INTRODUCTION

Overview

     American Express Company, together with its consolidated subsidiaries (“American Express,” the “Company,” “we,” “us” or “our”), is a leading global payments, network and travel company that offers its products and services throughout the world. We were founded in 1850 as a joint stock association. We were incorporated in 1965 as a New York corporation.

     Our headquarters are located in New York, New York in lower Manhattan. We also have offices in other locations in North America, as well as throughout the world.

      We have three reportable operating segments: Global Network & Merchant Services, U.S. Card Services and International Card & Global Commercial Services, and a Corporate & Other section, which we describe below.

Securities Exchange Act Reports and Additional Information

     We maintain an Investor Relations Web site on the Internet at http://ir.americanexpress.com. We make available free of charge, on or through this Web site, our annual, quarterly and current reports and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). To access these, just click on the “SEC Filings” link under the caption “Financial Information & Filings” found on our Investor Relations homepage.

     You can also access our Investor Relations Web site through our main Web site at www.americanexpress.com by clicking on the “About American Express” link, which is located at the bottom of our homepage. Information contained on our Investor Relations Web site and our main Web site is not incorporated by reference into this report or any other report filed with or furnished to the SEC.

*   Some of the statements in this report constitute forward-looking statements. You can identify forward-looking statements by words such as “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue” or other similar expressions. We discuss certain factors that affect our business and operations and factors that may cause our actual results to differ materially from these forward-looking statements under “Item 1A. Risk Factors” below. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.

2006 Highlights

     During 2006, American Express continued its strong performance of recent years. Compared with 2005, we delivered:

  •   net revenues of $27.1 billion, up 13% from $24.1 billion;
 
  •   income from continuing operations of $3.7 billion, up 16% from $3.2 billion;
 
  •   net income of $3.7 billion, which was essentially level with year-ago results (reflects the inclusion of nine months of earnings of Ameriprise Financial, Inc., which we spun-off to shareholders on September 30, 2005);
 
  •   diluted earnings per share based on income from continuing operations of $3.01, up 18% from $2.56;
 
  •   diluted earnings per share based on net income of $2.99, up 1% from $2.97; and
 
  •   return on average equity of 34.7%, compared with 25.4%.


     These results met or exceeded our on-average and over-time financial targets of earnings per share growth of 12% to 15%, revenue growth of at least 8% and return on equity of 33% to 36%.

     For a complete discussion of our 2006 financial results, including financial information regarding each of our reportable operating segments, see pages 30-111 of the Company’s 2006 Annual Report to Shareholders, which are incorporated herein by reference. For a summary of the Company and our reportable operating segments, and a discussion of our principal sources of revenue, see pages 30-32 and pages 74-76, respectively, of the 2006 Annual Report to Shareholders.

Products and Services

     We provide a variety of products and services worldwide, including, among others:

  •   global card network services;
 
  •   merchant acquisition and merchant processing for our network partners and proprietary payments businesses;
 
  •   charge cards and credit cards for consumers and businesses worldwide;
 
  •   consumer and s lending products;
 
  •   American Express® Travelers Cheques and Gift Cards;
 
  •   travel and business expense management products and services;
 
  •   business travel and travel management services;
 
  •   consumer travel services;
 
  •   point-of-sale and back-office products and services and marketing programs for merchants;
 
  •   international banking products; and
 
  •   magazine publishing.


In certain countries we have granted licenses to partially-owned affiliates and unaffiliated entities to offer some of these products and services.

     The Company’s various products and services are sold globally to diverse customer groups, including consumers, ses, mid-market companies, large corporations, and

banking institutions. These products and services are sold through various channels including direct mail, online, targeted sales forces and direct response advertising.

     Our general purpose card network, card issuing and merchant acquiring and processing businesses are global in scope. We are a world leader in providing charge and credit cards to consumers, ses and corporations. These cards, which include cards issued by American Express as well as cards issued by third-party banks and other institutions that are accepted on the American Express network (collectively, “Cards”), are currently issued in over 40 currencies. Our Cards permit Cardmembers to charge purchases of goods and services in most countries around the world at the millions of merchants that accept cards bearing our logo. We added a net total of 7.0 million Cards in 2006, bringing total worldwide Cards-in-force to 78.0 million (including Cards issued by third parties). In 2006, our worldwide billed business (spending on American Express ® Cards, including Cards issued by third parties) was $561.5 billion.

Spend-Centric Model is Competitive Advantage

     We believe that our “spend-centric” business model (which focuses on generating revenues primarily by driving spending on our Cards and secondarily by finance charges and fees) has significant competitive advantages. Average spending per Cardmember, which is substantially higher than for our competitors, represents greater value to merchants in the form of loyal customers and higher sales. This gives us the ability to earn a premium discount rate and invest in greater value-added services for merchants and Cardmembers. As a result of the higher revenues generated from higher spending, we have the flexibility to offer more attractive rewards and other incentives to Cardmembers, which in turn create an incentive for them to spend more on their Cards. This business model, along with our closed loop network, in which we are both the card issuer and the merchant acquirer, gives us a competitive advantage that we seek to leverage to provide more value to Cardmembers, merchants and Card issuing partners.

     Our business as a whole has not experienced significant seasonal fluctuations, although travel sales tend to be highest in the second quarter; Travelers Cheque sales and Travelers Cheques outstanding tend to be greatest each year in the summer months, peaking in the third quarter, and Card billed business tends to be moderately higher in the fourth quarter than in other quarters.

The American Express Brand

     Our brand and its attributes – trust, security, integrity, quality and customer service – are key assets of the Company. We continue to focus on our brand by educating employees about these attributes and by incorporating them into our programs, products and services. Our brand has been rated one of the most valuable brands in the world in various surveys, and we believe it provides us with a significant competitive advantage. We believe our brand and its attributes are critical to our success, and we invest heavily in managing, marketing and promoting it. (We account for our expenses in managing our brand advertising and related campaigns in the Global Network & Merchant Services segment discussed below.) In addition, we place significant

importance on trademarks, servicemarks and patents, and diligently protect our intellectual property rights around the world.

GLOBAL NETWORK & MERCHANT SERVICES

Global Network Services

     We operate a global general purpose charge and credit card network through our Global Network Services (“GNS”) business. Network functions include operations, service delivery, systems, authorization, clearing, settlement and brand advertising and marketing; the development of new and innovative products for the network; and establishing and enhancing relationships with merchants globally.

     Since May 1996, we have been pursuing a strategy of inviting U.S. banks and other institutions to issue Cards on the American Express network, building on a business strategy we have implemented successfully in a number of countries outside the United States, where we have many banks and other financial institutions issuing Cards on the American Express network. By leveraging our global infrastructure and the appeal of the American Express brand, we aim to broaden our Cardmember and merchant base for our network worldwide. Our GNS business has established more than 105 card issuing or merchant acquiring arrangements with banks and other institutions in 120 countries.

     A key asset of our network is the American Express brand, which is one of the world’s most highly recognized and respected brands.

     Cards bearing our logo are issued by our principal operating subsidiary, American Express Travel Related Services Company, Inc. (“TRS”), and certain of its subsidiaries and also by third-party institutions, and are accepted at all merchant locations worldwide that accept American Express-branded Cards. In addition, depending on the product, Cards bearing our logo are generally accepted at ATM locations worldwide that accept Cards. TRS and its subsidiaries issue the vast majority of Cards on our network.

     GNS focuses on partnering with qualified third-party banks and other financial institutions that choose to issue Cards accepted on our global network. Although we customize our network arrangements to the particular market and our partner’s requirements, as well as to our strategic plans in that marketplace, all GNS arrangements are designed to help issuers develop products for their highest-spending and most affluent customers and to support the value of American Express Card acceptance to merchants. We choose to partner with institutions who share a core set of attributes such as commitment to high quality standards, strong marketing expertise and compatibility with the American Express brand, and we require adherence to our product, brand and service standards. *

     Our GNS arrangements fall into three main categories.

*   The use of the term “partner” or “partnering” does not mean or imply a formal legal partnership.

     The first type of GNS arrangement is known as an independent operator (“IO”) arrangement. As of the end of 2006, we had 55 of these arrangements around the world. We pursue these arrangements to expand the presence of the American Express network throughout the world, in markets in which we do not offer a proprietary local currency card. Under this type of arrangement, the partner’s local presence and relationships help us enhance the impact of our brand in the market, reach merchant coverage goals more quickly, and operate at economic scale and cost levels that would be difficult for us to achieve on our own. We license our bank partner to issue local currency Cards in their market, including the classic Green, Gold and Platinum American Express Cards. In addition, the majority of these partners serve as the merchant acquirer and processor for local merchants. American Express retains the relationship with multi-national merchants. Our IO partner owns the customer relationships and credit risk for the Cards it issues, and makes the decisions about which customers will be issued Cards. GNS generates revenues in IO arrangements from fees paid by the IO partner derived from the number of Cards it issues, the level of Cardmember spending on those Cards, royalties and the total charge volume at merchants with which the IO partner has an agreement to accept Cards. Our IO partner is responsible for transaction authorization, billing and pricing, Cardmember servicing and funding Card receivables for its Cards.

     Examples of countries where we have entered into IO arrangements include Ecuador, Greece, South Korea, Pakistan, Croatia, Peru, Portugal and Vietnam. In 2006, we sold our proprietary card issuing and related businesses in Brazil, Malaysia and Indonesia to Global Network Services IO partners Banco Bradesco S.A., Maybank and Bank Danamon, respectively. Through our partnerships with these leading financial institutions, we believe we can accelerate growth in Cardmember spending, Cards-in-force and merchant acceptance in these countries.

