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 MARCH 31, 2005

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 April 22, 2005
- ------------------------------------------------------ -----------------------------
Common Shares (par value $.20 per share) 1,245,899,187 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 BALANCE SHEETS
(millions, except share data)
(Unaudited)

See Notes to Consolidated Financial Statements.

2

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

See Notes to Consolidated Financial Statements.

3

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 which are incorporated by
reference in the Annual Report on Form 10-K of American Express Company
(the Company or American Express) for the year ended December 31, 2004.
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.

On February 1, 2005, the Company announced plans to pursue a spin-off of
American Express Financial Advisors (AEFA) to shareholders. Shareholders
would receive 100 percent of the common shares of American Express
Financial Corporation (AEFC), through which the financial advisors
business is conducted. The transaction is intended to be tax-free to
shareholders and is expected to be completed late in the third quarter of
2005, subject to certain conditions, including necessary regulatory
approvals and the receipt of a favorable tax ruling and/or opinion, as
well as final board approval. See Note 23 in the Company's Annual Report
on Form 10-K for the year ended December 31, 2004 for further discussion
of the proposed spin-off. All discussions that follow describe the
Company's business and organization as currently structured.

Net investment income is presented net of interest expense of $71 million
and $51 million for the first quarters of 2005 and 2004, respectively,
related primarily to the Company's international banking operations.
Cardmember lending net finance charge revenue is presented net of
interest expense of $178 million and $127 million for the first quarters
of 2005 and 2004, respectively.

At both March 31, 2005 and December 31, 2004, cash and cash equivalents
included $1.0 billion segregated in special bank accounts for the benefit
of customers.

The Company had securitized cardmember receivables totaling $1.1 billion
and $1.9 billion at March 31, 2005 and December 31, 2004, respectively,
which were included in cardmember receivables on the Consolidated Balance
Sheets as they did 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 was included in long-term
debt.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment (SFAS No. 123(R))."
Under a rule issued by the Securities and Exchange Commission (SEC) in
April 2005, SFAS No. 123(R) is now effective for public companies for
annual, rather than interim, periods that begin after June 15, 2005. SFAS
No. 123(R) requires entities to measure and recognize the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited
exceptions). As noted in Note 2 below, the Company adopted, in January
2003, the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), prospectively for all stock
options granted after December 31, 2002. Substantially all stock options
for which intrinsic value accounting was continued under Accounting
Principles Board (APB) Opinion No. 25 will have vested by June 30, 2005.
SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. The requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. In
March 2005, the SEC also issued Staff Accounting Bulletin No. 107 (SAB
No. 107), which summarizes the staff's views regarding share-based
payment arrangements for public companies. The Company is currently
evaluating the impact of SFAS No. 123(R) and

4

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

SAB No. 107 on the Company's results of operations and financial position
but does not expect that the impact will be material.

In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (the Act)" (FSP
FAS 109-2), which would allow additional time beyond the financial
reporting period of enactment to evaluate the effect of the Act on the
Company's plan for reinvestment or repatriation of foreign earnings for
purposes of calculating the income tax provision. The Act contains a
provision that permits an 85% dividends received deduction for qualified
repatriations of earnings that would otherwise be permanently reinvested
outside the United States. The Company does not plan to reinvest or
repatriate any foreign earnings as a result of the Act.

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 first quarter 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 ($33
million) and from considering these liabilities in valuing deferred
acquisition costs (DAC) and deferred sales inducement costs associated
with those contracts ($10 million) 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 ($92 million) and from considering these liabilities in valuing
DAC associated with those contracts ($26 million offset). 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 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" (EITF 03-1). The Company complied with the disclosure
provisions of this rule in the Consolidated Financial Statements included
in its Annual Report on Form 10-K for the years ended December 31, 2004
and 2003. In March 2004, the FASB reached a consensus regarding the
application of a three-step impairment model to determine whether
investments accounted for in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115),
and other cost method investments are other-than-temporarily impaired.
However, with the issuance of FSP EITF 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF 03-1," on September 30, 2004, the provisions of
the consensus relating to the measurement and recognition of
other-than-temporary impairments will be deferred pending further
clarification from the FASB. The remaining provisions of this rule, which
primarily relate to disclosure requirements, are required to be applied
prospectively to all current and future investments accounted for in
accordance with SFAS No. 115 and other cost method investments. The
Company will evaluate the potential impact of EITF 03-1 after the FASB
completes its reassessment.

2. STOCK-BASED COMPENSATION

At March 31, 2005, the Company has two stock-based employee compensation
plans, which are described more fully in Note 15 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. Effective
January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS No. 123 for all stock options granted after December
31, 2002. For the three months ended March 31, 2005 and 2004, the Company
expensed $23 million and $13 million after-tax, respectively, related to
stock options granted January 1, 2003 or later.

5

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amended APB
Opinion No. 28, "Interim Financial Reporting," to require disclosure
about the pro forma effects of SFAS No. 123 on reported net income of
stock-based compensation accounted for under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The following table
illustrates the effect on net income and earnings per common share (EPS)
assuming the Company had followed the fair value recognition provisions
of SFAS No. 123 for all outstanding and unvested stock options and other
stock-based compensation for the three months ended March 31, 2005 and
2004:

3. INVESTMENTS

The following is a summary of investments at March 31, 2005 and December
31, 2004:

(a) The carrying value of these assets is at amortized cost, net of
reserves totaling $56 million at both March 31, 2005 and
December 31, 2004.

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 months ended March 31, 2005 and 2004:

6

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 the next 12 months,
the aggregate maximum amount of undiscounted future payments associated
with such guarantees would not exceed $91 billion at both March 31, 2005
and December 31, 2004. The total amount of related liability accrued at
March 31, 2005 and December 31, 2004 for such programs was $239 million
and $257 million, respectively, which management believes to be adequate
based on actual experience. The Company generally has no collateral or
other recourse provisions related to these guarantees. Expenses relating
to actual claims under these guarantees were approximately $7 million
and $6 million for the three months ended March 31, 2005 and 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.
Generally, guarantees range in term from three months to one year. AEB
receives a fee related to these guarantees, many of which help to
facilitate customer cross-border transactions. At March 31, 2005, AEB
held $790 million of collateral supporting these guarantees. The
following table provides information related to such guarantees as of
March 31, 2005 and December 31, 2004:

5. COMPREHENSIVE INCOME

Comprehensive income is defined as the aggregate change in shareholders'
equity, excluding changes in ownership interests. It is the sum of net
income and changes in (i) unrealized gains or losses on
Available-for-Sale securities, (ii) unrealized gains or losses on
derivatives, (iii) foreign currency translation adjustments and (iv)
minimum pension liability adjustment. The components of comprehensive
income, net of related tax, for the three months ended March 31, 2005 and
2004 were as follows:

7

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

6. RETIREMENT PLANS

The components of the net pension cost for all defined benefit plans
accounted for under SFAS No. 87, "Employers' Accounting for Pensions,"
are as follows:

The net periodic postretirement benefit expense recognized for the three
months ended March 31, 2005 and 2004 was $10 million and $11 million,
respectively.

7. TAXES AND INTEREST

Net income taxes paid by the Company during the three months ended March
31, 2005 and 2004 were approximately $172 million and $55 million,
respectively. The Company paid interest of approximately $429 million and
$311 million during the three months ended March 31, 2005 and 2004,
respectively.

