentation as a
result of adopting SOP 03-1 were not material.

30

SELECTED STATISTICAL INFORMATION
(Unaudited)

(Amounts in millions, except percentages and where indicated)

# - Denotes a variance of more than 100%.

* At June 30, 2004, amounts reflect September 30, 2003 balances from the
Threadneedle acquisition of $73.2 billion of assets managed for
institutions, $2.6 billion of separate account assets, $1.0 billion of
other owned assets and $7.9 billion of assets managed for individuals.

** Excludes non-branded administered assets of $5.4 billion at June 30,
2003. Assuming such assets had been included, the increase in
administered assets would have been 29%.

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

AEFA reported net income of $174 million for the three months ended June 30,
2004, up 11 percent from $157 million in the same period a year ago.

Total revenues increased 18 percent primarily due to significantly higher
management and distribution fees, increased net investment income, greater
insurance premiums and higher financial planning and advice services

31

fees. In addition, the acquisition of Threadneedle in the third quarter of
2003 contributed approximately 8 percent to the revenue growth and a modest
contribution to net income growth.

Management and distribution fees increased 32 percent representing a 42
percent increase in management fees and a 20 percent increase in distribution
fees. The management fees increase is primarily due to higher average assets
under management, reflecting the impact from the 2003 acquisition of
Threadneedle, 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. Other revenues increased 16
percent due to strong property-casualty and higher life insurance-related
revenues coupled with higher financial planning and advice services fees.

Net investment income increased 6 percent 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. For the three months
ended June 30, 2004, $36 million of total investment gains were partially
offset by $6 million of impairments and losses. The total investment gains
include an $18 million pretax benefit reflecting lower than expected losses
resulting from management's first quarter decision to liquidate a secured loan
trust managed by AEFA. Also included in these total investment gains and
losses are $17 million of gross realized gains and $5 million of gross
realized losses from sales of securities, as well as $1 million of
other-than-temporary impairment losses on investments, classified as
Available-for-Sale. For the three months ended June 30, 2003, $64 million of
total investment gains were more than offset by $80 million of impairments and
losses. Included in these total investment gains and losses are $63 million of
gross realized gains and $13 million of gross realized losses from sales of
securities, as well as $45 million of other-than-temporary impairment losses
on investments, classified as Available-for-Sale.

In the following table, the Company presents AEFA's aggregate revenues for the
quarters ended June 30, 2004 and 2003 on a basis that is net of provisions for
losses and benefits because the Company manages the AEFA business and
evaluates its financial performance, where appropriate, in terms of the
"spread" on its products. An important part of AEFA's business is margin
related, particularly the insurance, annuity and certificate businesses.

One of the drivers for the AEFA business is the return on invested cash,
primarily generated by sales of insurance, annuity and investment
certificates, less provisions for losses and benefits on these products. These
investments tend to be interest rate sensitive. Thus, GAAP revenues tend to be
higher in periods of rising interest rates and lower in times of decreasing
interest rates. The same relationship is true of provisions for losses and
benefits, only it is more accentuated period-to-period because rates credited
to customers' accounts generally reset at shorter intervals than the yield on
underlying investments. The Company presents this portion of the AEFA business
on a net basis to eliminate potentially less informative comparisons of
period-to-period changes in revenue and provisions for losses and benefits in
light of the impact of these changes in interest rates.

The provision for losses and benefits for annuities decreased 5 percent
primarily due to lower crediting rates and the effect of lower appreciation
in the S&P 500 on equity indexed annuities during the current quarter versus
the same period a year ago, partially offset by a higher average inforce
level. Insurance provisions increased 16 percent as higher inforce levels
were partially offset by lower life insurance crediting rates. Investment
certificates provisions decreased 17 percent primarily due to the effect
on the stock market certificate product of lower

32

appreciation in the S&P 500 during the current quarter versus the same
period a year ago and lower crediting rates, partially offset by higher
average reserves.

Human resources expense increased 27 percent reflecting the effects of the
Threadneedle acquisition and higher field force compensation-related costs.
The average number of employees (excluding financial advisors) was down 2
percent, excluding Threadneedle which added approximately 1,000 employees as
of the September 30, 2003 acquisition. Other operating expenses increased 27
percent reflecting the effect of the Threadneedle acquisition and costs
related to various industry regulatory and legal matters.

The effective tax rate at AEFA rose primarily as a result of required
amendments to prior-year tax returns.

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

AEFA's income before accounting change rose 39 percent to $402 million for the
six months ended June 30, 2004. AEFA reported net income of $331 million, up
14 percent from $290 million in the same period a year ago. AEFA's first half
of 2004 results reflect the $71 million ($109 million pretax) impact of the
January 1, 2004 adoption of SOP 03-1. SOP 03-1 requires insurance enterprises
to establish liabilities for benefits that may become payable under variable
annuity death benefit guarantees or other insurance or annuity contract
provisions.