     The second type of GNS arrangement is known as a network card license (“NCL”) (which we formerly referred to as a non-proprietary license). At the end of 2006, we had 48 of these arrangements in place. We pursue these arrangements to increase our brand presence and gain market share in markets in which we have a proprietary Card issuing business, and in a few cases those in which we also have IO partners. In an NCL arrangement, we grant the third-party financial institution a license to issue American Express-branded Cards. The NCL issuer owns the customer relationships for all Cards it issues, provides customer service to its Cardmembers, transaction authorization, billing and credit management, and is responsible for the marketing of the Cards, and designs the Card product features (including rewards and other incentives for Card holders), subject to meeting certain standards. We operate the merchant network, route and process Card transactions from the merchant’s point-of-sale through submission to the issuer, and settle with issuers. The NCL is the type of arrangement that we have implemented with banks in the United States.

     Examples of NCL arrangements include our relationships with Citibank (South Dakota), N.A. and Bank of America in the United States, Lloyds TSB Bank in the United Kingdom and Westpac Banking Corporation in Australia.

     GNS’ revenues in NCL arrangements are related to a variety of factors, including the level of Cardmember spending, royalties and fees charged to the Card issuer based on charge volume, and our provision of value-added services such as Cardmember insurance products and

other Card features and benefits for the issuer’s Cards. As indicated above, the NCL issuer bears the credit risk for the issued Cards, as well as the Card marketing and acquisition costs, Cardmember fraud risks and costs of rewards and other loyalty initiatives. We bear the risk arising from the GNS partner’s potential failure to meet its settlement obligations to us. We mitigate this risk by partnering with issuers that we believe are financially sound and will meet their obligations, and by monitoring their financial health, their compliance with the terms of their relationship with us and the political and economic environment in which they operate. In addition, we generally require NCL issuers to post a letter of credit, bank guarantee or other collateral to reduce this risk.

     The third type of GNS arrangement is a joint venture. We have utilized this type of arrangement in Switzerland, Belgium and several other countries. In these markets, TRS joins with a third party to establish a separate business in which TRS has a significant ownership stake. The joint venture typically signs new merchants to the American Express network and issues local currency Cards that carry our logo. In a joint venture arrangement, the joint venture assumes the Cardmember credit risk and bears the operating and marketing costs. The economics of the joint venture are similar to our proprietary Card issuing business, which we discuss below under “U.S. Card Services,” and we receive a portion of the joint venture’s income depending on the level of our ownership interest.

     Gross revenues we receive per dollar spent on a Card issued by a GNS partner are lower than those from our proprietary card issuing business. However, because the GNS partner is responsible for most of the operating costs and risk of its card issuing business, our expenses are lower than those in our proprietary card issuing business. The GNS business model generates an attractive earnings stream and risk profile that requires a lower level of capital support. The return on equity in our GNS business can thus be significantly higher than that of our proprietary card issuing business. Because the majority of GNS costs are fixed, the GNS business is highly scalable. GNS partners benefit from their association with the American Express brand and their ability to gain attractive revenue streams and expand and differentiate their product offerings with innovative marketing programs.

     In 2006, GNS signed 11 new partners to issue Cards on the American Express network. GNS partners launched over 125 new products during 2006, bringing the total number of American Express-branded GNS partner products to approximately 550. Outside the United States, we have signed a number of agreements over the past year in markets such as Brazil, Indonesia, Malaysia and Turkey.

     Some of the highlights of our GNS business outside the United States in 2006 include:

  •   Launch of the Virgin Atlantic American Express Credit Card in conjunction with Virgin Atlantic and MBNA Europe Bank;
 
  •   Launch of the dual currency ICBC Corporate American Express Card and the ICBC China Petrol American Express Card with Industrial and Commercial Bank of China and PetroChina Company Limited;
 
  •   Launch of the SAA Voyager Credit Card in partnership with Nedbank and South African Airways; and


 
•   Launch of the Korean Air American Express Card, the first American Express-branded airline cobrand card in Korea, in conjunction with Samsung Card and Korean Air.

     In contrast to the situation outside the United States, where banks and other qualified institutions have issued Cards on our network for many years, until 2004 no major U.S. banks had issued Cards in the United States on the American Express global network. This situation was the result of rules and policies of Visa U.S.A. and Visa International Service Association (together, “VISA”) and MasterCard, Incorporated and MasterCard International, Inc. (together, “MasterCard”) in the United States, which mandated expulsion of members that issued American Express-branded Cards. No bank was willing to risk forfeiting membership in VISA and/or MasterCard (collectively, the “bankcard associations”) to issue cards on our network.

     However, as a consequence of the decision in a lawsuit filed in October 1998 by the U.S. Department of Justice against VISA and MasterCard in which such rules and policies were found to violate the U.S. antitrust laws, these rules and policies were finally repealed in late 2004 after the U.S. Supreme Court declined to hear VISA’s and MasterCard’s appeal of the lower courts’ rulings against them. The Supreme Court’s decision not to hear the appeals marked the end of VISA’s and MasterCard’s rules that prevented their member banks from issuing cards on competitive networks and cleared the way for implementation of the trial court’s order requiring the repeal of the illegal rules. We view this decision as a major victory for U.S. consumers as well as U.S. banks because it opened the door to more vigorous network competition and more innovative card products and services.

     For American Express, the conclusion of the litigation brought by the Justice Department meant that we were now able to open our network to other card issuers in the United States, just as we have done internationally. Building a network business in the United States that operates in addition to our proprietary card business provides us with new and substantial opportunities for growth. We have acted on this decision by entering into several GNS arrangements with financial institutions in the United States, which have all launched products in the marketplace. These companies include MBNA, Bank of America, Citibank (South Dakota), N.A., HSBC Bank Nevada N.A., Barclays, which issues Cards to U.S. wealth management clients of UBS Financial Services Inc., and USAA Federal Savings Bank. In addition, we have a GNS arrangement with GE Money under which GE Money Bank issues Cards accepted on our network, the first of which is the Dillard’s American Express Card.

     In November 2004, we filed a lawsuit against VISA, MasterCard and certain of their member banks seeking monetary damages resulting from the illegal rules that were struck down in the U.S. Department of Justice lawsuit discussed above. (You can read more about this lawsuit in the “Legal Proceedings” section of this report below.)

     With approximately 550 different Card products launched on our network so far by our bank partners, GNS is an increasingly important business that is strengthening our brand visibility around the world, driving more transaction volume onto our merchant network and increasing the number of merchants accepting the American Express Card. GNS enables us to expand our global presence without having to invest large amounts of resources, as our GNS

partners already have established attractive customer bases they can target with American Express-branded products. Since 1999, Cards-in-force issued by GNS partners have grown at a compound annual growth rate of 27%, and totaled 15 million Cards at the end of 2006. Outside the United States, approximately 50% of new Cards issued in 2006 were Cards issued by one of our GNS partners. Spending on these Cards has grown at a compound annual rate of 25% since 1999, and totaled $35.4 billion in 2006.

     With the increase in electronic transmission of credit card transaction data over merchants’ point-of-sale systems, the necessity for merchants and merchant processors to secure this data against accidental or intentional compromise using a standard protocol that applies to all card types became clear to American Express and the other major card networks. In 2006, in order to strengthen the security practices of merchants and payment processing firms and to secure payment account data in a globally consistent manner, we and Discover Financial Services, JCB, MasterCard Worldwide and Visa International formed PCI Security Standards Council, LLC (“PCI Co.”), an independent standards-setting organization to manage the ongoing evolution of the Payment Card Industry (PCI) Data Security Standard, which focuses on improving payment card account security throughout the transaction process. By establishing PCI Co. to manage the PCI Data Security Standard, we and the other founders have developed a common standard that is more accessible and efficient for participants in the payment card industry. All merchants and service providers that store, process and transmit payment card data are required to comply with the PCI Data Security Standard. PCI Co. is dedicated to driving greater education, awareness and adoption of the PCI Data Security Standard to ensure that all stakeholders involved in the payment process conduct their business responsibly.

Regulation

     Local regulations governing the issuance of charge and credit cards have not been a significant factor impacting our arrangements with banks and qualifying financial institutions in any country in which such arrangements exist, because such banks and institutions generally are already licensed to issue general purpose cards. Accordingly, our GNS partners have generally not had difficulty in obtaining appropriate government authorization in the markets in which we have chosen to enter into GNS arrangements. As a network service provider to regulated U.S. banks, our GNS business is subject to review by certain federal bank regulators, including the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. As the operator of a general purpose card network, we are also subject to the USA PATRIOT Act of 2001 (the “Patriot Act”), which requires us to conduct due diligence on our GNS partners to ensure that they maintain sufficient anti-money laundering and “know your customer” programs to prevent our network from being used for money laundering or terrorist financing.

Global Merchant Services

     We operate a global merchant services business, which includes signing merchants to accept Cards, and accepting and processing Card transactions and paying merchants that accept Cards for purchases made by Cardmembers with Cards (“Charges”). We also provide point-of-

sale and back-office products and services and marketing programs to merchants, leveraging the capabilities provided by our closed loop structure.

     Our objective is for Cardmembers to be able to use the Card wherever and however they desire, as well as to increase merchant coverage in key geographic areas and in selected new industries that have not traditionally accepted general purpose credit and charge cards as a means of payment. We add new merchants to our network through a number of sales channels: a proprietary sales force, third-party sales agents, strategic alliances with banks, the Internet, telemarketing and inbound “Want to Honor” calls (i.e., merchants desiring to accept the Card contacting us directly).

     Since the early 1990s, we have significantly expanded the number of merchants that accept our Card products as well as the kinds of businesses that accept the Card. In recent years, we have focused our efforts on increasing the use of our Cards for everyday spending. In 1990, 64% of our U.S. billings came from the travel and entertainment sectors and 36% came from retail and other sectors. That proportion has now been more than reversed. In 2006, U.S. non-travel and entertainment billings represented over 65% of the U.S. billed business on American Express Cards. This shift resulted from the growth, over time, in the types of merchants that began to accept charge and credit cards in response to consumers’ increased desire to use these cards for more of their purchases, and our focus on expanding Card acceptance to meet Cardmembers’ needs.