8. 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 months ended March 31, 2005 and 2004 are as
follows:

8

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended March 31, 2005 and 2004, the dilutive effect
of stock options excludes 18 million and 11 million options,
respectively, from the computation of diluted EPS because to do so would
have been antidilutive. As discussed in Footnote 1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004, the
convertible debentures issued in November 2003 will not affect the
computation of EPS unless the Company's common share price exceeds the
base conversion price (currently $69.41 per share). In that scenario,
the Company would reflect the additional common shares in the
calculation of diluted earnings per share using the treasury stock
method. The maximum number of shares issuable under the debentures is
16.7 million.

9. SEGMENT INFORMATION

The Company is principally engaged in providing travel-related, financial
services and international banking services throughout the world. TRS'
products and services include, among others, charge cards, cardmember
lending products, Travelers Cheques and corporate and consumer travel
services. AEFA is comprised primarily of asset management and insurance
businesses whose products are principally offered through its network of
over 12,000 financial advisors. AEB's products and services include
providing private, financial institution and corporate banking; 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 table presents certain information regarding these
operating segments, based on management's evaluation and internal
reporting structure, for the three months ended March 31, 2005 and 2004.
For certain income statement items that are affected by asset
securitizations at TRS, data are provided on both a GAAP basis, as well
as on a managed basis, which excludes the effect of securitizations.
Pretax income and net income are the same under both a GAAP and managed
basis. See TRS Results of Operations section of MD&A for further
information regarding the effect of securitizations on the financial
statements.

9

AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

* RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 REFLECT A $109
MILLION NON-CASH PRETAX CHARGE ($71 MILLION AFTER-TAX) RELATED TO THE
JANUARY 1, 2004 ADOPTION OF SOP 03-1.

10. RESTRUCTURING CHARGES

As discussed in Note 22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company recorded aggregate
restructuring charges of $102 million ($66 million after-tax) for
initiatives executed during 2004. During the first quarter of 2005, the
Company recorded additional charges of $10 million relating principally
to the restructuring activities associated with its business travel
operations. The following table summarizes by category the Company's
aggregate restructuring charge activity for the three months ended March
31, 2005:

10

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

American Express Company is engaged in a variety of businesses comprising
three operating segments: Travel Related Services (TRS), American Express
Financial Advisors (AEFA) and American Express Bank (AEB).

TRS includes a broad range of products including charge and credit cards;
stored value products such as Travelers Cheques, Travelers Cheque funds cards
and gift cards; travel agency services and travel, entertainment and
purchasing expense management services; network services and merchant
acquisition and merchant processing for our network partners and proprietary
payments businesses. TRS' various products are sold globally to diverse
customer groups, including consumers, small businesses, mid-market companies,
large corporations and banking institutions. These products are sold through
various channels including direct mail, on-line applications, targeted
sales-forces and direct response advertising.

TRS generates revenue from a variety of sources including global payments,
such as charge and credit cards, travel services and stored value products,
including Travelers Cheques. Charge and credit cards generate revenue for the
Company primarily in three different ways:

- - Discount revenue, the Company's largest single revenue source, which
represents fees charged to merchants when cardmembers use their cards to
purchase goods and services on our network,
- - Finance charge revenue, which is earned on outstanding balances related
to the cardmember lending portfolio, and
- - Card fees, which are earned for annual membership, and other commissions
and fees such as foreign exchange conversion fees and card-related fees
and assessments.

In addition to operating costs associated with these activities, other major
expense categories are expenses related to marketing and reward programs that
add new cardmembers, promote cardmember loyalty and spending and provisions
for anticipated cardmember credit and fraud losses. During the first quarter
of 2005, the TRS segment accounted for approximately 74 percent and 85 percent
of the Company's total revenues and net income, respectively.

AEFA is comprised primarily of asset management and insurance businesses whose
products are principally offered through its network of over 12,000 financial
advisors.

AEFA earns management and distribution fees on mutual funds, wrap products,
assets managed for institutions and separate accounts. AEFA's insurance and
annuity products generate revenue through premiums and other charges collected
from policyholders and contractholders and through investment income earned on
owned assets supporting these products. AEFA incurs various operating costs,
principally provision for losses and benefits for annuities, investment
certificates and insurance products.

On February 1, 2005, the Company announced plans to pursue a spin-off of AEFA
to shareholders. Shareholders would receive 100 percent of the common shares
of American Express Financial Corporation (AEFC), through which the financial
advisors business is conducted. The transaction is intended to be tax-free to
shareholders and is expected to be completed late in the third quarter of
2005, subject to certain conditions, including necessary regulatory approvals
and the receipt of a favorable tax ruling and/or opinion, as well as final
board approval. Expenses related to this spin-off will be reflected in each
quarter as incurred. See Note 23 in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004 for further discussion of the proposed
spin-off. All discussions that follow describe the Company's business and
organization as currently structured.

AEB offers financial products and services to retail customers, wealthy
individuals and financial institutions outside the United States that generate
interest income, commissions and fees, foreign exchange income and other
revenue. In addition to various operating costs, AEB recognizes provisions for
credit losses, mainly on its outstanding loans.

11

The Company follows accounting principles generally accepted in the United
States (GAAP). In addition to information provided on a GAAP basis, the
Company discloses certain data on a "managed basis." 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 sheets and income statements. See the TRS Results of Operations
section for further discussion of this approach.

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 MARCH 31, 2005
AND 2004

The Company's consolidated net income rose 19 percent to $946 million and
diluted earnings per share (EPS) rose 23 percent to $0.75 in the three-month
period ended March 31, 2005 as compared to a year ago. The Company's
consolidated income before the prior year's accounting change rose 9 percent
and diluted EPS before accounting change rose 14 percent. On a trailing
12-month basis, return on average shareholders' equity was 22.8 percent.

Net income and EPS for the three months ended March 31, 2004 reflect the $71
million ($109 million pretax) or $0.05 per diluted share impact of the
Company's adoption of the American Institute of Certified Public Accountants
(AICPA) Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). SOP 03-1 requires insurance enterprises to
establish liabilities for benefits that may become payable under variable
annuity death benefit guarantees or other insurance or annuity contract
provisions. Previous 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 1
percentage point for the three months ended March 31, 2005.

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

REVENUES
Consolidated revenues for the three months ended March 31, 2005 were $7.6
billion, up 10 percent from $6.9 billion in the same period a year ago
reflecting 11 percent growth at TRS, 8 percent growth at AEFA and a 1 percent
decline at AEB. As discussed in further detail below, the increase in the
first quarter was due primarily to higher discount revenue, increased net
securitization income, higher net investment income and greater cardmember
lending net finance charge revenue.

Discount revenue at TRS rose 13 percent to $2.7 billion as compared to a year
ago as a result of a 15 percent increase in worldwide billed business,
reflecting a 10 percent increase in average cardmember spending per
proprietary basic card and 7 percent growth in cards-in-force, offset in part
by a lower discount rate.

Net investment income of $803 million increased 8 percent over the year ago
period primarily as a result of a 12 percent increase at AEFA that was
partially offset by lower net interest income at AEB. The increase at AEFA
reflects higher levels of invested assets and the effect of net investment
gains in 2005 compared to net investment losses in 2004.

Cardmember lending net finance charge revenue at TRS of $592 million rose 9
percent, reflecting 5 percent growth in the average balance of the owned
cardmember lending portfolio and a higher portfolio yield.

Net securitization income of $316 million increased 38 percent for the three
months ended March 31, 2005 versus the same period a year ago primarily due to
a greater average balance of securitized loans, a higher portfolio yield and a
decrease in portfolio write-offs, partially offset by greater interest expense
due to a higher coupon rate paid to certificate holders.