Total revenues increased 20 percent primarily due to significantly higher
management and distribution fees and greater insurance premiums. In addition,
the acquisition of Threadneedle in the third quarter of 2003 contributed
approximately 7 percent to the revenue growth and a modest contribution to net
income growth.

Management and distribution fees increased 40 percent representing a 44
percent increase in management fees and a 35 percent increase in distribution
fees. The management fees increase is primarily due to higher average assets
under management, reflecting the impact from the 2003 acquisition of
Threadneedle, improvement in equity market valuations versus last year and net
asset inflows. Distribution fees increased as a result of greater mutual fund
fees and increased brokerage-related activities. Other revenues increased 17
percent due to higher property-casualty and life insurance-related revenues
coupled with higher financial planning and advice services fees.

Net investment income rose 3 percent versus last year primarily due to the
benefits of slightly higher levels of invested assets and a slightly higher
yield. For the six months ended June 30, 2004, $56 million of total investment
gains were more than offset by $64 million of impairments and losses. The
total investment gains include an $18 million benefit reflecting lower than
expected losses resulting from management's first quarter decision to
liquidate a secured loan trust managed by AEFA. Total investment losses
include the original first quarter $49 million charge related to the same
early liquidation. Also included in these total investment gains and losses
are $35 million of gross realized gains and $10 million of gross realized
losses from sales of securities, as well as $1 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale. For the
six months ended June 30, 2003, $251 million of total investment gains were
more than offset by $262 million of impairments and losses. Included in these
total investment gains and losses are $249 million of gross realized gains and
$62 million of gross realized losses from sales of securities, as well as $158
million of other-than-temporary impairment losses on investments, classified
as Available-for-Sale.

In the following table, the Company presents AEFA's aggregate revenues for the
six months ended June 30, 2004 and 2003 on a basis that is net of provisions
for losses and benefits (see three month discussion for reasons for this
presentation).

33

The provision for losses and benefits for annuities decreased 6 percent
primarily due to lower crediting rates, partially offset by a higher average
inforce level. Insurance provisions increased 11 percent as higher average
inforce levels were partially offset by lower life insurance crediting
rates. Investment certificates provisions decreased 7 percent primarily
due to lower crediting rates and the effect on the stock market certificate
product of lower appreciation in the S&P 500 during the first half of the
year versus the same period a year ago, partially offset by higher average
reserves.

Human resources expense increased 27 percent reflecting the effects of the
Threadneedle acquisition, higher field force compensation-related costs and
merit increases. The average number of employees (excluding financial
advisors) was down 2 percent, excluding Threadneedle, which added
approximately 1,000 employees as of the September 30, 2003 acquisition. These
increases were partially offset by a $44 million DAC valuation benefit
reflecting a portion of the benefit of the lengthening of amortization periods
for certain insurance and annuity products. The total DAC valuation benefit of
$66 million (including the $22 million benefit noted below) is discussed in
more detail in the following DAC section. Other operating expenses increased
26 percent reflecting the effect of the Threadneedle acquisition and costs
related to various industry regulatory and legal matters. These increases were
partially offset by the $22 million DAC valuation benefit noted earlier and a
lower minority interest expense for premium deposits related to a joint
venture with AEB. See the DAC section below for further discussion of DAC and
related adjustments.

The effective tax rate at AEFA rose primarily as a result of required
amendments to prior-year tax returns.

DEFERRED ACQUISITION COSTS

Deferred acquisition costs represent the costs of acquiring new business,
principally direct sales commissions and other distribution and underwriting
costs that have been deferred on the sale of annuity, life and health
insurance and, to a lesser extent, property/casualty and certain mutual fund
products. For annuity and insurance products, DAC are amortized over periods
approximating the lives of the business, generally as a percentage of premiums
or estimated gross profits or as a portion of the interest margins associated
with the products. For certain mutual fund products, DAC are generally
amortized over fixed periods on a straight-line basis.

For annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. The
rate is net of asset fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its
assumptions with respect to customer asset value growth rates on a quarterly
basis.

Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margin and maintenance expense level assumptions,
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest

34

margins used to amortize DAC might also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an increase in DAC amortization expense
while a decrease in amortization percentage will result in a decrease in DAC
amortization expense. The impact on results of operations of changing
assumptions with respect to the amortization of DAC can be either positive or
negative in any particular period and is reflected in the period in which such
changes are made.

During the first quarter of 2004 and in conjunction with the adoption of SOP
03-1, AEFA extended the time periods over which DAC associated with certain
insurance and annuity products are amortized. In adopting SOP 03-1, AEFA
established additional liabilities for insurance benefits that may become
payable under variable annuity death benefit guarantees or on single pay
universal life contracts. In order to establish the proper relationships
between these liabilities and DAC associated with the same contracts, AEFA
changed its estimates of meaningful life for certain contracts so DAC
amortization periods are the same as liability funding periods. As a result,
AEFA recognized a $66 million valuation benefit reflecting the lengthening of
the amortization periods for the same contracts impacted by SOP 03-1.