     During 2006, we continued our efforts to encourage consumers to use the Card for everyday spending. We increased the number and types of merchants in retail and everyday spending categories that accept the Card, such as quick-serve restaurants, mass transit, healthcare and recurring billing merchants.

     In addition, we also continued our drive of bringing Card acceptance to industries where cash or checks are the predominant form of payment. For example, in the area of real estate, we signed an agreement with The Moinian Group to allow down-payments for luxury condominiums to be charged on the American Express Card. Card acceptance for private jets and residence/destination clubs, as well as business-to-business purchases, are other examples of new industries in which the Card is now accepted, and which have the potential to increase our average Cardmember spending.

     Globally, acceptance of general purpose charge and credit cards continues to increase, including among merchants in industries that have not traditionally accepted charge and credit cards. As in prior years, during 2006, we continued to grow merchant acceptance of Cards around the world and to refine our approach to calculating merchant coverage in accordance with changes in the marketplace. Management estimates that, as of the end of 2006, our merchant network in the United States accommodated more than 90% of Cardmembers’ general purpose charge and credit card spending, and our international merchant network as a whole accommodated approximately 80% of our Cardmembers’ general purpose charge and credit card spending. These percentages are based on comparing our Cardmembers’ spending on our network currently with our estimate of what our Cardmembers would spend on our network if all merchants that accept general purpose credit and charge cards accepted American Express Cards.

     We earn “discount” revenue from fees charged to merchants for accepting Cards as payment for goods or services sold. The merchant discount is the fee charged to the merchant for accepting Cards and is generally expressed as a percentage of the amount charged on a Card. The merchant discount is generally deducted from the amount of the payment that the “merchant acquirer” (in most cases, TRS or one of its subsidiaries) pays to a merchant for Charges submitted. A merchant acquirer is the entity that contracts for Card acceptance with the merchant, accepts transactions from the merchant, pays the merchant for these transactions and submits the transactions through the American Express network to the appropriate Card issuer for billing to the Cardmember. When a Cardmember presents the Card for payment, the merchant creates a record of charge for the transaction and submits it to the merchant acquirer for payment. To the extent that TRS or one of its subsidiaries is the merchant acquirer, the merchant discount is recorded by us as discount revenue at the point-of-sale.

     Where we act as the merchant acquirer and the Card presented at a merchant is issued by a third-party bank or financial institution, such as in the case of our GNS partners, we will make financial settlement to the merchant and receive the discount revenue. In our role as the operator of the Card network, we will also receive financial settlement from the Card issuer, who retains an issuer rate (i.e., the individually negotiated amount that Card issuers receive for transactions charged on our network with Cards that they issue, which is usually expressed as a percentage of the charged amount). The difference between the discount revenue (received by us in the form of the merchant discount) and the issuer rate received by the Card issuer generates a return to us. Where we are the Card issuer and the merchant acquirer is a third-party bank or financial institution (which can be the case in a country in which the IO is the local merchant acquirer), we receive an issuer rate in our settlement with the merchant acquirer, which is recorded by us as discount revenue.

     The following diagrams depict the relationships among the parties in a point-of-sale transaction effected on the American Express network where we act as both the Card issuer and merchant acquirer (the “3-Party Model”) and under an NCL arrangement where third-party financial institutions in the United States act as Card issuers (the “NCL Model”):

     

 

     The merchant discount rate that we charge is principally determined by the value we deliver to the merchant and generally represents a premium over other networks. We deliver greater value to the merchant through higher spending Cardmembers relative to cards issued on

competing card networks, the overall higher volume of spending by all Cardmembers, marketing expertise, and Cardmembers’ insistence on using their Cards when enrolled in rewards or other Card loyalty programs, including those as part of our Corporate Card program.

     The merchant discount rate varies with the industry in which the merchant does business, the Charge volume, the timing and method of payment to the merchant, the method of submission of Charges and, in certain instances, the geographic scope of the Card acceptance agreement signed with us (local or global) and the Charge amount. In 2006, as in prior years, we experienced some reduction in our global weighted average merchant discount rate, principally reflecting the impact of selective repricing initiatives, continued changes in the mix of business and volume-related pricing adjustments. We expect that the effect of these factors will likely continue to result in some erosion over time of the weighted average merchant discount rate, particularly outside the United States.

     While most merchants understand our merchant discount rate pricing in relation to the value provided, we do encounter a relatively small number of merchants that accept our Cards, but tell their customers that they prefer to accept another type of payment and, consequently, suppress use of the Card. We respond to this issue aggressively to ensure that our Cardmembers are able to use their Card where and when they want to. We have made progress by: concentrating on acquiring merchants where Cardmembers want to use the Card; continuing to enhance the value we provide by programs such as American Express Selects ® and My WishList, which enable merchants to gain valuable exposure and additional sales by providing exclusive offers and experiences to American Express Cardmembers; providing better and earlier communication of our value proposition; and, when necessary, cancelling merchants who suppress the use of our Card products.

     In the case of My WishList, a seasonal Web site we developed in conjunction with merchant partners, we are able to greatly enhance our merchant value. Through the site, we provide Cardmembers with opportunities to buy a limited number of sought-after items, such as automobiles, trips, electronics and jewelry, at a fraction of their retail prices, as well as access to numerous offers from top brands. Through American Express Selects, we make available to our Cardmembers high quality shopping, dining and travel values from merchants all over the world, and these merchants have an opportunity to reach out to our Cardmembers.

     Merchant satisfaction is a key goal of our Global Merchant Services business. We focus on understanding and addressing factors that influence merchant satisfaction, including developing and executing innovative programs that increase Card usage at merchants, using technology resources, our closed loop and deep marketing expertise and strengthening our relationships with merchants through an expanding roster of services that help them meet their business goals. We offer a full range of point-of-sale solutions, including integrated point-of-sale terminals and direct links that allow merchants to accept American Express Cards, as well as bankcards, debit cards and checks, and contactless point-of-sale terminals that enable merchants to accept contactless payment products including our ExpressPay from American Express ® products. Virtually all proprietary point-of-sale solutions support direct processing (i.e., direct connectivity) to American Express, which lowers a merchant’s cost of Card acceptance and avoids payment delays caused by a third party.

     ExpressPay, a contactless payment feature, is designed to be a fast, easy-to-use alternative for making everyday purchases at merchants where speed and convenience is important. ExpressPay is now accepted at over 30,000 places in the United States, including top quick-service restaurant, movie theater, drug store and convenience store chains. ExpressPay, powered by radio-frequency technology, is available both in a key-fob form and has been introduced within several Card products. In 2006, we expanded merchant coverage of ExpressPay by partnering with organizations like the Utah Transit Authority, Jack in the Box, and Arby’s Restaurant Group, Inc. at participating locations.

     We continue to focus our efforts on the fast-growing recurring billing industry through Automatic Bill Payment, a service that allows merchants to bill Cardmembers on a regular basis for recurring charges such as insurance premiums, newspaper subscriptions, health club memberships, commutation costs and cable television service. We have also made modifications to our host authorization system to approve more transactions and reduce Cardmember inconvenience at the point-of-sale without a corresponding increase in fraud or credit losses.

     Wherever we manage both the acquiring relationship with merchants and the Card issuing side of the business, there is a “closed loop,” which distinguishes our network from the bankcard networks in that there is access to information at both ends of the Card transaction. We maintain a direct relationship with both our Cardmembers and our merchants, and we handle all key aspects of those relationships. Our relationships allow us to analyze information on Cardmembers’ spend. This enables us to provide targeted marketing for merchants and special offers to Cardmembers through a variety of channels, subject to compliance with our privacy policy and legal requirements. We protect the confidentiality of this data, and comply with strict privacy, firewall and applicable legal requirements. We work closely with our Card issuing bank partners to maintain key elements of this closed loop, which permits them to customize marketing efforts, deliver greater value to their Cardmembers and help us to direct increased business to merchants who accept the Card.

     As the merchant acquirer, we have certain contingent liabilities that arise if a billing dispute between a Cardmember and a merchant is settled in favor of the Cardmember. Drivers of this liability are returns in the normal course of business, disputes over fraudulent charges, the quality or non-delivery of goods and services and billing errors. Typically, we offset the amount due to the Cardmember against payments for the merchant’s current or future Charge submissions. We can realize losses when offsetting submissions cease, such as when the merchant commences a bankruptcy proceeding or goes out of business. We actively monitor our merchant base to assess the risk of this exposure. When appropriate, we will take action to reduce the net exposure to a given merchant by requiring a parent company guarantee or letter of credit, holding cash reserves funded through Charge payable holdbacks from a merchant, lengthening the time between when the merchant submits a Charge for payment and when we pay the merchant or implementing other appropriate risk management tools. We also establish reserves on our balance sheet for these contingencies.

     In some markets outside the United States, particularly in the United Kingdom, third-party processors and some bankcard acquirers have begun to offer merchants the capability of converting credit card transactions from the local currency to the currency of the cardholder’s residence (i.e., the cardholder’s billing currency) at the point-of-sale, and submitting the transaction in the cardholder’s billing currency, thus bypassing the traditional foreign currency conversion process of the card network. This practice is known as “dynamic currency conversion.” If a merchant utilizes a dynamic currency conversion process, the merchant and processor share any fee assessed or spread earned for converting the transaction at the point of sale, thus reducing or eliminating revenue for card issuers and card networks relating to the conversion of foreign charges to the cardholder’s billing currency. This practice is not widespread, and it is uncertain to what extent consumers will prefer to have foreign currency transactions converted by merchants in this way. Our policy generally requires merchants to submit Charges and be paid in the currency of the country in which the transaction occurs, and we convert the transaction to the Cardmember’s billing currency.