12

EXPENSES
Consolidated expenses for the three months ended March 31, 2005 were $6.2
billion, up 9 percent from $5.7 billion for the same period in 2004 reflecting
increases of 8 percent at TRS and 15 percent at AEFA and a decline of 1
percent at AEB. As discussed in further detail below, the increase in the
first quarter of 2005 was primarily driven by higher marketing, promotion,
rewards and cardmember services expenses, greater human resources costs,
greater provisions for losses and benefits and increased interest expense,
which were partially offset by lower other operating expenses. Consolidated
expenses include $22 million related to the AEFA spin-off. Also included in
consolidated expenses are $21 million of charges recorded in connection with
initiatives relating principally to the continuation of the restructuring of
the TRS' business travel operations and reengineering of certain functions
within the Company's finance group and banking operations.

Human resources expenses increased 12 percent to $2.0 billion due to 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
from stock options reflects the Company's decision to expense stock options
beginning in 2003, partially offset by the decision to issue fewer stock
options. Higher expense related to restricted stock awards reflects
the Company's decision to modify compensation practices and use restricted
stock awards in place of stock options for middle management. The increase
in human resources expenses also includes the first quarter 2004 impact of
the $44 million deferred acquisition cost (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 below.

Marketing, promotion, rewards and cardmember services expenses increased 30
percent to $1.4 billion versus a year ago primarily due to a 29 percent
increase at TRS, reflecting both higher marketing and promotion expenses and,
to a lesser extent, greater reward costs. The increase in marketing and
promotion expenses was primarily driven by the Company's recent global brand
advertising campaign and continued focus on business-building initiatives.
Rewards costs reflect strong volume growth, higher redemption rates and the
continued increase in cardmember loyalty program participation. Management
believes, based on historical experience, that cardmembers enrolled in rewards
and co-brand programs yield higher spend, better retention, stronger credit
performance and greater profit for the Company.

Total provisions for losses and benefits increased 8 percent to $1.1 billion
over last year, primarily resulting from increases in the charge card and
lending provisions at TRS and increased interest credited on investment
certificates at AEFA. Other expenses decreased 24 percent to $413 million
primarily reflecting decreased expenses at TRS as a result of the third
quarter 2004 sale of the ATM business, a positive change in reserves resulting
from various control improvements and reduced printing and supplies expenses.
These decreases were partially offset by $35 million (after tax) of expenses
related to securities industry regulatory matters at AEFA (see Mutual Fund
Industry Developments below for further discussion) and the impact of the $22
million DAC valuation benefit in the first quarter 2004 at AEFA.

The effective tax rate was 31 percent for both the three-month periods ended
March 31, 2005 and 2004.

As previously disclosed, the Company expects to incur expenses related to the
proposed tax-free spin-off of AEFA, which cumulatively will be significant.
The transaction is expected to occur late in the third quarter of this year.
Separately, the Company also continues to engage in various reengineering
activities, which are expected to result in significant expenses during the next
several quarters. In addition, the Company is working with tax authorities to
complete tax audits for certain prior years, the completion of which are
expected to result in the Company's recognizing significant benefits later this
year.

13

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. Assuming the completion of the
AEFA spin-off discussed above, the Company plans to raise its return on equity
target to 28 to 30 percent while maintaining a 65 percent payout of free
capital generated. During the quarter, the Company paid $150 million in
dividends and continued share repurchases as discussed below.

SHARE REPURCHASES
The Company has in place a share repurchase program to return equity capital
in excess of its business needs to shareholders. These share 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 quarter of
2005, the Company repurchased 12.3 million common shares at an average price
of $53.86. Since the inception of the share repurchase program in September
1994, 507.8 million shares have been acquired under total authorizations to
repurchase up to 570 million shares, including purchases made under past
agreements with third parties. The lower repurchase activity during the first
quarter 2005 compared to recent quarters reflects a more measured approach to
repurchases as the Company evaluates the capital implications of the
anticipated AEFA spin-off.

CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
The Company generated net cash provided by operating activities in amounts
greater than net income for both the three months ended March 31, 2005 and
2004 primarily due to provisions for losses and benefits, which represent
expenses in the Consolidated Statements of Income but do not require cash at
the time of provision. Similarly, depreciation and amortization represent
non-cash expenses. In addition, net cash was provided by fluctuations in other
operating assets and liabilities. These accounts vary significantly in the
normal course of business due to the amount and timing of various payments.

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

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 three months ended March 31, 2005, net cash was provided by investing
activities primarily due to the net decrease in cardmember receivables and
loans, partially offset by net maturities of cardmember loans within the
securitization trust. For the three months ended March 31, 2004, net cash was
used in investing activities primarily due to the cumulative benefit of sales
of annuities, insurance and certificate products at AEFA, partially offset by
decreases in cardmember receivables and loans.

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.

14

Net cash used in financing activities for the three months ended March 31,
2005 was greater compared to the same period in 2004 primarily due to a larger
net decrease in total debt and a net decrease in customer deposits in 2005
versus a net increase in 2004, partially offset by increased net sales of
annuities and investment certificates and a reduced amount of share repurchase
activity.

PARENT COMPANY FUNDING
At March 31, 2005, the Parent Company had $4.3 billion of debt or equity
securities available for issuance under shelf registrations filed with the
Securities and Exchange Commission (SEC). 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
March 31, 2005, $3.3 billion was outstanding under this program.

The Board of Directors authorized a Parent Company commercial paper program
supported by the multi-purpose committed bank credit facility discussed below.
There was no Parent Company commercial paper outstanding as of March 31, 2005
and no borrowings have been made under its bank credit facility. As of March
31, 2005, the Company maintained total committed bank lines of credit totaling
$13.9 billion, which included $1.96 billion allocated to the Parent Company.
During April 2005 the Company renewed and extended a total of $7 billion of
these committed credit line facilities. In connection with the renewal and
extension, the Company renegotiated the consolidated tangible net worth
covenant contained therein (as well as in the remaining credit facility
containing such covenant) to provide for an adjustment upon completion of
the proposed spin-off of the shares of AEFC. This covenant is applicable only
to the Parent Company's credit lines. Under the terms of this covenant, the
Parent Company's right to borrow under the credit facilities is subject to the
Company's maintaining consolidated tangible net worth (as defined under the
credit facilities) of not less than $9 billion until the completion of the
proposed spin-off. After completion of the proposed spin-off, the amount
required under the consolidated tangible net worth covenant would be reduced by
approximately 70% of AEFC's pre-spin-off contribution to the Company's
consolidated tangible net worth.

15

TRAVEL RELATED SERVICES

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

STATEMENTS OF INCOME

TRS reported net income of $801 million for the three month period ended March
31, 2004, a 20 percent increase from $665 million for the same period a year
ago.

The following management discussion includes information on both a GAAP basis
and managed basis. The Company presents TRS information on a managed basis
because that is the way the Company's management views and manages the
business. It differs from the accompanying financial statements, which are
prepared in accordance with GAAP, as managed basis presentation assumes there
have been no securitization transactions, i.e., as if all securitized
cardmember loans and related income effects are reflected in the Company's
balance sheet and income statement, respectively. Management believes that the
trends in the Company's cardmember lending business are more accurately
portrayed by evaluating the performance of both securitized and
non-securitized cardmember loans. Asset securitization is just one of several
ways the Company funds cardmember loans. Use of a managed basis presentation,
including non-securitized and securitized cardmember loans, presents a more
accurate picture of the key dynamics of the cardmember lending business,
avoiding distortions due to the mix of funding sources at any particular point
in time. For example, irrespective of the mix, it is important for management
and investors to

16

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 finance charge revenue on the owned loan
portfolio as well as finance charge revenue on the retained seller's interest
from securitization activity. GAAP basis results also include investment
income on the Company's investments in other subordinated retained interests
from loan securitization issuances.