DAC balances for various insurance, annuity and other products sold by AEFA
are set forth below:

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. Several areas in particular involve DAC and
deferred sales inducements, recognition of guaranteed minimum death benefits
(GMDB) and certain other variable annuity benefits, asset management fees and
structured investments. The direction and magnitude of the changes in equity
markets can increase or decrease amortization of DAC and deferred sales
inducement benefits, incurred amounts under GMDB and other variable annuity
benefit provisions and asset management fees and correspondingly affect
results of operations in any particular period. Similarly, the value of AEFA's
structured investment portfolio and derivatives arising from the consolidation
of certain secured loan trusts are impacted by various market factors.
Persistency of, or increases in, bond and loan default rates, among other
factors, could result in negative adjustments to the market values of these
investments in the future, which would adversely impact results of operations.
See AEFA's Liquidity and Capital Resources section of MD&A for a further
discussion of structured investments and consolidated derivatives.

MUTUAL FUND INDUSTRY DEVELOPMENTS

As has been widely reported, the SEC, the National Association of Securities
Dealers, Inc. (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund industry practices, including
late trading, market timing, disclosure of revenue sharing arrangements and
inappropriate sales of B shares. AEFA has received requests for information
concerning its practices and is providing information and cooperating fully
with these inquiries.

In May 2004, the Company reported that the broker-dealer subsidiary of AEFA
had received notification from the staff of the NASD indicating that it had
made a preliminary determination to recommend that the NASD bring an action
against AEFA for potential violations of federal securities laws and the rules
and regulations of the Securities and Exchange Commission and the NASD. The
notice received by AEFA comes in the context of a broader industry-wide review
of the mutual fund and brokerage industries that is being conducted by various
regulators. The NASD staff's allegations relate to AEFA's practices with
respect to various revenue sharing arrangements pursuant to which AEFA
receives payments from certain non-proprietary mutual funds for agreeing to
make their products available through AEFA's national distribution network. In
particular, the NASD has alleged that AEFA

35

(i) failed to properly disclose such revenue sharing arrangements from January
2001 until May 2003, (ii) failed to properly disclose such revenue sharing
arrangements in its brokerage confirmations and (iii) received directed
brokerage from January 2001 until December 2003. The notice from the NASD
staff is intended to give AEFA an opportunity to discuss the issues it has
raised. AEFA has been availing itself of this opportunity and continues to
cooperate fully with the NASD's inquiry regarding this matter, as well as all
other regulatory inquiries.

In addition to the foregoing, in February 2004 AEFA was one of 15 firms that
settled an enforcement action brought by the SEC and the NASD relating to
breakpoint discounts (i.e., volume discounts available to investors who make
large mutual fund purchases) pursuant to which AEFA paid a fine of $3.7
million and is in the process of reimbursing customers to whom the firm failed
to deliver such discounts.

Congress has proposed legislation and the SEC has proposed and, in some
instances, adopted rules relating to the mutual fund industry, including
expenses and fees, mutual fund corporate governance and disclosures to
customers. While there remains a significant amount of uncertainty as to what
legislative and regulatory initiatives may ultimately be adopted, these
initiatives could impact mutual fund industry participants' results, including
AEFA's, in future periods.

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION

(Dollars in billions, except percentages)

* Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.

Investments decreased compared to June 30, 2003 primarily as a result of lower
unrealized appreciation, partially offset by proceeds from sales of the
underlying fixed rate products. Investments include $3.2 billion, $3.2 billion
and $2.3 billion of below investment grade securities (excluding net
unrealized appreciation and depreciation) at June 30, 2004, December 31, 2003
and June 30, 2003, respectively. These investments represent 8 percent, 8
percent and 6 percent of AEFA's investment portfolio at June 30, 2004,
December 31, 2003 and June 30, 2003, respectively. Non-performing assets
relative to invested assets (excluding short-term cash positions) were 0.04%,
0.07% and 0.08% at June 30, 2004, December 31, 2003 and June 30, 2003,
respectively. Management believes a more relevant measure of exposure of
AEFA's below investment grade securities should exclude $240 million of below
investment grade securities (excluding net unrealized appreciation and
depreciation), which were recorded as a result of the adoption of the
Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities," (FIN 46).
These assets are not available for AEFA's general use as they are for the
benefit of the collateralized debt obligation (CDO) debt holders and
reductions in values of such investments will be fully absorbed by the third
party investors. Excluding the impacts

36

of FIN 46, investments include $3.0 billion of below investment grade
securities (excluding net unrealized appreciation and depreciation),
representing 7 percent of AEFA's investment portfolio at June 30, 2004.