Competition

     Our network competes with other charge and credit card networks, including, among others, VISA, MasterCard, Diners Club (which, in the United States and Canada, has been folded into the network operated by MasterCard), Discover, a business unit of Morgan Stanley (primarily in the United States), and JCB Co., Ltd. (primarily in Asia). We are the third largest general purpose charge and credit card network based on charge volume, behind VISA and MasterCard, which are larger than we are in most markets.

     The principal competitive factors that affect the network and merchant service business include:

  •   the number of Cards-in-force and amount of spending on these Cards;
 
  •   the quantity and quality of the establishments where the Cards can be used;
 
  •   the economic attractiveness to card issuers and merchant acquirers of participating in the network;
 
  •   the success of marketing and promotional campaigns;
 
  •   reputation and brand recognition;
 
  •   innovation in systems, technology and product offerings;
 
  •   the quality of customer service;
 
  •   the security of Cardmember and merchant information; and
 
  •   cost of Card acceptance relative to the value provided.


     Another aspect of network competition is the recent emergence and rapid growth of alternative payment mechanisms and systems, which include aggregators (such as PayPal), wireless payment technologies (including using mobile telephone networks to carry out transactions), pre-paid systems and systems linked to credit cards, and bank transfer models. In the United States, a “credit push” payment mechanism is being developed to re-direct online customers to payment systems based on ACH (automated clearing house, i.e., inter-bank

transfer), and existing debit networks are making efforts to develop online PIN functionality, which could potentially reduce the relative use of charge and credit cards online.

     Some of our competitors have attempted to replicate our closed loop structure, such as VISA’s Visa Incentive Network. Although it remains to be seen how effective VISA will be, efforts by VISA and other card networks and payment providers to replicate the closed loop speak both to its continued value, as well as the intense competitive environment in which we operate.

Regulation

     In recent years, regulators in several countries have focused on the fees involved in the operation of card networks, including the fees merchants are charged to accept cards. Regulators in the United Kingdom, Poland, Germany, Spain, the European Union, Australia, Mexico and Switzerland, among others, have conducted, and are continuing to conduct, investigations into the way bankcard network members collectively set the “interchange,” which is the fee paid by the bankcard merchant acquirer to the card issuing bank. The interchange fee is generally the largest component of the merchant discount rate charged to merchants by the merchant acquirer for bankcard debit and credit charges. Although the regulators’ focus has primarily been on VISA and MasterCard as the dominant card networks, antitrust actions and government regulation of the bankcard associations’ pricing could ultimately affect all networks. Downward movement of interchange and merchant discount fees may affect the relative economic attractiveness to card issuers and merchant acquirers of participation in a particular network. Lower interchange and/or merchant discount revenue may lead card issuers to look for other sources of revenue such as annual card fees, as well as to reduce costs by scaling back or eliminating rewards programs. In certain countries where antitrust actions or regulations have forced our competitors to lower their fees, we have made adjustments to our own fee arrangements with merchants to reflect local competitive trends. For example, reductions in bankcard interchange mandated by the Reserve Bank of Australia reforms in 2003 have resulted in lower merchant discount rates for VISA and MasterCard. As a result of changes in the marketplace, we have reduced our own merchant discount rates in Australia although we have nevertheless been able to increase billed business and the number of merchants accepting our Cards. In addition, under legislation enacted in Argentina, a merchant acquirer is required to charge the same merchant discount rate to all merchants in the same industry category, and merchant discount rates cannot exceed 3%.

     In its Final Report on the retail banking sector issued in January 2007, which included review of the payment cards industry, including interchange fees, the European Commission appears to favor competition law enforcement tools, rather than regulating price levels, as the preferred means to address perceived issues of insufficient competition in the European payment cards industry. The conclusions of the European Commission as expressed in its Final Report do not have the force of law, but may be used as the basis for future legislation or regulation in the European Union countries. In 2007, as an example, the competition regulator in Poland found insufficient basis for VISA and MasterCard interchange fees and ordered the associations to stop their current interchange setting practices, and the banks are appealing that decision.

     In the United States, the Board of Governors of the Federal Reserve System and various Federal Reserve Banks have been following developments on interchange and have held several conferences focused on credit card interchange rates. While the Federal Reserve has expressed interest in monitoring this issue, it has not indicated the need to regulate interchange rates in the United States. In Congress, there have been several hearings on Visa/MasterCard interchange over the last year. During 2006, there were also a number of bills proposed in individual state legislatures seeking to impose caps on credit card interchange or to prohibit card companies from charging merchant discount on the state tax portion of credit card purchases. None of those bills was enacted. It is expected that Congressional hearings and similar proposed state legislation will continue during 2007. In the event that governmental or regulatory activity to limit interchange continues or increases, our revenues and profitability could be adversely affected.

     Regulators, including most recently the European Commission, have considered the industry practice of prohibiting merchants from passing the cost of merchant discount fees along to consumers through surcharges on card purchases. Although some countries, such as the United Kingdom, have for a number of years permitted merchants to levy a surcharge on credit card purchases, provided that surcharges were clearly disclosed, there has to date been a relatively low overall incidence of surcharging, as merchants do not want to risk offending customers or losing them to competitors that do not assess surcharges for credit card purchases. In its Final Report, the European Commission indicated that prohibiting surcharging appeared to restrict inter-network competition and may constitute a barrier to entry for alternative, non-cash payment instruments. In Australia, we have seen selective merchant surcharging in certain industries such as telecommunications and, in some cases, on a basis that is greater than applied to the bankcard networks.

     The European Commission will likely be enacting a new legislative directive that will put in place a licensing and supervision framework for all electronic payment methods in the European Union over the course of the next several years. The objective is to create a single, internal payments market throughout the European Union. The directive will likely be finalized in 2007 and adopted as legislation in the member states of the European Union through to the end of 2008. By 2010, licensing will be required and supervision will commence for American Express’ card operations in the European Union. One provision of this draft directive gives merchants the right to surcharge, subject to disclosure requirements. At the same time, new technical standards are being adopted by the industry. All of the foregoing will entail costs to implement and maintain.

U.S. CARD SERVICES

     As a significant part of its proprietary Card issuing business, TRS and its U.S. banking subsidiaries issue a wide range of Card products and services to consumers and ses in the United States. Our consumer travel business, which provides travel services to Cardmembers and other consumers, complements our core Card business, as does our travelers check and prepaid services business. The proprietary Card business offers a broad set of card products to attract our target customer base. Core elements of our strategy are:

  •   focusing on acquiring and retaining high-spending, creditworthy Cardmembers across multiple groups;
 
  •   designing Card products with features that appeal to specific customer segments;
 
  •   the use of strong incentives to drive spending on our various Card products, including our Membership Rewards® program and other rewards features;
 
  •   the use of loyalty programs such as Delta SkyMiles® , sponsored by our cobrand and other partners to drive spending;
 
  •   the development and nurturing of wide-ranging relationships with cobrand and other partners;
 
  •   a multi-card strategy (having multiple Card products in customers’ wallets); and
 
  •   high-quality customer service.


Consumer and S Services

     We and our licensees offer individual consumer charge Cards such as the American Express Card, the American Express One ® Card, the American Express ® Gold Card, the Platinum Card ® , and the ultra-premium Centurion ® Card; revolving credit Cards such as Blue from American Express ® , Blue Cash ® Card from American Express and Blue Sky from American Express, a travel rewards Card launched in 2005; and a variety of Cards sponsored by and cobranded with other corporations and institutions, such as the Delta SkyMiles ® Credit Card from American Express, True Earnings SM Card exclusively for Costco Members, Starwood Preferred Guest ® Credit Card and JetBlue Card from American Express.

Charge Cards

     Our charge Cards, which carry no pre-set spending limits, are primarily designed as a method of payment and not as a means of financing purchases of goods or services. Charges are approved based on a variety of factors including a Cardmember’s current spending patterns, payment history, credit record, and financial resources. Cardmembers generally must pay the full amount billed each month, and no finance charges are assessed on the balance. Charge Card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, may be cancelled. The no preset-spending limit and pay-in-full nature of these products attract high-spending Cardmembers who want to use a charge Card to facilitate larger payments.

     The charge Cards also offer enrollment services to Cardmembers. The Sign & Travel ® program gives qualified U.S. Cardmembers the option of extended payments for airline, cruise and certain travel charges that are purchased with our charge Cards. The Extended Payment Option offers qualified U.S. Cardmembers the option of extending payment for certain charges on the charge Card in excess of a specified amount.

Revolving Credit Cards

     We offer a variety of revolving credit Cards. These Cards have a range of different payment terms, grace periods and rate and fee structures. Since late 1994, our lending balance growth has been among the

top tier of card issuers. Much of this growth has been due to the breadth of our lending products, such as Blue from American Express, Blue Cash from American Express and the Delta SkyMiles Credit Card from American Express, as well as the increased number of charge Cardmembers who have taken advantage of our “lending on charge” options (such as the Sign & Travel and Extended Payment Option programs described above).

Cobrand Cards

     We issue Cards under cobrand agreements with selected commercial firms in the United States. The competition among card issuers and networks for attractive cobrand card partnerships is quite intense because they can generate high-spending loyal cardholders. The duration of our cobrand arrangements generally ranges from five to ten years. Cardmembers earn rewards provided by the partners’ respective loyalty programs based upon their spending on the cobrand Cards, such as frequent flyer miles, hotel loyalty points and cash back. We make payments to our cobrand partners, which can be significant, based primarily on the amount of Cardmember spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. We expense amounts due under cobrand arrangements in the month earned. Payment terms vary by arrangement, but are monthly or quarterly. Generally, once we make payment to the cobrand partner, the partner is solely liable for providing rewards to the Cardmember under the cobrand partner’s own loyalty program. As the issuer of the cobrand card, we retain all the credit risk with the Cardmember and bear the receivables funding and operating expenses for such cards. The cobrand partner retains the risk associated with the miles, points or other currency earned by the Cardmember under the partner’s loyalty program.