TRS' owned portfolio is primarily comprised of cardmember receivables
generated by the Company's charge card products and unsecuritized cardmember
loans. The Company securitizes cardmember loans as part of its financing
strategy; consequently, the level of unsecuritized cardmember loans is
primarily a function of the Company's financing requirements. As a portfolio,
unsecuritized 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.
Delinquency, reserve coverage and net write-off rates have historically been
broadly comparable between the Company's owned and managed portfolios.

On a GAAP basis, results reflect net securitization income, which is comprised
of the non-credit provision components of the net gains and charges from
securitization activities, the amortization and related impairment charges, if
any, of the interest-only strip, excess spread related to securitized loans,
net finance charge revenue on retained interests in securitized loans, and
servicing income, net of related discounts or fees. Excess spread, which is
the net positive cash flow from interest and fee collections allocated to the
investor's interests after deducting the interest paid on investor
certificates, credit losses, contractual servicing fees and other expenses is
recognized in securitization income as it is earned. Net securitization income
of $316 million increased 38 percent for the three months ended March 31, 2005
versus the same period a year ago primarily due to a greater average balance
of securitized loans, a higher portfolio yield and a decrease in the portfolio
write-offs, partially offset by greater interest expense due to a higher
coupon rate paid to certificate holders. See Selected Statistical Information
below for data relating to TRS' owned loan portfolio.

During the three months ended March 31, 2005 and 2004, TRS recognized net
gains, including the credit components, of $6 million ($4 million after-tax)
and $8 million ($5 million after-tax), respectively, from net securitization
activities. For the three months ended March 31, 2005, the net gains consisted
of $41 million of income from the securitization of $1.2 billion of cardmember
loans, including the impact of the related credit reserves on the sold loans.
This amount was partially offset by $35 million of charges related to the
maturity of $1.0 billion of previously outstanding issuances. For the three
months ended March 31, 2004, the net gains consisted of $39 million of income
from the securitization of $800 million of cardmember loans, including the
impact of the related credit reserves on the sold loans. This amount was
partially offset by $31 million of charges related to changes in interest-only
strip assumptions.

Management views any net 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 March 31, 2005 and 2004 assumes that the impact of this net activity was
offset by higher marketing, promotion, rewards and cardmember services
expenses of $4 million and $4 million, respectively, and other operating
expenses of $2 million and $4 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.

17

GAAP BASIS TO MANAGED BASIS RECONCILIATION -- EFFECT OF SECURITIZATIONS

THREE MONTHS ENDED MARCH 31, (Dollars in millions)

18

SELECTED STATISTICAL INFORMATION

* Cards billed business and cards-in-force include activities related to
proprietary cards and cards issued under network partnership agreements.
Average basic cardmember spending and average fee per card are computed
from proprietary card activities only.

19

SELECTED STATISTICAL INFORMATION (CONTINUED)

# - Denotes a variance of more than 100%.

20

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

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 March 31, 2005.

REVENUES
TRS' net revenues increased 9 percent to $5.8 billion primarily due to higher
discount revenue, increased cardmember lending net finance charge revenue and
greater other commissions and fees.

Discount revenue of $2.7 billion rose 13 percent compared to a year ago as a
result of a 15 percent increase in billed business partially offset by a lower
discount rate. The decrease in the discount rate primarily reflects changes in
the mix of spending between various merchant segments due to the cumulative
impact of stronger than 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, combined with
volume-related pricing discounts and selective repricing initiatives, will
probably continue to result in some discount rate erosion over time.

The 15 percent increase in billed business to $109.3 billion resulted from a
10 percent increase in spending per proprietary basic card worldwide and 7
percent growth in cards-in-force. U.S. billed business rose 14 percent to
$79.6 billion reflecting 13 percent growth within the consumer card business,
17 percent growth in small business services volume and a 7 percent increase
within corporate services. U.S. non-T&E related volume categories, which
represented approximately 66 percent of U.S. billed business during the first
three months of 2005, increased 17 percent over the same period a year ago
while U.S. T&E volumes rose 8 percent reflecting continued improvement in all
T&E industries during the quarter. Total billed business outside the United
States, excluding the impact of foreign exchange translation, was up 13
percent reflecting a growth rate in the mid-teens in Latin America and Canada
and high single-digit growth in Europe and Asia. Worldwide airline related
volumes, which represented 13 percent of total billed business volumes during
the quarter, rose 9 percent as a result of 14 percent growth in transaction
volumes, partially offset by a 5 percent decrease in the average airline
charge. Additionally, global network volumes grew over 35 percent as compared
to the year ago period.

U.S. cards-in-force rose 9 percent to 40.3 million reflecting the benefit of
continued strong card acquisition spending and an improved average customer
retention level within the proprietary issuing business, as well as growth in
U.S. network cards. Non-U.S. cards-in-force increased 5 percent to 25.8
million due to growth in both proprietary and network partnership cards.

Cardmember lending net finance charge revenue of $1.1 billion rose 6 percent
on 4 percent growth in average balance of the managed lending portfolio and a
higher portfolio yield. The net interest yield on the managed worldwide
lending portfolio increased to 8.8% from 8.7% in 2004 reflecting a lower
proportion of the U.S. portfolio on introductory or promotional rates,
increased finance charge rates, partially offset by rising funding costs.

Net card fees of $498 million increased 6 percent versus a year ago,
reflecting the growth in cards-in-force. The average annual fee per
proprietary card-in-force was $35 for both the three months ended March 31,
2005 and 2004. Other commissions and fees increased 9 percent to $616 million
on greater volume-related foreign exchange conversion fees and higher
card-related assessments and network partner-related fees.

EXPENSES
TRS' total expenses increased 6 percent to $4.6 billion primarily due to
higher marketing, promotion, rewards and cardmember services expenses and
greater human resources expenses, partially offset by reduced provisions for
losses and lower other operating expenses.

Marketing, promotion, rewards and cardmember services expenses of $1.3 billion
increased 29 percent compared to the prior year, reflecting substantially
higher marketing and promotion expenses and, to a lesser extent, greater
reward costs. The increase in marketing and promotion expenses is primarily
due to the Company's ongoing global

21

brand advertising campaign and continued focus on business building
initiatives. The growth in rewards costs is attributable to strong volume
growth, a higher redemption rate and the continued increase in cardmember
loyalty program participation.

The provision for losses on charge card products increased 9 percent to $215
million, which reflects the effect of higher volumes partially offset by a
lower provision rate. The lower provision rate is primarily due to strong
credit quality as reflected in an improved past due rate and net loss ratio.
The provision for losses on the worldwide lending portfolio decreased 12
percent to $507 million despite growth in loans outstanding due to
well-controlled credit practices. The net write-off rate for the worldwide
lending portfolio was 4.1% for the three months ended March 31, 2005 as
compared to 4.6% for the same period a year ago.

Human resources expenses of $1.1 billion increased 7 percent versus last year
due to greater management incentive expenses, increased employee benefit costs
and merit increases. Other operating expenses decreased 24 percent to $308
million reflecting lower expenses as a result of the third quarter 2004 sale
of the ATM business, a positive change in reserves resulting from various
control improvements and reduced printing and supplies expenses.

The effective tax rate was 32 percent for both the three-month periods ended
March 31, 2005 and 2004.