During 2004, AEFA continued to hold investments in CDOs and an SLT, some of
which are also managed by AEFA, and were not consolidated pursuant to the
adoption of FIN 46 as the Company was not considered a primary beneficiary. As
a condition to its managing certain CDOs, AEFA is required to invest in the
residual or "equity" tranche of the CDO, which is typically the most
subordinated tranche of securities issued by the CDO entity. AEFA invested in
CDOs and the SLT as part of its investment strategy in order to offer a
competitive rate to contractholders' accounts. AEFA's exposure as an investor
is limited solely to its aggregate investment in the CDOs and SLTs, and it has
no obligations or commitments, contingent or otherwise, that could require any
further funding of such investments. As of June 30, 2004, the carrying values
of the CDO residual tranches and SLT notes, managed by AEFA, were $30 million
and nil, respectively. AEFA also has a retained interest in a CDO
securitization with a carrying value of $712 million, of which $529 million is
considered investment grade, as well as an additional $25 million in rated CDO
tranches and $28 million in a minority-owned SLT, both of which are managed by
third parties. CDOs and the SLT are illiquid investments. As an investor in
the residual tranche of CDOs, AEFA's return correlates to the performance of
portfolios of high-yield bonds and/or bank loans. As a noteholder of the SLT,
AEFA's return is based on a reference portfolio of loans.

The carrying value of the CDO and SLT investments, as well as derivatives
recorded on the balance sheet as a result of consolidating certain SLTs, and
AEFA's projected return are based on discounted cash flow projections that
require a significant degree of management judgment as to assumptions
primarily related to default and recovery rates of the high-yield bonds and/or
bank loans either held directly by the CDO or in the reference portfolio of
the SLT and, as such, are subject to change. Generally, the SLTs are
structured such that the principal amount of the loans in the reference
portfolio may be up to five times that of the par amount of the notes held by
AEFA. Although the exposure associated with AEFA's investment in CDOs and SLTs
is limited to the carrying value of such investments, they have additional
volatility associated with them because the amount of the initial value of the
loans and/or other debt obligations in the related portfolios is significantly
greater than AEFA's exposure. In addition, the derivatives recorded as a
result of consolidating certain SLTs under FIN 46 are valued based on the
expected performance of a reference portfolio of high-yield loans. The
exposure to loss as a result of AEFA's investment in these SLTs consolidated
under FIN 46 is represented by the pretax net assets of the consolidated SLTs,
which were $714 million at June 30, 2004; upon the closing of the early
liquidation of an SLT as described above, this exposure is expected to be
reduced by approximately $238 million. Deterioration in the value of the
high-yield bonds or bank loans would likely result in deterioration of AEFA's
investment return with respect to the relevant CDO or SLT investment or
consolidated derivative, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT may be subject to early
liquidation, which could result in further deterioration of the investment
return or, in severe cases, loss of the CDO, SLT or consolidated derivative
carrying amount.

Separate account assets increased from the prior year due to market
appreciation, an additional $2.6 billion of assets from the Threadneedle
acquisition as well as net inflows. Separate account assets increased from
December 31, 2003 due to market appreciation and net inflows.

Client contract reserves increased 4 percent when compared to June 30, 2003
primarily as a result of positive net cash flows in fixed insurance, fixed
annuities and investment certificates.

37

AMERICAN EXPRESS BANK

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

STATEMENTS OF INCOME
(Unaudited)

AEB reported net income of $28 million and $58 million for the three and six
months ended June 30, 2004, respectively, up from $27 million and $46 million,
respectively, for the same periods a year ago. For the six-month period,
results include $11 million ($8 million after-tax) of human resources and
other operating costs reflecting AEB's decision to further rationalize certain
New York and Asia activities.

Net interest income declined for both periods due to lower levels of Personal
Financial Services (PFS) loan balances, reflecting AEB's previous decision to
temporarily curtail loan origination in Hong Kong and a decline in the
Corporate Banking loan portfolio. Commissions and fees increased 24 percent
and 25 percent, respectively, primarily due to higher volumes in the Financial
Institutions Group (FIG) and Private Banking. Foreign exchange income and
other revenues rose 2 percent and 7 percent, respectively, due to higher
client activity in Private Banking and PFS, partially offset by lower FIG
revenue primarily due to losses on FIG seed capital investments in mutual
funds versus gains last year, and lower capital gains in the six-month period.

Human resources expenses rose 11 percent and 18 percent for the three and
six-month periods ended June 30, 2004, respectively, reflecting higher
management incentive costs, merit increases and reengineering expenses in New
York and Asia, noted previously. Other operating expenses rose 12 percent and
11 percent, respectively, for the same periods primarily due to higher
technology charges in the three-month period and currency translation losses,
previously recorded in shareholder's equity, resulting from AEB's decision to
further rationalize certain activities in Asia in the six-month period.

Provision for losses decreased 57 percent and 71 percent for the three and six
months, respectively, due to an improvement in bankruptcy-related write-offs
in the consumer lending portfolio in Hong Kong and lower PFS loan volumes.

38

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION (GAAP BASIS)

(b) Includes assets managed by AEFA.
(c) Excludes American Express International Deposit Company's total assets
(which are 100% consolidated at AEFA).
(d) Computed on a trailing 12-month basis using total assets as included in
the Consolidated Financial Statements prepared in accordance with GAAP.
(e) Computed on a trailing 12-month basis using total shareholder's equity as
included in the Consolidated Financial Statements prepared in accordance
with GAAP.
(f) Based on legal entity information.