Cobrand Partnerships with Financial Services Institutions

     We also issue Cards that are marketed under cobrand partnership arrangements with financial services partners. Such partnerships involve the offering of a standard product (issued by TRS or one of its subsidiaries) to customers of the financial services partner, generally cobranded with the partner’s name on the Card. Under these arrangements, we make payments to the financial services partners that are primarily based on the number of accounts acquired and retained through the arrangement and the amount of Cardmember spending on such Cards. The duration of such arrangements generally ranges from three to seven years.

     For example, during 2005 we established an alliance with Guaranty Bank to distribute cobranded cards to Guaranty’s s customers throughout its branch network in Texas and California. In 2006, we expanded this partnership to include a cobranded American Express Preferred Rewards Gold Card, to be offered to Guaranty Bank’s consumer customers at its various locations. This past year, we also announced a strategic bank partnership between OPEN from American Express and Sovereign Bank, under which Sovereign will offer American Express Business Cards to s customers in the Northeast.

      American Express Centurion Bank and American Express Bank, FSB as Issuers of Certain Cards

     Our revolving credit Cards in the United States are issued by American Express Centurion Bank (“Centurion Bank”), which markets primarily through direct mail and other remote marketing channels, and American Express Bank, FSB (“AEBFSB”), which markets primarily through in-person selling and third-party cobrand partners. Both banks are wholly owned subsidiaries of TRS.

     Centurion Bank is a Utah-chartered industrial bank regulated, supervised and regularly examined by the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). Centurion Bank is an FDIC-insured depository institution. AEBFSB is a federal savings bank regulated, supervised and regularly examined by the Office of Thrift Supervision (“OTS”), a bureau of the U.S. Department of the Treasury. AEBFSB is an FDIC-insured depository institution. The activities of Centurion Bank and AEBFSB are subject to examination by their respective regulators. Both banks take steps to maintain compliance programs to address the various safety and soundness, internal control and compliance requirements, including anti-money laundering requirements, that apply to them. You can find a further discussion of the anti-money laundering initiatives affecting us under “Corporate and Other” below.

     Centurion Bank is subject to the risk-based capital adequacy requirements promulgated by the FDIC. Under these regulations, a bank is deemed to be well-capitalized if it maintains a tier one risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. Based on Centurion Bank’s tier one risk-based capital, total risk-based capital and leverage ratios, Centurion Bank was considered to be well-capitalized at December 31, 2006.

     AEBFSB is subject to the risk-based capital adequacy requirements promulgated by the OTS. Under these regulations, a federal savings bank is deemed to be well-capitalized if it maintains a tier one risk-based capital ratio of at least 6%, a total risk-based capital ratio of at least 10%, and a tier one core capital ratio of at least 5%. Based on AEBFSB’s tier one risk-based capital, total risk-based capital and tier one core capital ratios, AEBFSB was considered to be well-capitalized at December 31, 2006.

Card Pricing and Account Management

     Certain of our Cards, particularly charge Cards, charge an annual fee that varies based on the type of Card and the number of Cards for each account. We also offer many revolving credit Cards with no annual fee but on which we assess finance charges for revolving balances. Depending on the product, we also charge Cardmember fees to participate in rewards programs, for account performance (e.g., late fees) or for certain services (e.g., additional copies of account statements). We apply standards and criteria for creditworthiness to each Cardmember through a variety of means both at the time of initial solicitation or application and on an ongoing basis during the Card relationship. We use sophisticated credit models and techniques in our risk management operations and believe that our strong risk management capabilities provide us with a competitive advantage.

Membership Rewards ® Program

     The Membership Rewards program from American Express has over 1,300 redemption partners worldwide and is offered in 98 markets. The program allows Cardmembers to earn one point for virtually every dollar charged on eligible, enrolled American Express ® Cards, and then redeem their points for a wide array of rewards, including travel, retail merchandise, dining and entertainment, financial services and even donating their points to benefit tens of thousands of charities. Points have no expiration date, and there is no limit on the number of points one can earn.

     In 2006, we introduced innovative features such as First Collection SM portfolio, a luxury rewards tier exclusively for Platinum Card ® and Centurion ® Card members. Redemption partners include some of the world’s finest retail establishments and service providers, such as Tiffany & Co., Lamborghini and Oberoi Hotels & Resorts. We also introduced Bonus Points Mall SM program, an online gateway to more than 100 retailers, where Cardmembers can earn double Membership Rewards points for their purchases. We also redesigned our Web site to deliver enhanced capabilities. In 2007, we plan to introduce a tiered structure that will include tailored rewards offerings and services for our premium Cards.

     When a Cardmember enrolled in the Membership Rewards program uses the Card, we establish reserves to cover the cost of estimated future reward redemptions for points earned to date. When a Membership Rewards program enrollee redeems a reward using Membership Rewards points, we make a payment to the Membership Rewards program partner providing the reward pursuant to contractual arrangements. Because of higher charge volumes and increased customer participation in Membership Rewards, the expense of the program has increased both in the United States and internationally over the past several years and continues to grow.

     Despite the increasing costs of the Membership Rewards program as penetration and usage expand, it plays a vital role in our profitability. The program continues to be an important driver of Cardmember spending and loyalty. We believe, based on historical experience, that Cardmembers enrolled in rewards programs yield higher spend, stronger credit performance and greater profit for us. For the three-year period through the end of 2006, total spending by U.S. Membership Rewards participants increased by 66%. By offering a broader range of redemption choices, we have given our Cardmembers more flexibility in the use of their rewards points and favorably affected our average cost per point. We continually seek to optimize the overall economics of the program and make changes to enhance its value to Cardmembers. Our program is also valuable to merchants that become redemption partners as we bring them high-spending Cardmembers and new marketing channels to reach these Cardmembers.

Cardmember Special Services and Programs

     Throughout the world, our Cardmembers have access to a variety of fee-free and fee-based special services and programs, depending on the type of Cards they have and their country of residence. Examples of these special services and programs include:


•   the Membership Rewards program;

•   Global AssistSM Hotline; •   Emergency Check Cashing Privileges;
 
•   Buyer’s Assurance Plan; •   Automatic Flight Insurance;
 
•   Car Rental Loss and Damage Insurance; •   Premium Baggage Protection;
 
•   Purchase Protection Plan; •   Assured Reservations;
 
•   Emergency Card Replacement; •   Online Fraud Protection Guarantee;
 
•   Return Protection; •   Credit Card Registry;
 
•   Manage Your Card Account Online; •   Credit Bureau Monitoring and Reporting;
 
•   Online Year End Summary; •   Identity Theft Assistance; and
 
•   Roadside Assistance – Anywhere; •   Event Ticket Protection Plan.
 
•   Automatic Bill Pay;


     During 2006, we began “Membership Changes Everything SM ,” a five-week series of free activities in the New York City area for Cardmembers who carry American Express-issued Cards, which was designed to exhibit the benefits and services that accompany Card membership.

     We offer the Platinum Card, a charge Card that provides access to additional and enhanced travel, protection, personal assistance and other services. In addition, we offer the Centurion ® Card, an ultra-premium charge card providing highly personalized customer service and an array of travel, lifestyle and financial benefits.

OPEN from American Express ®

     In addition to our U.S. Consumer Card business, through AEBFSB we are also a leading provider of financial services to ses (firms that generally have less than 100 employees and/or sales of $10 million or less), a key growth area in the United States. OPEN from American Express (“OPEN”) offers s owners a wide range of tools, services and savings designed to meet their evolving needs, including:

  •   charge and credit Cards;
 
  •   access to lines of credit up to $100,000;
 
  •   discounts at select suppliers of business services and products, including airline tickets, car rentals, hotel stays, package shipping, computer and software equipment, telecommunications, printing and photocopying services and other business services;
 
  •   expense management reporting;
 
  •   enhanced online account management capabilities;
 
  •   retail and travel protections such as baggage insurance; and
 
  •   travel services.


     During 2006, we continued to expand the breadth of products and services offered by OPEN ® by, among other things, introducing several new Cards:

  •   the JetBlue Business Card from American Express, which offers small business owners an automatic OPEN Savings® discount of 5% on JetBlue flights, plus one award dollar on virtually every purchase and double awards dollars on select small business purchases, including JetBlue travel, gasoline, office supplies, wireless phone charges and car rentals;
 
  •   the American Express SimplyCashSM Business Card, offering automatic cash back


      rewards for s owners through monthly rebates within the Cardmembers’ statements. Cardmembers receive 5% cash back each month on gas, office supplies and wireless charges, and 1% cash back on virtually all other purchases; and
 
  •   The Starwood Preferred Guest® Business Credit Card, which incorporates programs and services tailored specifically to the s owner and gives Starpoints for all their business spending that can be redeemed for hotel stays or airline flights. At the same time, we enhanced and relaunched the Starwood Preferred Guest Credit Card for consumers, enabling Cardmembers to take advantage of greater benefits and richer rewards.


     These programs are in addition to OPEN Savings, which is a program that offers savings for OPEN customers on travel and other major business expenses simply by using their American Express ® Business Card at participating companies. These savings may be combined with any existing discounts or offers. During 2006, we expanded OPEN Savings by signing new partners and expanding relationships with existing ones in various categories, including:

  •   the launch of airline partners Delta Airlines and JetBlue Airways. Small business owners using any American Express Business Card receive an automatic 3% discount on the total cost of Delta and JetBlue flights. In addition, Cardmembers who purchase flights on these airlines, using their respective Delta SkyMiles, SkyPoints Delta Business Card or JetBlue Business Card, will receive an additional 2% discount off the total cost of the flights; and
 
  •   the inclusion of two new technology partners, Gateway and Symantec.