AIRLINE INDUSTRY MATTERS
Historically, the Company has not experienced significant revenue declines
resulting from a particular airline's scaling-back or closure of operations
due to bankruptcy or other financial challenges because the volumes generated
from the airline are typically shifted to other participants in the industry
that accept the Company's card products. Nonetheless, the Company is exposed
to business and credit risk in the airline industry primarily through business
arrangements where the Company has remitted payment to the airline for a
cardmember purchase of tickets that have not yet been used or "flown". This
creates a potential exposure for the Company in the event that the cardmember
is not able to use the ticket and the Company, based on the facts and
circumstances, credits the cardmember for the unused ticket. Historically,
this type of exposure has not generated any significant losses for the Company
because of the need for an airline that is operating under bankruptcy
protection to continue accepting credit and charge cards and honoring requests
for credits and refunds in the ordinary course in furtherance of its
reorganization and its formal assumption, with bankruptcy court approval, of
its card acceptance agreement, including approval of the Company's right to
hold cash to cover these potential exposures to provide credits to
cardmembers. Typically, as an airline's financial situation deteriorates the
Company increases cash held to protect itself in the event of an ultimate
liquidation of the airline. The Company's goal in these distressed situations
is to hold sufficient cash over time to ensure that upon liquidation the cash
held is equivalent to the credit exposure related to any unused tickets.

As previously disclosed, during the fourth quarter of 2004, the Company
announced that it signed agreements with Delta Air Lines to extend its
co-brand, Membership Rewards and merchant partnerships. The agreements will
extend these partnerships into the next decade. The prepayment has a
three-year term, is fully collateralized by a pool of assets and is subject to
certain conditions. The Company prepaid $250 million of Delta SkyMiles rewards
points in the fourth quarter of 2004 and prepaid the remaining $250 million of
Delta SkyMiles rewards points in the first quarter of 2005. In addition to the
prepayment, the Company has commitments to loan Delta up to an aggregate $75
million under a senior secured facility arranged by GE Commercial Finance, a
portion of which is in the form of a term loan and a portion of which is in
the form of a revolving line of credit. As of March 31, 2005, approximately $70
million was outstanding under this facility. Both the prepayment and the senior
secured facility have a three-year term, are fully collateralized by a pool of
assets and are subject to certain conditions.

22

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 cardmember loans increased as compared to March
31, 2004, primarily as a result of higher average cardmember spending and an
increase in the number of cards-in-force, and decreased as compared to
December 31, 2004, primarily as a result of seasonal spending at year-end.

Total debt increased as compared to March 31, 2004 primarily as a result of
increased funding requirements due to increases in cardmember receivable and
loan balances as noted above. Similarly, total debt decreased from December
31, 2004 primarily as a result of the reduction in cardmember receivables and
loans from seasonal high levels.

TRS funds its cardmember receivables and loans using various funding sources,
such as short- and long-term debt, medium-term notes, and sales of cardmember
receivables and loans in securitizations. As of March 31, 2005, Credco had the
ability to issue approximately $7.2 billion of debt securities under shelf
registration statements filed with the SEC.

In April 2005, the Company renewed and extended a total of $7 billion of its
committed credit line facilities. The committed credit facilities, which total
$13.4 billion, include the U.S. $2.3 billion Australian Credit Facility
discussed below. As contemplated, in the second quarter of 2004, Credco
borrowed $1.47 billion under these facilities as part of a change in local
funding strategy for business in Canada. Of the $13.4 billion available for
borrowing, Credco may borrow a maximum amount of $12.6 billion (including
amounts outstanding), with a commensurate reduction in the amount available
to the Parent Company. Centurion Bank and American Express Bank, FSB (FSB),
both wholly-owned subsidiaries of TRS, may each borrow a maximum amount of
$400 million. These facilities expire as follows (billions): 2006, $2.0;
2009, $6.4; and 2010, $5.0. The availability of the credit lines to Credco,
Centurion Bank and the FSB is subject to their compliance with certain
financial covenants, which do not include the previously referenced tangible
net worth covenant that is applicable only to the Parent Company's borrowings
on its credit lines.

In the third quarter of 2004, Credco entered into a new 5-year multi-bank
credit facility for Australian $3.25 billion (approximately U.S. $2.3 billion)
and borrowed Australian $2.7 billion (approximately U.S. $1.9 billion) under
this credit facility to provide an alternate funding source for business in
Australia.

Credco's ability to borrow under its credit facilities is subject to its
maintenance of a 1.25 ratio of combined earnings and fixed charges to fixed
charges. These credit facilities do not condition borrowing on the absence
of a

23

material adverse change. The facilities may not be terminated should there
be a change in the Company's credit rating.

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 March 31, 2005, the Company held $4.0 billion in U.S.
Treasury notes under this program.

Securitization of cardmember receivables generated under designated consumer
charge card accounts are accomplished through the transfer of cardmember
receivables to the American Express Master Trust (the Charge Trust).
Securitizations of these receivables are accounted for as secured borrowings
because the Charge Trust is not a qualifying special purpose entity (QSPE).
Accordingly, the related assets being securitized are not treated as sold and
the securities issued to third-party investors are reported as long-term debt
on the Company's Consolidated Balance Sheets. In the three months ended March
31, 2005, $0.8 billion of previously issued trust securities matured. During
the next 12 months, $1.1 billion of cardmember receivable trust securities
that were previously issued by the Charge Trust are scheduled to mature.

Securitization of cardmember loans arising from various portfolios of consumer
accounts are accomplished through the transfer of cardmembers loans to a QSPE,
the American Express Credit Account Master Trust (the Lending Trust). As of
March 31, 2005, the Lending Trust held total assets of $27.2 billion, of which
$20.5 billion had been sold. During the first quarter of 2005, the Company
sold $1.2 billion of cardmember loans. Additionally, during the first quarter
of 2005, $1.0 billion of securities issued to investors from the Lending Trust
matured. During the next 12 months, $5.3 billion of securities that were
previously issued to investors from the Lending Trust are scheduled to mature.
When securities mature, principal collections received from the Lending Trust
assets are used to redeem the securities.

24

AMERICAN EXPRESS FINANCIAL ADVISORS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

STATEMENTS OF INCOME

# - Denotes a variance of more than 100%

* INCLUDES VARIABLE UNIVERSAL LIFE AND UNIVERSAL LIFE INSURANCE CHARGES.
** REFLECTS A $109 MILLION NON-CASH PRETAX CHARGE ($71 MILLION AFTER-TAX)
RELATED TO THE JANUARY 1, 2004 ADOPTION OF SOP 03-1.

25

SELECTED STATISTICAL INFORMATION

# - Denotes a variance of more than 100%.

AEFA reported net income of $166 million for the three months ended March 31,
2005, up 5 percent from $157 million in the same period a year ago. Income
before accounting change was down 27 percent from $228 million a year ago.
AEFA's first quarter 2004 results reflect the $71 million ($109 million
pretax) impact of the January 1, 2004 adoption of SOP 03-1. SOP 03-1 required
insurance enterprises to establish liabilities for benefits that may become
payable under variable annuity death benefit guarantees or other insurance or
annuity contract provisions. First quarter 2004 results also include a $66
million ($43 million after-tax) deferred acquisition cost valuation benefit
reflecting the lengthening of the amortization periods for certain insurance
and annuity products in conjunction with the adoption of SOP 03-1.

REVENUES
Total revenues increased 8 percent to $1.9 billion primarily due to increased
net investment income, greater investment management and service fees, higher
property-casualty insurance revenues and increased other revenues.