AEB had worldwide loans outstanding at June 30, 2004 and December 31, 2003 of
approximately $6.5 billion, up from $5.8 billion at June 30, 2003. The
increase since the second quarter of 2003 results from a net $400 million
increase in consumer and Private Banking loans, consisting of a $600 million
increase in Private Banking loans and a $200 million decline in PFS and other
loans, and a $350 million increase in Financial Institution loans, partially
offset by a $100 million decrease in Corporate Banking loans. As of June 30,
2004 and December 31, 2003, consumer and Private Banking loans comprised 68
percent of total loans as compared to 66 percent at June 30, 2003. Financial
Institution loans comprised 30 percent of total loans at June 30, 2004 as
compared to 29 percent at December 31, 2003 and 28 percent at June 30, 2003.
Corporate Banking loans comprised 2 percent of total loans at June 30, 2004
versus 3 percent at December 31, 2003 and 6 percent at June 30, 2003 as AEB
continues to wind down its Corporate Banking business.

Total non-performing loans of $50 million at June 30, 2004 decreased from $78
million at December 31, 2003 and $102 million at June 30, 2003. The decreases
reflect loan payments and write-offs, partially offset by net downgrades.

Other banking activities, such as securities, unrealized gains on foreign
exchange and derivatives contracts, various credit-related commitments and
market placements added approximately $7.7 billion, $7.6 billion and $7.8
billion to AEB's credit exposures at June 30, 2004, December 31, 2003 and
June 30, 2003, respectively. Included in these

39

additional exposures at June 30, 2004, December 31, 2003 and June 30, 2003
are relatively lower risk cash and securities-related balances totaling
$5.7 billion, $5.4 billion and $5.8 billion, respectively.

Managed assets rose over the past 12 months primarily due to 10 percent growth
in Private Banking client holdings, 3 percent growth in PFS client holdings
and 50 percent growth in FIG managed assets reflecting net asset inflows,
market appreciation and a positive foreign currency translation impact.

CORPORATE AND OTHER

Corporate and Other reported net expenses of $58 million and $116 million for
the three and six months ended June 30, 2004, respectively, compared with net
expenses of $56 million and $100 million in the same periods a year ago. Net
expenses increased primarily due to higher interest expense on long-term debt
issued in the second half of 2003 and increased corporate investment spending
on compliance and technology projects, partially offset by an $18 million
benefit from the final settlement of a Federal tax audit.

OTHER REPORTING MATTERS
Accounting Developments

See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.

ITEM 4. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective. There have not
been any changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

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," "may," "should," "could," "would," "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
cost effectively manage and expand cardmember benefits, including containing
the growth of its marketing, promotion, rewards and cardmember services
expenses; the Company's ability to accurately estimate the provision for the
cost of the Membership Rewards program; the Company's ability to grow its
business and meet or exceed its return on shareholders' 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 of the
Company to generate sufficient revenues for expanded investment spending and
to actually spend such funds to the extent available, and the ability to
capitalize on such investments to improve business metrics; credit risk
related to consumer debt, business loans, merchant bankruptcies and other
credit exposures both in the U.S. and

40

internationally; volatility in the valuation assumptions for the
interest-only (I/O) strip relating to TRS'lending securitizations;
fluctuation in the equity and fixed income markets, which can affect the
amount and types of investment products sold by AEFA, the market value of its
managed assets, and management, distribution and other fees received based on
the value of those assets; AEFA's ability to recover Deferred Acquisition
Costs (DAC), as well as the timing of such DAC amortization, in connection
with the sale of annuity, insurance and certain mutual fund products; changes
in assumptions relating to DAC, which could impact the amount of DAC
amortization; the ability to improve investment performance in AEFA's
businesses, including attracting and retaining high-quality personnel; the
success, timeliness and financial impact, including costs, cost savings and
other benefits including increased revenues, 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, 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 potential negative
effect on the Company's businesses and infrastructure, including information
technology, of terrorist attacks, disasters or other catastrophic events in
the future; the impact on the Company's businesses resulting from continuing
geopolitical uncertainty; the overall level of consumer confidence; 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 on its card products in light of market pressures, increase merchant
coverage, retain cardmembers after low introductory lending rates have
expired, and expand the global network services business; the triggering of
obligations to make payments to certain co-brand partners, merchants, vendors
and customers under contractual arrangements with such parties under certain
circumstances; AEFA's ability to develop and roll out new and attractive
products to clients in a timely manner and effectively manage the economics
in selling a growing volume of non-proprietary mutual funds and other retail
financial products to clients; successfully cross-selling financial, travel,
card and other products and services to the Company's customer base, both
in the United States and internationally; 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; 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; bankruptcies, restructurings or similar events affecting the
airline or any other industry representing a significant portion of TRS'
billed business, including any potential negative effect on particular card
products and services and billed business generally that could result from
the actual or perceived weakness of key business partners in such industries;
fluctuations in foreign currency exchange rates; political or economic
instability in certain regions or countries, which could affect lending and
other commercial activities, among other businesses, or restrictions on
convertibility of certain currencies; changes in laws or government
regulations; the costs and integration of acquisitions; and outcomes and
costs associated with litigation and compliance and regulatory matters.
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, 2003, and its other reports filed with the SEC.