Competition – Card Issuing Business

     Our proprietary Card business encounters substantial and intense competition. As a card issuer, we compete in the United States with financial institutions (such as Citibank, Bank of America, JPMorgan Chase, and Capital One Financial) that issue general purpose credit cards, primarily under revolving credit plans, and the Morgan Stanley affiliate that issues the Discover Card on the Discover Business Services network. We also encounter limited competition from businesses that issue their own cards or otherwise extend credit to their customers, such as retailers and airline associations, although these cards are not generally substitutes for our Cards because of their limited acceptance. Because of continuing consolidations among banking and financial services companies and credit card portfolio acquisitions by major card issuers, there are now a smaller number of significant issuers and the largest issuers have continued to grow, in several cases by acquiring card portfolios and also by cross-selling through their retail branch networks.

     Competing card issuers offer a variety of products and services to attract cardholders, including premium cards with enhanced services or lines of credit, airline frequent flyer program mileage credits, cash rebates and other reward or rebate programs, services for s owners, “teaser” promotional interest rates for both credit card acquisition and balance transfers, and cobranded arrangements with partners that offer benefits to cardholders. In recent years we have encountered increasingly intense competition in the s sector, as competitors

have targeted OPEN’s customer base as a result of our leadership position in providing financial services to ses.

     Most financial institutions that offer demand deposit accounts also issue debit cards to permit depositors to access their funds. Use of debit cards for point-of-sale purchases has grown as most financial institutions have replaced ATM cards with general purpose debit cards bearing either the VISA or MasterCard logo. As a result, the volume of transactions made with debit cards in the United States has continued to increase significantly and, in the United States, has grown more rapidly than credit and charge card transactions. Debit cards are marketed as replacements for cash and checks, and transactions made with debit cards are typically for small dollar amounts. The ability to substitute debit cards for credit and charge cards is limited because the consumer must have sufficient funds in his or her demand deposit account to cover the transaction in question. For example, larger purchases or delayed purchases may not be appropriate for debit cards. We do not currently issue point-of-sale debit cards for use on the American Express network.

     The principal competitive factors that affect the card-issuing business are:

  •   the features and the quality of the services, including rewards programs, provided to Cardmembers;
 
  •   the number, spending characteristics and credit performance of Cardmembers;
 
  •   the quantity and quality of the establishments that accept Cards;
 
  •   the cost of Cards to Cardmembers;
 
  •   pricing, payment and other Card account terms and conditions;
 
  •   the number and quality of other payment instruments available to Cardmembers;
 
  •   the nature and quality of expense management data capture and reporting capability;
 
  •   the success of targeted marketing and promotional campaigns;
 
  •   reputation and brand recognition;
 
  •   the ability of issuers to manage credit and interest rate risk throughout the economic cycle;
 
  •   the ability of issuers to implement operational and cost efficiencies; and
 
  •   the quality of customer service.


     As the payment industry continues to evolve, we are also beginning to face competition from non-traditional players, such as online networks and telecom providers, that leverage new technology to create payment solutions.

Financing Activities

     American Express Credit Corporation, a wholly owned subsidiary of TRS, along with its subsidiaries (“Credco”), purchases the majority of charge Card receivables arising from the use of Cards issued in the United States and in certain currencies outside the United States. Credco finances the purchase of receivables principally through the issuance of commercial paper and the sale of medium- and long-term notes. Centurion Bank and AEBFSB finance their revolving credit receivables, in part, through the sale of short- and medium-term notes and certificates of deposit in the United States. TRS, Centurion Bank and AEBFSB also fund receivables through

asset securitization programs. The cost of funding Cardmember receivables and loans is a major expense of Card operations. (You can find a discussion of TRS’ and Centurion Bank’s securitization and other financing activities on page 32, page 35, pages 43 - 48 and pages 55 - 56 under the caption “Financial Review,” and Note 5 on pages 87 - 89 of the Company’s 2006 Annual Report to Shareholders, which portions we incorporate herein by reference.)

Regulation – Card Issuing Business

     The charge card and consumer lending businesses are subject to extensive regulation. In the United States, the business is subject to a number of federal laws and regulations, including:

  •   the Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling of credit);
 
  •   the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act (“FACT Act”) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected);
 
  •   the Truth in Lending Act (“TILA”) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications);
 
  •   the Fair Credit Billing Act (which, among other things, regulates the manner that billing inquiries are handled and specifies certain billing requirements); and
 
  •   the Electronic Funds Transfer Act (which regulates disclosures and settlement of transactions for electronic funds transfers including those at ATMs).


     Certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions (see “Corporate and Other” below). Federal legislation also regulates abusive debt collection practices. In addition, a number of states, the European Union, and many foreign countries in which we operate have significant consumer credit protection and disclosure and privacy-related laws (in certain cases more stringent than the laws in the United States). The application of bankruptcy and debtor relief laws affect us to the extent that such laws result in amounts owed being classified as delinquent and/or charged off as uncollectible. Card issuers and card networks are subject to anti-money laundering and anti-terrorism legislation, including, in the United States, the Patriot Act. (For a discussion of this legislation and its effect on our business, see “Regulation” in the “Global Network Services” section above and see “Corporate and Other” below.)

     Centurion Bank, AEBFSB and our other bank entities are subject to a variety of laws and regulations applicable to financial institutions. Changes in such laws and regulations or in the regulatory application or judicial interpretation thereof could impact the manner in which we conduct our business and the costs of compliance. The regulatory environment in which our Card and lending businesses operate has become increasingly complex and robust. More recently, the U.S. Congress, as well as regulators and various consumer advocacy groups, have begun increasing focus and attention on the types and levels of fees charged by card issuers for,

among other things, late payments, returned checks, payments by telephone, copies of statements and the like. We regularly review and, as appropriate, refine our business practices in light of existing and anticipated developments in laws, regulations and industry trends so we can continue to manage our business prudently and consistent with regulatory requirements and expectations.

     In January 2003, the Federal Financial Institutions Examination Council (the “FFIEC”), an interagency body composed of the principal U.S. federal entities that regulate banks and other financial institutions, issued new guidance to the industry on credit card account management and loss allowance practices (the “Guidance”). The Guidance covers five areas: (i) credit line management, (ii) over-limit practices, (iii) minimum payment and negative amortization practices, (iv) workout and forbearance practices, and (v) certain income (fee) recognition and loss allowance practices. The Guidance is generally applicable to all institutions under the supervision of the federal bank regulatory agencies that comprise the FFIEC, although it is primarily the result of the identification by bank regulators in their examinations of other credit card lenders’ practices deemed by them to be inappropriate, particularly, but not exclusively, with regard to subprime lending programs. At present, we do not have any lending programs that target the subprime market. Centurion Bank and AEBFSB evaluate and discuss the Guidance with their respective regulators on an ongoing basis as part of their regulatory examination processes, and, as a result, may refine their practices from time to time based on regulatory input. The Guidance has not had, nor do we expect it to have, any material impact on our businesses or practices.

Global Travelers Cheques and Prepaid Services (“TCPS”)

     We have been in the business of issuing and selling travelers checks since 1891. In addition to travelers checks, we also offer a variety of other prepaid products, including reloadable and non-reloadable prepaid cards and, through American Express Incentive Services L.L.C., a joint venture with Maritz Inc., we offer various incentive prepaid products, including the Corporate Gift Cheque, the Incentive Funds Card and several points-based incentive cards.

     We sell the American Express ® Travelers Cheque (“Travelers Cheque” or “Cheque”) as a safe and convenient alternative to cash. Travelers Cheques are available in eight currencies, including Euros. We also issue and sell other forms of paper travelers checks: American Express ® Gift Cheques, which are available in U.S. and Canadian dollars, and the American Express Cheque-Secure Funds, which are available in dollars and Euros, and are offered in certain countries as a safe way to keep cash at home. Sales of Travelers Cheques declined slightly in 2006, reflecting the migration of the prepaid business toward plastic.

     TCPS offers prepaid gift cards in the United States: the American Express ® Gift Card (“Gift Card”), which can be used in the United States at businesses that accept American Express Cards, subject to certain usage limitations, and mall-branded gift cards, which are specifically designed for use solely at merchants that accept the American Express Card and that are located within a specific shopping mall. Our Gift Cards are now sold through tens of thousands of

locations throughout the United States, and we added many new ones during the year, including gas stations, retail bank branches and grocery stores. Sales of Gift Cards continued to rise, reflecting the growing popularity of these products and our efforts to increase buying convenience for customers.

     We also continued to offer the Travelers Cheque Card (“TCC”), a reloadable, prepaid card marketed as a plastic form of our Travelers Cheque. During 2006, the TCC was sold in the United States, the United Kingdom and Germany, in U.S. dollars, British pounds sterling and Euros, respectively, for use worldwide, for both online and in-person purchases and at ATMs (ATM fees apply) that accept the American Express Card. TCC holders have access to the same customer service and security provided to holders of Travelers Cheques, including card replacement or refund if the TCC is lost or stolen (usually within 24 hours).

     We sell American Express paper and plastic prepaid products through a variety of channels. We sell these products directly to consumers via phone and the Internet. Travelers Cheques and Gift Cheques are sold primarily through a broad network of selling outlets worldwide, including American Express travel offices, independent travel agents, financial institutions, and many other financial, travel and commercial businesses. Many of the same sellers also sell our prepaid cards. We sometimes compensate selling outlets for their sales.

     In 2006, we continued to expand our Gift Card retail distribution network significantly to include Walgreens and Office Depot, as well as more than 2,500 locations in the grocery category, malls and large national retail chains. These sellers use prepaid card merchandise racks to market and sell our Gift Cards.