26

Net investment income increased 12 percent to $622 million reflecting higher
levels of invested assets and the effect of net investment gains in 2005
compared to net investment losses in 2004. For the three months ended March
31, 2005, $20 million of gross investment gains were partially offset by $10
million of gross investment losses and impairments. Included in these gross
investment gains and losses are $13 million of gross realized gains and $9
million of gross realized losses from sales, as well as $1 million of
other-than-temporary impairment losses, on investments classified as
Available-for-Sale. For the three months ended March 31, 2004, $20 million of
gross investment gains were more than offset by $58 million of impairments and
losses, which included a $49 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 (SLT) managed by AEFA. Included
in these total investment gains and losses were $18 million of gross realized
gains and $5 million of gross realized losses from sales of securities
classified as Available-for-Sale.

Investment management and service fees of $450 million increased 5 percent due
to higher average assets under management, reflecting improved equity market
valuations and net asset inflow. Distribution fees declined one percent to
$351 million as lower limited partnership and brokerage-related fees were
partially offset by greater fees earned on wrap accounts. Total mutual fund
cash sales were flat as proprietary sales declined, while non-proprietary
sales rose versus last year. A significant portion of non-proprietary sales
continued to occur in wrap accounts (which are included in assets managed).

Property-casualty insurance premiums increased 20 percent to $115 million,
reflecting a 17 percent increase in the average number of policies inforce
generated, most notably, from the Costco relationship. Other revenues
increased 22 percent to $120 million principally as a result of higher fees
earned on non-proprietary funds and growth in financial planning and advice
services fees.

EXPENSES
Total expense increased 15 percent to $1.6 billion primarily due to increased
human resources expenses, higher amortization of deferred acquisition costs,
increased provisions for losses and benefits as well as higher other operating
expenses. As noted previously, the Company incurred a total of $22 million of
expenses related to AEFA spin-off activities during the first quarter of 2005,
of which $20 million was recorded at AEFA.

Total provision for losses and benefits increased 10 percent to $549 million
as a result of significantly higher interest credited on investment
certificates, increased benefits on insurance and annuities and higher losses
and expenses on property-casualty insurance, partially offset by decreased
interest credited on annuities and universal life-type contracts. Interest
credited on investment certificates rose 72% to $76 million due to higher
average reserves and higher interest crediting rates.

During the three months ended March 31, 2005, field force human resources
expense increased 8 percent to $376 million reflecting $14 million of the $20
million in spin-off related costs noted above, higher assets per advisor and
growth in the advisor force. The total advisor force grew 2 percent to 12,356.
Non-field human resources costs rose 22 percent to $272 million reflecting
performance related incentives at Threadneedle Asset Management Holdings LTD,
higher benefit and management incentive costs and merit increases. The average
number of non-field employees was relatively unchanged from year ago levels.

DAC amortization expense of $128 million increased significantly primarily due
to the impact of the first quarter 2004 $66 million DAC valuation benefit
noted earlier. See the DAC section below for further discussion of DAC and
related adjustments. Other operating expenses increased 9 percent to $301
million primarily reflecting higher advertising and promotion expenses and
increased expenses of $35 million (after tax) related to securities industry
regulatory matters. See Mutual Fund Industry Developments below for further
discussion.

The effective tax rate was 29 percent and 28 percent for the three-month
periods ended March 31, 2005 and 2004, respectively.

27

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. These costs are deferred to the extent they are recoverable from
future profits. 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
depending on the products' characteristics. 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
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 (1) established additional liabilities for insurance benefits that
may become payable under variable annuity death benefit guarantees or on
single pay universal life contracts, which prior to January 1, 2004, were
expensed when payable; and (2) extended the time periods over which DAC
associated with certain insurance and annuity products are amortized to
coincide with the liability funding periods in order to establish the proper
relationships between these liabilities and DAC associated with the same
contracts. As a result, AEFA recognized a $109 million charge ($71 million
after-tax) due to the accounting change on establishing the future liability
under death benefit guarantees and recognized a $66 million ($43 million
after-tax) reduction in DAC amortization expense to reflect the lengthening of
the amortization periods for certain products impacted by SOP 03-1.

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

28

IMPACT OF 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 is 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 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.

On March 21, 2005, AEFA's broker-dealer subsidiary entered into an agreement
with the NASD to settle alleged violations of NASD rules arising from the sale
to AEFA customers of Class B (i.e., no front end load) mutual fund shares
between January 1, 2002 and July 31, 2003. AEFA's agreement with the NASD is
one of several that the NASD entered into with certain brokerage firms
regarding allegedly inappropriate sales of Class B shares. Under the terms of
the settlement, AEFA consented to the payment of a fine to the NASD in the
amount of $13 million. The Company established reserves in prior quarters to
cover the payment of the fine. AEFA also agreed to offer certain customers who
purchased Class B shares in any fund family from January 1, 2002 through the
date of the settlement and continue to hold such shares the option of
converting their Class B shares into a number of Class A shares equal to (x)
the number of Class A shares that the customer could have purchased on the
date(s) that they purchased their Class B shares plus (y) any shares
reflecting reinvestment of dividends. AEFA agreed to pay cash to certain
customers who have sold a portion or all of their Class B shares in order to
put them into substantially the same financial position (based on actual fund
performance and redemption value) in which such customers would have been had
the customers purchased Class A shares instead of Class B shares.

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.

Congress has also 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. For example, during the past year, mutual fund and investment
advisors were required by the SEC to adopt and implement written policies and
procedures designed to prevent violation of the federal securities laws and to
designate a chief compliance officer responsible for administering these
policies and procedures. While there

29

remains a significant amount of uncertainty as to what legislative and
regulatory initiatives may ultimately be adopted, these initiatives could
negatively 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.

AEFA's total assets and liabilities increased from a year ago levels primarily
due to higher investments, client contract reserves and separate account
assets and liabilities, which increased as a result of new client inflows and
market appreciation. The increase in managed assets, including separate
accounts, to $286.2 million since March 31, 2004 resulted from market
appreciation and foreign currency translation of $16.0 billion and net inflows
of $5.1 billion. The $6.5 billion decrease in managed assets, including
separate accounts, since December 31, 2004 reflects net outflows of $2.0
billion and market depreciation and foreign currency translation of $4.5
billion. In addition, accounts receivable and customers' deposits
increased due to increased Membership Banking activity, which was transferred
into the AEFA operating segment (from TRS) during 2004.

Investments include $3.0 billion of below investment grade securities
(excluding net unrealized appreciation and depreciation) at March 31, 2005 and
$3.1 billion at both December 31, 2004 and March 31, 2004. These investments
represent 7 percent of AEFA's investment portfolio at March 31, 2005, December
31, 2004 and March 31, 2004. Non-performing assets relative to invested assets
(excluding short-term cash positions) were 0.05%, 0.02% and 0.07% at March 31,
2005, December 31, 2004 and March 31, 2004, respectively. Management believes
a more relevant measure of exposure of AEFA's below investment grade
securities and non-performing assets should exclude $228 million, $230 million
and $231 million, at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively, 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 value of such investments will be fully absorbed by the third
party investors. Excluding the impacts of FIN 46, investments include $2.8
billion at March 31, 2005 and $2.9 billion at both December 31, 2004 and March
31, 2004 of below investment grade securities (excluding net unrealized
appreciation and

30

depreciation). They represent 6 percent of AEFA's investment
portfolio at March 31, 2005 down from 7 percent at both December 31, 2004 and
March 31, 2004. Non-performing assets (excluding short-term cash positions)
were less than 0.03% at March 31, 2005 and 0.01% at both December 31, 2004 and
March 31, 2004.