41

PART II. OTHER INFORMATION

AMERICAN EXPRESS COMPANY

Item 1. Legal Proceedings

The Company and its subsidiaries are involved in a number of legal
and arbitration proceedings, including class actions, concerning
matters arising in connection with the conduct of their respective
business activities. The Company believes it has meritorious defenses
to each of these actions and intends to defend them vigorously. The
Company believes that it is not a party to, nor are any of its
properties the subject of, any pending legal or arbitration
proceedings that would have a material adverse effect on the
Company's consolidated financial condition, results of operations or
liquidity. However, it is possible that the outcome of any such
proceedings could have a material impact on results of operations in
any particular reporting period as the proceedings are resolved.
Certain legal proceedings involving the Company are set forth below.
For a discussion of certain other legal proceedings involving the
Company and its subsidiaries, please refer to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.

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 fares negotiated privately with corporations. On April 21,
2004, British Airways and American Express agreed to a joint
stipulation pursuant to which each party dismissed its respective
claims against the other.

Beginning in mid-July 2002, 12 putative class action lawsuits were
filed in the United States District Court for the Southern District
of New York. In October 2002, these cases were consolidated under the
caption In Re American Express Company Securities Litigation. These
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
timeframe. The purported class covers the period from July 18, 1999
to July 17, 2001. The actions seek unspecified compensatory damages
as well as disgorgement, punitive damages, attorneys' fees and costs,
and interest. On March 31, 2004, the Court granted the Company's
motion to dismiss the lawsuit. In May 2004, the plaintiffs gave
notice that they intended to appeal the Court's order of dismissal.

In November 2002, a suit, captioned Haritos et al. v. American
Express Financial Corporation and IDS Life Insurance Company, was
filed in the United States District Court for the District of
Arizona. The suit is filed by plaintiffs who purport to represent a
class of all persons that have purchased financial plans from AEFA
advisors during an undefined class period. Plaintiffs allege that the
sale of the plans violates the Investment Advisers Act of 1940 (the
"IAA"). The suit seeks an unspecified amount of damages, rescission
of the investment advisor plans and restitution of monies paid for
such plans. In June 2004, the Court denied the Company's motion to
dismiss the action as a matter of law. The Court did indicate,
however, that the plaintiffs may not have a compelling case under
the IAA. Notwithstanding the Court's denial of the Company's motion
to dismiss, the Company believes that the plaintiffs' case suffers
from various factual and legal weaknesses and it intends to
continue to defend the case vigorously.

The Company has been named in several purported class actions in
various state courts alleging that the Company violated the
respective state's laws by wrongfully collecting amounts assessed
on converting transactions made in foreign currencies to U.S. dollars
and/or failing to properly disclose the existence of such amounts in
its Cardmember agreements and billing statements.

42

The plaintiffs in the actions seek, among other remedies, injunctive
relief, money damages and/or attorneys' fees on their own behalf and
on behalf of the putative class of persons similarly situated. In
June 2004, the Company and certain of its subsidiaries filed a
motion in the U.S. District Court for the Southern District of Florida
in the case captioned Lipuma v. American Express Bank, American
Express Travel Related Services Company, Inc. and American Express
Centurion Bank (filed in August 2003) renewing the request seeking
preliminary approval of a nationwide class action settlement to
resolve all lawsuits and allegations with respect to the Company's
collection and disclosure of fees assessed on transactions made in
foreign currencies. (The settlement had been preliminarily approved by
the Court in February 2004; however, subsequent to such preliminary
approval, the matter was reassigned to another judge in the same
court who vacated the preliminary approval order and invited the
parties to present the settlement for consideration once again.) The
motion asked the Court to preliminarily approve a settlement pursuant
to which the Company would (a) deposit $75 million into a fund that
would be established to reimburse class members with valid claims,
make certain contributions to charitable organizations to be
identified later and pay attorneys' fees and (b) make certain changes
to the disclosures in its Cardmember agreements and billing
statements regarding its foreign currency conversion practices. The
Company has established reserves to cover the proposed payment that
would be made to reimburse class members and pay attorneys' fees. The
motion also asked the court to enjoin all other proceedings that make
related allegations pending a final approval hearing including, but
not limited to the following cases: (i) Environmental Law Foundation,
et al. v. American Express Company, et al., Superior Court of Alameda
County, California (filed March 2003); (ii) Rubin v. American Express
Company and American Express Travel Related Services Company, Inc.,
Circuit Court of Madison County, Illinois (filed April 2003); (iii)
Angie Arambula, et al. v. American Express Company, et al., District
Court of Cameron County, Texas, 103rd Judicial District (filed May
2003); (iv) Fuentes v. American Express Travel Related Services
Company, Inc. and American Express Company, District Court of Hidalgo
County, Texas (filed May 2003); (v) Wick v. American Express Company,
et al., Circuit Court of Cook County, Illinois (filed May 2003); (vi)
Bernd Bildstein v. American Express Company, et al., Supreme Court of
Queens County, New York (filed June 2003); (vii) Janowitz v. American
Express Company, et al., Circuit Court of Cook County, Illinois
(filed September 2003); and (viii) Paul v. American Express Company,
et al., Superior Court of Orange County, California (filed January
2004).