Competition – Travelers Checks and Prepaid Cards

     Travelers Cheques compete with a wide variety of financial payment products, including cash, foreign currency, checks, other brands of travelers checks, and, increasingly, debit and ATM cards, as well as credit and charge cards (even though travelers checks and prepaid cards are not substitutes for charge and credit cards) and, to a limited extent, competing prepaid cards. The principal competitive factors affecting the travelers check and prepaid card industry are:

  •   the number and location of merchants willing to accept the form of payment;
 
  •   the availability to the consumer of other forms of payment;
 
  •   the amount of fees charged to the consumer;
 
  •   the compensation paid to, and frequency of settlement by, selling outlets;
 
  •   the accessibility of sales and refunds for the products;
 
  •   the success of marketing and promotional campaigns; and
 
  •   the ability to service the customer satisfactorily, including for lost or stolen instruments.


     Our prepaid cards (“open-system” cards that can be used at multiple unaffiliated sellers of goods or services) compete with the same payment methods described above; however, gift cards compete primarily with cash, checks and other open-system and store-specific gift cards.

Regulation – Travelers Cheques and Prepaid Cards

     As an issuer of travelers checks, we are regulated in the United States under the “money transmitter” or “sale of check” laws in effect in most states. These laws require travelers check (and, where applicable, prepaid card) issuers to obtain licenses, to meet certain safety and soundness criteria, to hold outstanding proceeds of sale in highly-rated and secure investments, and to provide detailed reports. We invest the proceeds from sales of our Travelers Cheques and prepaid cards issued by TRS in accordance with applicable law, predominantly in highly-rated debt securities consisting primarily of intermediate- and long-term federal, state and municipal obligations. In 2006, a few states (e.g., Hawaii and New Hampshire) passed money transmitter laws for the first time, and we have applied for or secured licenses in each of these jurisdictions. Many states examine licensees annually. In addition, travelers check issuers are required by the laws of many states to comply with state unclaimed and abandoned property laws under which such issuers must pay to states the face amount of any travelers check that is uncashed or unredeemed after 15 years. A few states have amended their abandoned property laws to apply to prepaid cards.

     In the past few years, some states have enacted laws pertaining to the issuance and the sale of gift cards. We continue to monitor state legislative activity restricting the fees that consumers can be charged or the expiration dates that can apply to gift cards. In certain states where regulation has made it impossible for us to offer gift cards profitably, we have limited or withdrawn from selling these cards. Federal anti-money laundering regulations require, among other things, the registration of traveler check issuers as “Money Service Businesses” and compliance with anti-money laundering recordkeeping and reporting requirements by issuers and selling outlets. At this time, stored value issuers and redeemers, while considered to be “Money Service Businesses,” are not required to register under these regulations. Outside the United States, there are varying licensing and anti-money laundering requirements, including some that are similar to those in the United States.

American Express Consumer Travel Network – USA

     The American Express Consumer Travel Network – USA provides travel, financial and Cardmember services to consumers through American Express-owned travel service offices, call centers, participating American Express Representatives (independently-owned travel agency locations that operate under the American Express brand) and the Consumer Travel Web site. U.S. Consumer Travel has distinguished itself in the luxury marketplace through its Platinum Travel Services and Centurion Travel Services, which provide programs such as the International Airline Program, which offers two-for-one fares on certain international first and business class tickets, and the Fine Hotels & Resorts program, a luxury hotel program offering room upgrades and value-added amenities. Other premium programs developed by Consumer Travel for Centurion and Platinum Card members include Centurion Cruise Privileges ® , Centurion Destinations ® and Platinum Destinations ® Vacations, the Private Jets Program, Private Villas and Yachts. Consumer Travel also provides Membership Rewards programs designed for unique Cardmember segments such as Membership Rewards Land & Sea packages and Gold Destinations.

     In addition, the Consumer Travel business operates a wholesale travel business in the United States through our Travel Impressions subsidiary. (A wholesaler purchases inventory, such as hotel rooms, from suppliers and then resells the services to the customer at retail prices that the wholesaler determines.) Our wholesale travel business packages American Express Vacations and distributes travel packages through other retail travel agents and private label brands for third parties in the United States.

     Our Consumer Travel Web site, americanexpress.com/travel, offers a full range of travel rates and discounts on airfares, hotels, car rentals, last-minute deals, cruises and full vacation packages. The Web site offers unique American Express Cardmember benefits such as an American Express Travel Office locator, Travel Specialist finder tools, double Membership Rewards points, and travel planning resources and destination content through the “Local Color” portion of the Web site. In addition, Cardmembers are able to redeem Membership Rewards points for some categories of travel through both our Web site and our call centers and Travel Offices.

     In 2006, Consumer Travel attracted eight new members with 43 locations to our Representative Network, including The Travel Team, CI Travel and Passageways Travel.

     TRS’ worldwide travel network of more than 2,200 retail travel locations is important in supporting the American Express brand and providing Cardmember servicing throughout the world, including a range of Traveler Cheques, Gift Cheques, Gift Cards and foreign exchange services.

Competition – Consumer Travel Network – USA

     American Express Consumer Travel competes with a variety of different competitors including traditional “brick and mortar” travel agents, credit card companies with significant travel benefits, online travel agents and travel suppliers that distribute their products to consumers directly via the Internet or telephone-based customer service centers. In recent years we have experienced an increasing presence of “niche” players that are seeking to capitalize on the growth in the luxury travel segment by combining luxury travel offers with concierge-type services.

INTERNATIONAL CARD & GLOBAL COMMERCIAL SERVICES

International Proprietary Consumer Card

     We issue our charge and credit Cards in numerous countries around the globe. Although our geographic scope is widespread, we generally do not have significant share in the markets in which we operate. We focus primarily on those markets that we believe offer us the greatest financial opportunity.

     The Company continued to bolster its international proprietary Card business through the launch of numerous new or enhanced Card products during 2006. These are Cards that we issue, either on our own or, as further described below, as cobrands with partnering institutions. This past year, among other new proprietary products, we announced or launched:

  •   the American Express RED Card® in the United Kingdom, in partnership with Project RED, pursuant to which a portion of the money spent by Cardmembers is donated to the Global Fund for HIV/Aids programs in Africa;
 
  •   cobranded consumer credit Cards with Qantas airlines in Australia and Thai Airways International in Thailand, designed to appeal to the airlines’ most frequent travelers;
 
  •   the American Express s platinum charge Card in Italy, and a s gold charge Card in France;
 
  •   new Platinum credit Cards in India and Argentina; and
 
  •   distribution agreements with Commerzbank to distribute consumer Cards in Germany; with ABN-AMRO to distribute consumer Cards in the Netherlands; and with Mitsubishi UFJ Financial Group to distribute consumer Cards in Japan.


     We offer many of the same programs in our international proprietary Card issuing business as we do in our U.S. proprietary issuing business. For example, as in the United States, we offer various flexible payment options similar to our Sign & Travel program and our Extended Payment Option to Cardmembers in several international markets.

     Also, as in the United States, we issue Cards internationally under distribution agreements with banks. Another example of our distribution partnerships is affinity cards with fraternal, professional, educational and other organizations. For instance, we have been successful in penetrating the affinity card segment in Australia, where we issue Cards with the majority of the largest professional associations in that country. In Australia, affinity cards are a substantial part of our total revolving portfolio and contribute to our proprietary consumer lending activities.

     As in the United States, rewards programs are a strong driver of Cardmember spending in the international consumer business. We have more than 1,300 redemption partners across our international business, with an average of 75 partners in each country; less than 23% of these partners are in the travel industry. Cardmembers can redeem their points with more than 35 airlines and over 200 hotels. Our redemption options include travel, retail merchandise, entertainment, shopping and recreation gift certificates, experiences, financial services and charity rewards. In 2006, we continued to enhance our rewards programs in several markets, offering more flexible choices that enable Cardmembers to redeem points more quickly. Significantly, in selected markets we launched TravelKey, which allows Cardmembers to book flights and vacations with virtually any airline to any destination without restrictions, and enhanced the Membership Rewards Web site to offer easier online redemption. In Australia, we introduced Membership Rewards Concierge Service to help Cardmembers create customized rewards packages.

     Membership Travel Services International provides premium travel and lifestyle, as well as concierge services, a benefit that exemplifies the customer experience provided to our Platinum Card and Centurion Card customers, through 25 exclusively dedicated international call centers in 25 countries. Additionally, Membership Travel Services operates 25 proprietary Travel Service Offices in Mexico, Argentina and Italy to provide Cardmembers with travel and foreign exchange assistance. Across all markets, we are enhancing our capabilities to sell exclusively negotiated benefits and luxury travel packages with preferred suppliers through American Express’s International Airline Program, the Fine Hotel & Resorts Program and American Express ® Vacations to create exceptional experiences for our Cardmembers.

Competition – International Proprietary Consumer Card
     As compared to the United States, consumers outside the United States use cards for a smaller percentage of their total payments, with some large emerging market countries just beginning to transition to card usage in any meaningful way. Currently, we have a small share of consumer card spending outside the United States. Internationally, our proprietary Card issuing business is subject to competition from multinational banks, such as Citibank, HSBC and Banco Santander, as well as many local banks and financial institutions. Globally, we view Citibank and HSBC as our strongest competitors, as they offer card products in a large number of markets.

Global Commercial Services

      Through our Global Commercial Services (“GCS”) group, we provide expense management services to more than 100,000 firms worldwide through our Corporate Card program, Corporate Purchasing Solutions, electronic invoicing and payment services (Source-to-Settle (“S2S” SM )) and Global Business Travel Services. American Express is a leading global issuer of commercial cards and is also a leading global travel management company for corporations and businesses. During 2006, we added or retained several major Corporate Card clients in the United States and internationally, including Accenture, Costco Wholesale Corporation, Merrill Lynch, Phillips and Siemens Corporation. We also were awarded the corporate travel business of several new clients including Astra Zeneca PLC, Medtronic Inc., Nortel Networks Corporation, BearingPoint Inc. and Lear Corporation. GCS offers four primary products and services:

  •   Corporate Card, issued to individuals through a corporate account established by their employer and designed primarily for travel and entertainment spending;
 
  •   Corporate Purchasing Solutions, an account established by a company to pay for everyday business expenses such as office and computer supplies;
 
  •   S2S, a suite of electronic solutions for companies looking to automate their source-to-settle processes and gain savings and control by integrating steps in their entire procurement cycle; and
 
  •   Business Travel, which helps businesses manage their travel expenses through a variety of travel-related products and services.