As of March 31, 2005, AEFA continued to hold investments in CDOs managed by
AEFA that were not consolidated pursuant to the adoption of FIN 46 as the
Company was not considered the primary beneficiary. As a condition to its
managing certain CDOs, AEFA is generally 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's exposure as an
investor is limited solely to its aggregate investment in the CDOs, and
it has no obligations or commitments, contingent or otherwise, that could
require any further funding of such investments. As of March 31, 2005, the
carrying values of the CDO residual tranches managed by AEFA were $33 million,
a net increase of $6 million from December 31, 2004 primarily as a result of
the placement of new CDO products with clients. AEFA also has a retained
interest in a CDO-related securitization trust with a carrying value of $653
million, of which $471 million is considered investment grade. One of the
results of this transaction is that increases and decreases in future cash
flows of the individual CDOs are combined into one overall cash flow for
purposes of determining the carrying value of the retained interests and
related impact on results of operations. CDOs 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 comprising the
CDOs.

The carrying value of the CDOs, as well as derivatives recorded on the balance
sheet as a result of consolidating certain SLTs which are in the process of
being liquidated, 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 CDOs or in the
reference portfolio of the SLTs and, as such, are subject to change. Although
the exposure associated with AEFA's investment in CDOs is limited to the
carrying value of such investments, they have significant 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 the event of significant deterioration of a
portfolio, the relevant CDO may be subject to early liquidation, which could
result in further deterioration of the investment return or, in severe cases,
loss of the CDO carrying amount. The derivatives recorded as a result of
consolidating certain SLTs under FIN 46 are primarily valued based on the
expected gains and losses from liquidating a reference portfolio of high-yield
loans. The overall exposure to loss related to these derivatives is
represented by the pretax net assets of the SLTs, which is $465 million at
March 31, 2005. However, because the portfolio has been substantially
liquidated, a significant portion of the net assets within the structure is
cash and cash equivalents and, as a result, the overall market exposure has
been reduced to approximately $20 million.

31

AMERICAN EXPRESS BANK

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

STATEMENTS OF INCOME

# - Denotes a variance of more than 100%.

AEB reported net income of $30 million for the first quarter of 2005, down 1
percent from the same period a year ago. 2004 results included $11 million ($8
million after-tax) of reengineering costs, $9 million of which reflected a
restructuring charge related to the exit of businesses in Pakistan and
Bangladesh and $2 million of which was related to ongoing reengineering
activities. First quarter 2005 results included $3 million ($2 million
after-tax) of costs related to ongoing reengineering activities.

Net interest income of $74 million decreased 9 percent as lower spreads in the
investment portfolio were partially offset by higher Private Banking volumes.
Commissions and fees of $73 million increased 5 percent primarily due to
higher volumes in the Financial Institutions Group (FIG) and Private Banking.
Foreign exchange income and other revenues rose 3 percent to $60 million due
to a small gain on the sale of the Luxembourg Private Banking business.

Human resources expenses rose 8 percent to $81 million reflecting merit
increases and higher management incentive costs, partially offset by the
benefits of reengineering initiatives. Other operating expenses rose 5 percent
reflecting increased business volume-related expenses, partially offset by the
benefits of reengineering initiatives.

Provision for losses decreased 19 percent to $5 million due to a Corporate
Banking recovery.

The effective tax rate was 35 percent and 38 percent for the three-month
periods ended March 31, 2005 and 2004, respectively.

32

LIQUIDITY AND CAPITAL RESOURCES

SELECTED BALANCE SHEET INFORMATION (GAAP BASIS)

* Includes assets managed by AEFA.
** Excludes American Express International Deposit Company's total assets
(which are 100% consolidated at AEFA).
# - Denotes a variance of more than 100%.

AEB had worldwide loans outstanding at March 31, 2005 of approximately $7.0
billion, up from $6.9 billion at December 31, 2004 and $6.4 billion at March
31, 2004. The following table summarizes the composition of AEB's loan
portfolio by business line as of March 31, 2005, December 31, 2004 and March
31, 2004.

In addition to the loan portfolio, other banking activities, such as
securities, unrealized gains on foreign exchange and derivatives contracts,
various contingencies and market placements added approximately $7.2 billion
to AEB's credit exposures at both March 31, 2005 and December 31, 2004 and
$7.4 billion at March 31, 2004. Included in

33

the $7.2 billion of additional exposures at March 31, 2005 were cash and
securities-related balances totaling $4.7 billion.

CORPORATE AND OTHER

Corporate and Other reported net expenses of $51 million and $58 million for
the three months ended March 31, 2005 and 2004, respectively. Net expenses
decreased primarily due to lower net interest expense, partially offset by $3
million of AEFA spin-off related expenses.

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
following: the Company's ability to complete the planned spin-off of its AEFA
business unit, which is subject to final approval by the Company's Board of
Directors, the receipt of necessary regulatory approvals and a favorable tax
ruling and/or opinion, and in connection with the proposed spin-off, the
Company's ability to capitalize AEFA consistent with rating agency
requirements and to manage transition costs and implement effective transition
arrangements with AEFA on a post-completion basis; 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; consumer and
business spending on the Company's travel related services products,
particularly credit and charge cards and Travelers Cheques and other prepaid
products and growth in card lending balances, which depend in part on the
ability to issue new and enhanced card and prepaid products, services and
rewards programs, and increase revenues from such products, attract new
cardmembers, reduce cardmember attrition, capture a greater share of existing
cardmembers' spending, sustain premium discount rates on its card products in
light of regulatory and market pressures, increase merchant coverage, retain
cardmembers after low introductory lending rates have expired, and expand the
global network services (GNS) business; the Company's ability to introduce new
product, reward program enhancements and service enhancements on a timely
basis during the latter half of 2005 and the first half of 2006; the success
of the GNS business in partnering with banks in the United States, which will
depend in part on the extent to which such business further enhances the
Company's brand, allows the Company to leverage its significant processing
scale, expands merchant coverage of the network, provides U.S. GNS bank

34

partners the benefits of greater cardmember loyalty and higher spend per
customer, and merchant benefits such as greater transaction volume and
additional higher spending customers; the continuation of favorable trends,
including increased travel and entertainment spending and the overall level of
consumer confidence; successfully cross-selling financial, travel, card and
other products and services to the Company's customer base, both in the United
States and abroad; the Company's ability to generate sufficient revenues for
expanded investment spending, and the ability to capitalize on such
investments to improve business metrics; the costs and integration of
acquisitions; the success, timeliness and financial impact (including costs,
cost savings and other benefits including increased revenues), and beneficial
effect on the Company's operating expense to revenue ratio, both in the
short-term and over time, 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 expenses as
business expands or changes, including the ability to accurately estimate the
provision for the cost of the Membership Rewards program; the Company's
ability to manage credit risk related to consumer debt, business loans,
merchant bankruptcies and other 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; 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; 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; risks associated
with the Company's agreements with Delta Air Lines to prepay $500 million for
the future purchases of Delta SkyMiles rewards points and to loan up to $75
million to Delta; AEFA's ability to improve investment performance, including
attracting and retaining high-quality personnel, and reduce outflows of
invested funds; AEFA's ability to develop and introduce 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; 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, and the level of guaranteed minimum death benefits paid
to clients; changes in assumptions relating to DAC, which could impact the
amount of DAC amortization; changes in federal securities laws affecting the
mutual fund industry, including possible enforcement proceedings and the
adoption of rules and regulations designed to prevent trading abuses, restrict
or eliminate certain types of fees, change mutual fund governance and mandate
additional disclosures, and the ability to make the required investment to
upgrade compliance systems and procedures in response to these changes; AEFA's
ability to avoid deterioration in its high-yield portfolio in order to
mitigate losses in its investment portfolio; fluctuations in foreign currency
exchange rates; fluctuations in interest rates, which impact the Company's
borrowing costs, return on lending products and spreads in the insurance,
annuity and investment certificate products; accuracy of estimates for the
fair value of the assets in the Company's investment portfolio and, in
particular, those investments that are not readily marketable, including the
valuation of the interest-only strip relating to TRS' lending securitizations;
the amount of recovery under the Company's insurance policies for losses
resulting from the September 11th terrorist attacks; 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; 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, including changes in tax laws or
regulations that could result in the elimination of certain tax benefits;
outcomes and costs associated with litigation and compliance and regulatory
matters; deficiencies and inadequacies in the Company's internal control over
financial reporting, which could result in inaccurate or incomplete financial
reporting; and competitive pressures in all of the Company's major businesses.
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,
2004, and its other reports filed with the SEC.