The Company has been named in a number of purported class actions in
which the plaintiffs allege an unlawful antitrust tying arrangement
between the Company's charge cards, credit cards and debit cards in
violation of various state and federal laws, including the following:
(i) Cohen Rese Gallery et al. v. American Express Company et al.,
U.S. District Court for the Northern District of California (filed
July 2003); (ii) Italian Colors Restaurant v. American Express
Company et al., U.S. District Court for the Northern District of
California (filed August 2003); (iii) DRF Jeweler Corp. v. American
Express Company et al., U.S. District Court for the Southern District
of New York (filed December 2003); (iv) Hayama Inc. v. American
Express Company et al., Superior Court of California, Los Angeles
County (filed December 2003); (v) Chez Noelle Restaurant v. American
Express Company et al., U.S. District Court for the Southern District
of New York (filed January 2004); (vi) Mascari Enterprises d/b/a
Sound Stations v. American Express Company et al., U.S. District
Court for the Southern District of New York (filed January 2004);
(vii) Mims Restaurant v. American Express Company et al., U.S.
District Court for the Southern District of New York (filed February,
2004); and (viii) The Marcus Corporation v. Amercian Express Company
et al., U.S. District Court for the Southern District of New York
(filed July, 2004). The plaintiffs in these actions seek injunctive
relief and an unspecified amount of damages. Upon motion to the Court
by the Company, the venue of the Cohen Rese and Italian Colors
actions was moved to the U.S. District Court for the Southern
District of New York in December 2003. Each of the above-listed
actions (except for Hayama) is now pending in the U.S.

43

District Court for the Southern District of New York. On April 30,
2004, the Company filed a motion to dismiss all the actions filed
prior to such date that were pending in the U.S. District Court for
the Southern District of New York. In addition, the Company has asked
the Court in the Hayama action to stay that action pending resolution
of the motion in the Southern District of New York.

The Securities and Exchange Commission (the "SEC"), NASD, Inc. (the
"NASD"), and several state attorneys general have brought numerous
enforcement proceedings against individuals and firms challenging
several mutual fund industry practices including late trading
(allowing mutual fund customers to receive 4:00 p.m. ET prices for
orders placed or confirmed after 4:00 p.m. ET), market timing
(abusive rapid trading in mutual fund shares), disclosure of revenue
sharing arrangements, which are paid by fund advisers or companies to
brokerage firms who agree to sell those funds, and inappropriate
sales of B (no front end load) shares. American Express Financial
Advisors ("AEFA") has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.

In May 2004, the Company reported that the broker-dealer subsidiary
of AEFA had received notification from the staff of the NASD
indicating that it had made a preliminary determination to recommend
that the NASD bring an action against AEFA for potential violations
of federal securities laws and the rules and regulations of the
SEC and the NASD. The notice received by AEFA comes in the context
of a broader industry-wide review of the mutual fund and brokerage
industries that is being conducted by various regulators. The NASD
staff's allegations relate to AEFA's practices with respect to
various revenue sharing arrangements pursuant to which AEFA receives
payments from certain non-proprietary mutual funds for agreeing to
make their products available through AEFA's national distribution
network. In particular, the NASD has alleged that AEFA (i) failed to
properly disclose such revenue sharing arrangements from January 2001
until May 2003, (ii) failed to properly disclose such revenue sharing
arrangements in its brokerage confirmations and (iii) received
directed brokerage from January 2001 until December 2003. The notice
from the NASD staff is intended to give AEFA an opportunity to discuss
the issues it has raised. AEFA has been availing itself of this
opportunity and continues to cooperate fully with the NASD's inquiry
regarding this matter, as well as all other regulatory inquiries.

In early March 2004, a purported class action, captioned Naresh Chand
v. American Express Company, American Express Financial Corporation
and American Express Financial Advisors, Inc. was filed in the United
States District Court for the Southern District of New York.
Subsequent to the filing of the Chand lawsuit, the following
purported class actions were also filed against the Company, American
Express Financial Corporation and American Express Financial
Advisors, Inc. in the U.S. District Court for the Southern District
of New York: (i) Elizabeth Flenner v. American Express Company et al.
(March 2004); (ii) John B. Perkins v. American Express Company et al.
(March 2004); (iii) Kathie Kerr v. American Express Company et al.
(April 2004); and (iv) Leonard D. Caldwell, Gale D. Caldwell and
Richard T. Allen v. American Express Company et al. (April 2004). In
addition, in July 2004, a purported class action captioned Ronald
Beer v. American Express Company et al. was filed in the Supreme
Court of the State of New York, New York County. The plaintiffs in
each of the lawsuits allege violations of certain federal securities
laws and/or state statutory and common law. The plaintiffs, among
other things, allege that the defendants did not adequately disclose
AEFA financial advisors' incentive to sell American Express-branded
mutual funds to clients, as well as the "incentive arrangements" for
the sale to and continued holding by AEFA clients of mutual funds of
eleven mutual fund families ("preferred funds") from whom AEFA
received revenue sharing payments. The lawsuits seek an unspecified
amount of damages, rescission and restitution.

In addition to the foregoing, in February 2004 AEFA was one of 15
firms that settled an enforcement action brought by the SEC and the
NASD relating to breakpoint discounts (i.e.,

44

volume discounts available to investors who make large mutual fund
purchases) pursuant to which AEFA agreed to pay a fine of $3.7
million and to reimburse customers to whom the firm failed to
deliver such discounts.

In mid-April 2004, a purported class action captioned Corgan v.
American Express Financial Corporation and American Express Financial
Advisors was filed in the Circuit Court of St. Clair County,
Illinois. The complaint also names various other defendants that are
not affiliated with the Company and its subsidiaries. The plaintiff
purports to represent a class of all persons holding shares in mutual
funds within various defendants' respective fund complexes, including
AEFA's, within the last ten years. The plaintiff alleges that persons
holding shares in the defendants' funds were damaged by defendants'
"breaches of prospectuses, subscription agreements and
confirmations." The lawsuit seeks damages and attorneys' fees. The
plaintiffs voluntarily dismissed their complaint in May 2004.

In June 2004, an action captioned John E. Gallus et al. v. American
Express Financial Corp. and American Express Financial Advisors Inc.
was filed in the United States District Court for the District of
Arizona. The plaintiffs allege that they are investors in several
"AXP" mutual funds and they purport to bring the action derivatively
on behalf of those funds under the Investment Company Act of 1940.
The plaintiffs allege that fees allegedly paid to the defendants by
the funds for investment advisory and administrative services are
excessive. The plaintiffs seek remedies including restitution and
rescission of investment advisory and distribution agreements. The
Company intends to file a motion to dismiss the complaint.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

(e) Issuer Purchases of Securities

The table below sets forth the information with respect to purchases
made by or on behalf of the Company of the Company's common stock
during the quarter ended June 30, 2004.

45

(1) The Board of Directors of the Company authorized the repurchase
of 120 million shares of common stock in November 2002. At
present, the Company has approximately 105 million shares
remaining under such authorization. Such authorization does not
have an expiration date, and at present, there is no intention
to modify or otherwise rescind such authorization. Since
September 1994, the Company has acquired 465 million shares
under various Board authorizations to repurchase up to an
aggregate of 570 million shares, including purchases made under
agreements with third parties.

(2) Includes: (1) shares delivered or attested to in satisfaction of
the exercise price and/or tax withholding obligation by holders
of employee stock options who exercised options (granted under
the Company's incentive compensation plans) and (2) restricted
shares withheld (under the terms of grants under the Company's
incentive compensation plans) to offset tax withholding
obligations that occur upon vesting and release of restricted
shares. The Company's incentive compensation plans provide that
the value of the shares delivered or attested to, or withheld,
shall be the average of the high and low price of the Company's
common stock on the date the relevant transaction occurs.

(3) Share purchases under publicly announced programs are made
pursuant to open market purchases or privately negotiated
transactions (including with employee benefit plans) as market
conditions warrant and at prices the Company deems appropriate.

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 of shareholders was held on April 26, 2004, see the
information set forth under the caption "Item 4. Submission of
Matters to a Vote of Security Holders" in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2004,
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 22, 2004, Items 9 and 12, reporting on the
Company's financial results for the three months ended March 31,
2004, and including a 2004 First Quarter Earnings Supplement.

Form 8-K, dated May 19, 2004, Item 5, reporting on a notification
received by the broker-dealer subsidiary of the Company's
American Express Financial Advisors operating segment from the
staff of NASD, Inc.

Form 8-K, dated June 3, 2004, Item 9, reporting on a presentation
delivered by Kenneth I. Chenault, Chairman and Chief Executive
Officer of the Company, at the Sanford C. Bernstein & Co.'s
Strategic Decisions Conference.

Form 8-K, dated July 26, 2004, Items 9 and 12, reporting the
Company's financial results for the three and six months ended
June 30, 2004, and including a 2004 Second Quarter Earnings
Supplement.

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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: July 29, 2004 By /s/ Gary L. Crittenden
-----------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

Date: July 29, 2004 By /s/ Joan C. Amble
-----------------------------------
Joan C. Amble
Senior Vice President and
Comptroller
(Principal Accounting Officer)

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EXHIBIT INDEX

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

E-1