35

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 operation 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, 2004.

TRS PROCEEDINGS

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. 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. On October 15, 2004, the U.S. District Court for the Southern
District of Florida granted 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 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). The settlement
that has been preliminarily approved by the Court contemplates that 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 preliminary approval order enjoins 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); (viii) Paul v. American Express Company, et al.,
Superior Court of Orange County, California (filed January 2004); and
(ix) Ball v. American Express, et al., Superior Court of San Joaquin,
California (filed August 2004). A final approval hearing was held in
March 2005, and the Company is awaiting the Court's decision.

36

In July 2004, a purported class action captioned Ross, et al. v. American
Express Company, American Express Travel Related Services and American
Express Centurion Bank was filed in the United States District Court for
the Southern District of New York. The complaint alleges that AMEX
conspired with Visa, MasterCard and Diners Club in the setting of foreign
conversion rates and in the inclusion of arbitration clauses in certain
of their cardmember agreements. The basis for these allegations is the
presence of an American Express lawyer at a seminar where legal issues
common to the financial services industry were discussed. Those meetings
were attended by in-house lawyers of financial institutions including
American Express. The suit seeks injunctive relief and unspecified
damages. The class is defined as "all Visa, MasterCard and Diners Club
general purpose cardholders who used cards issued by any of the MDL
Defendant Banks...." American Express cardholders are not part of the
class. The Company has filed a motion to dismiss the complaint as to
American Express.

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. American 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. 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. A decision on that motion is pending.
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 Company has also filed a motion to dismiss the action filed
by The Marcus Corporation.

In December 2004, a purported class action captioned National
Supermarkets Association, Inc., Mascari Enterprises, Inc. d/b/a Sound
Stations, and Bunda Starr Corp. d/b/a Brite Wines and Spirits v. MBNA
America Bank, N.A., MBNA Corp., Citibank (South Dakota) N.A. and
Citigroup, Incorporated, was filed in the United States District Court
for the Southern District of New York. The action is a lawsuit related to
the antitrust tying actions described in the preceding paragraph.
Although the Company is not named as a defendant, the plaintiffs in this
action are also plaintiffs in the direct actions against American Express
described in the preceding paragraph. This lawsuit alleges that, by
agreeing to issue American Express-branded cards, MBNA and Citibank have
conspired with the Company in the alleged wrongful tying arrangement
described in the preceding paragraph. The Company believes this lawsuit
is without merit and is contrary to the Department of Justice's
successful efforts to render unenforceable Visa's and MasterCard's rules
that prevented banks from issuing American Express-branded cards in the
United States. The Company also believes that this lawsuit is susceptible
to the same defenses available to the Company in the direct actions filed
against it, which are described in the

37

preceding paragraph. The Company has intervened in this action and has
filed a motion to have the case dismissed.

AEFA PROCEEDINGS

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 from November 1997
through July 2004. 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. In
February 2005, the Court denied the Company's motion to dismiss the
plaintiffs' Second Amended Complaint. Notwithstanding the Court's denial
of the Company's motions 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 SEC, 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 Class B (i.e., no front end
load) shares. AEFA has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.

On March 21, 2005, AEFA's broker-dealer subsidiary entered into an
agreement with the NASD to settle alleged violations of NASD rules
arising from the sale to AEFA customers of Class B (i.e., no front end
load) mutual fund shares between January 1, 2002 and July 31, 2003.
AEFA's agreement with the NASD is one of several that the NASD entered
into with certain brokerage firms regarding allegedly inappropriate sales
of Class B shares. Under the terms of the settlement, AEFA consented to
the payment of a fine to the NASD in the amount of $13 million. The
Company established reserves in prior quarters to cover the payment of
the fine. AEFA also agreed to offer certain customers who purchased Class
B shares in any fund family from January 1, 2002 through the date of the
settlement and continue to hold such shares the option of converting
their Class B shares into a number of Class A shares equal to (x) the
number of Class A shares that the customer could have purchased on the
date(s) that they purchased their Class B shares plus (y) any shares
reflecting reinvestment of dividends. AEFA agreed to pay cash to certain
customers who have sold a portion or all of their Class B shares in order
to put them into substantially the same financial position (based on
actual fund performance and redemption value) in which such customers
would have been had the customers purchased Class A shares instead of
Class B shares.

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

38

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 with all other regulatory inquiries.

On February 17, 2005, the New Hampshire Bureau of Securities Regulation
filed a petition against AEFA. The petition alleges that AEFA violated
New Hampshire and federal securities laws by failing to disclose revenue
sharing and directed brokerage payments received from non-proprietary
mutual funds for agreeing to make their products available through AEFA's
national distribution network. The petition also alleges that AEFA failed
to disclose incentives for advisors to sell proprietary products and
other alleged conflicts of interest. The petition seeks, among other
things, an order to show cause why AEFA's broker-dealer license should
not be denied, suspended or revoked, a proposed fine and restitution of
financial planning fees during the relevant period (principally 1999 to
2003) in the amount of $17.5 million, and disgorgement of revenue sharing
and directed brokerage payments and other relief. AEFA intends to
cooperate fully in this matter.

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 plaintiffs
voluntarily agreed to transfer this case to the United States District
Court for the District of Minnesota. In March 2005, the Court, in a
ruling on the motion to change venue, dismissed one count of the
complaint that fund directors breached their fiduciary duties. The
Company also filed a motion to dismiss the complaint. The Court denied
the motion to dismiss the remaining counts, but granted plaintiffs only
limited discovery after which time the Company will be permitted to renew
its motion to dismiss.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Securities

The table below sets forth the information with respect to purchases of
the Company's common stock made by or on behalf of the Company during the
quarter ended March 31, 2005.

(1) The Board of Directors of the Company authorized the repurchase of
120 million shares of common stock in November 2002. At present,
there are approximately 62.2 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
507.8 million shares of common stock 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 by or deducted from holders of
employee stock options who exercised options (granted under the
Company's incentive compensation plans) in satisfaction of the
exercise price and/or tax withholding obligation of such holders 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.

40

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

The Company's annual meeting of shareholders was held on April 27, 2005.
The matters that were voted upon at the meeting, and the number of votes
cast for, against or withheld, as well as the number of abstentions and
broker non-votes, as to each such matter, where applicable, are set forth
below.

Item 6. Exhibits

The list of exhibits required to be filed as exhibits to this report are
listed on page E-1 hereof, under "Exhibit Index," which is incorporated
herein by reference.

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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: May 3, 2005 By /s/ Gary L. Crittenden
--------------------------------
Gary L. Crittenden
Executive Vice President and
Chief Financial Officer

Date: May 3, 2005 By /s/ Joan C. Amble
--------------------------------
Joan C. Amble
Executive 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