Corporate Card, Corporate Purchasing Solutions, and S2S

     The American Express ® Corporate Card is a charge card that individuals may obtain through a corporate account established by their employer for business purposes. Through the Corporate Card program, companies can manage their travel, entertainment and purchasing expenses and improve negotiating leverage with suppliers, among other benefits. We use our direct relationships with merchants to offer Corporate Card clients superior data about company spending, as well as streamlined dispute resolution. We issue local currency Corporate Cards in over 35 countries, which we distribute through proprietary operations and partner banks, and international dollar Corporate Cards in over 100 countries.

     Corporate Purchasing Solutions (“CPS”) helps global, large and middle market companies manage their everyday spending. CPS is used by corporations to buy everyday goods and services, such as office supplies and industrial supplies and equipment, in 24 markets around the world. This type of spending by corporations is less susceptible to economic downturns than traditional travel and entertainment spending and helps to diversify the spending mix on our Cards.

     S2S SM solutions are designed to help companies improve the efficiency of their supply chain, reduce processing costs and increase control and compliance along all steps in the purchasing process. The S2S product set significantly expands the American Express suite of commercial card products and services and responds to clients’ needs as they transform their purchasing process, from sourcing and ordering through invoice and payment. To support the development and roll-out of the S2S electronic invoice and payment suite of solutions, at the end of 2006, the Company acquired Harbor Payments, Inc., an Atlanta-based technology company with an established network of corporate clients and business-to-business suppliers.

     In addition to providing expense management services to large and global corporations, our GCS business markets Corporate Card programs to middle market companies (defined in the United States as firms with annual revenues of $10 million to $1 billion) worldwide. GCS is focused on continuing to expand its business with midsize companies, which represent significant growth opportunities. Businesses of this size often do not have corporate card programs. However, once enrolled in the program, midsize companies, which usually do not have well-defined purchasing programs, will typically put a significant portion of their business spending (both travel and entertainment and non-T&E, such as office supplies) on the Card because they can gain control, savings and employee benefits. In 2005, our GCS business invested in a wide range of marketing programs and product enhancements, and added sales staff to build our business within the midsize segment. In support of this strategy, GCS offers the Savings at Work SM program in the United States, as well as similar programs globally, which provide companies with cash back and/or discounted pricing on everyday business products and services, such as car rentals, hotels, restaurants and courier services.

     With the increased focus on cost containment by firms, we have experienced significant growth over the past few years in the Corporate Meeting Card, which helps U.S.-based and international companies control company meeting expenses. The Corporate Meeting Card is available in 19 global markets and provides clients with a tool to capture such spending and provides company meeting planners with a tool to simplify the meetings payment process and access to data to negotiate with suppliers. GCS also offers the Corporate Defined Expense Program. This product allows companies to set a maximum amount to be charged on a Card before expiration and permits them to segregate spending data for specific purposes on projects. It is designed for companies that want to allocate funds for a specific purpose, such as employee relocations or training.

     During 2006, we also partnered with a group of major hotel companies in North America and Europe to offer our corporate clients secure Web-based access to enhanced data regarding their employees’ lodging spend. This enhanced data is available for integration with expense reporting providers to allow for pre-itemization of lodging transactions, thereby reducing the amount of time required for employees to process their T&E expenses.

     GCS also offers American Express@Work ® , a secure, web-based suite of online tools that enables clients to manage their global Corporate Card, Corporate Purchasing Solutions and Corporate Meeting Card programs on a 24/7 basis through a single user interface. @ Work provides authorized client representatives online access to global management information to help them gain visibility into their spending patterns, as well as the ability make changes to their program or Card accounts through an easy to use online interface. @ Work also includes automated expense reporting and reconciliation tools that enable clients to enforce program compliance and effectively integrate spend information with their internal accounting systems. This suite of online tools is intended to assist companies in managing expenses more efficiently than offline alternatives, thereby decreasing both the direct and indirect costs associated with maintaining accounts and ensuring program compliance.

Competition – Global Commercial Card Business

     The commercial payments industry is dynamic and highly competitive, with competition increasingly intense at both the card network and card issuer levels. At the network level, we have experienced increasing competition in the commercial card marketplace, including aggressive expansion into new and emerging markets, efforts to transition business-to-business spend from cash and check to cards and electronic invoicing and payment vehicles and expanding marketing and advertising budgets for commercial services.

     In addition, both VISA and MasterCard have increased efforts to support card issuers such as U.S. Bank, JPMorgan Chase, GE Capital Financial Inc. and Citibank (in the United States and globally), who are willing to build and support data collection and reporting necessary to satisfy customer requirements.

     Card issuers have increasingly acquired niche technology offerings to enhance data capture capabilities and reporting functionality. These efforts are built on the solid progress of the bankcard associations to offer more global, robust solutions. As such, global servicing, data quality, technological functionality and simplicity, and customer experience are among the key competitive factors in the commercial card business.

Global Travel Services

     GCS Global Travel Services consists of American Express Business Travel and Global Foreign Exchange Services.

     American Express Business Travel provides globally integrated solutions, both online and offline, to help organizations optimize their travel investments and service their traveling employees. These solutions include travel reservation advice and booking transaction processing; travel expense management policy consultation; supplier negotiation and consultation; management information reporting, data analysis and benchmarking; and group and incentive travel services.

     Business Travel services customers directly in 34 key markets worldwide, of which 28 are proprietary operations and six are managed through joint ventures. In addition, Business Travel also serves customers in other relevant markets through franchise partnerships. In 2006, Business Travel sold and franchised operations in Brazil and New Zealand. American Express processed $21.8 billion of travel spend globally in 2006.

     Business Travel continues to update its economic model and invest in new innovative products, services and technologies to enhance the value that we deliver to our customers and address ongoing travel industry challenges and opportunities. For example, we have substantially reduced our reliance on commission revenues from suppliers (such as airlines or hotels), and now generate revenues primarily from customers who pay for the services that we provide. We have comprehensive cost-saving travel management offerings for our clients, including webfare guarantees for the small- and mid-sized segments in the United States, a travel management loyalty program with double Membership Rewards points for individual travelers and automatic ticket refunds in the United States and select international markets. We also offer customers savings and benefits through the Preferred Extra supplier value programs and advisory services, which provide consulting solutions in all areas of travel and entertainment expense management. Business Travel also offers the TravelBahn ® Distribution Solution, a proprietary distribution solution that provides access to airline inventory and fares for American Express Business Travel customers with a number of carriers, in North America and in select international markets. Business Travel offers a range of other solutions to our customers that provide them with savings, control, services and traveler care.

     Among other developments during 2006, we also worked with Rearden Commerce to launch American Express Intelligent Online Marketplace (AXIOM SM ), an online marketplace of more than 135,000 suppliers that lets clients find, purchase and manage both traditional travel and related services, such as airport parking, dining and package shipping. This site passes on negotiated savings from our merchant partners to clients, and makes it easier for business travelers to book with approved suppliers.

     During 2006, Business Travel also formed Global Advisory Services, providing clients with end-to-end solutions to help them optimize their investments in air, hotel, car rental and meetings spending. Business Travel also introduced Security Suite, a global traveler security

solution to support our clients in locating and caring for their traveling executives in times of unexpected events and crises.

     Business Travel continued numerous reengineering initiatives in 2006, including the rationalization of our network, standardization of platforms and processes and implementation of new technology solutions to increase the flexibility of our business model, increase productivity, reduce costs and enhance the quality of customer service globally. Business Travel has also moved many of its business processes and customer servicing online. In the United States, 43% of all of GCS’ business travel transactions were processed online, and while lower than in the United States, online penetration rates in other markets, including the United Kingdom, Canada, Mexico and Australia have been increasing in recent years, ranging from 7% to 27%.

     Global Foreign Exchange Services (“FES”) consists of retail and wholesale foreign exchange services and International Payments. In 2006, we completed the divestiture of most of our retail travel and FES standalone city locations, with the exceptions of Australia, Mexico and Italy. We are concentrating the retail foreign exchange business in key international airports, including London’s Heathrow, the Aeroports de Paris and Changi Airport in Singapore. For corporate clients, our International Payments online payment product allows companies and banks to make cross-border payments in major foreign currencies at competitive exchange rates. Wholesale banknote services are also provided to select financial institutions and travel-related companies.

Competition – Global Travel Services

     Business Travel continues to face intense competition in the United States and internationally from numerous traditional and online travel management companies, as well as from direct sales by airlines and other travel suppliers. Competition among travel management companies is mainly based on price, service, value creation, convenience, global capabilities and proximity to the customer. In addition, competition comes from corporate customers themselves, as some companies have become accredited as in-house corporate travel agents.

     In 2006, significant changes were announced to the ownership and network structure of four of the major traditional travel management companies – Business Travel International, TQ3, Carlson Wagonlit and Navigant International, Inc. – consolidating and realigning the shape of the industry. Similarly, changes to the ownership structures of numerous other travel industry companies were announced in 2006, including, but not limited to, Qantas Airways Ltd., Sabre Holdings Corporation, Travelport Ltd. and Worldspan LP. In addition, the recently-withdrawn offer by US Airways to acquire Delta Air Lines has increased speculation that the U.S. airline industry may be entering a period of consolidation. More change in the industry is expected to follow. Each of these changes to the competitive environment in the industry may result in additional challenges to travel management companies, which could have a competitive impact.

     For many years, travel management companies have faced pressure on revenues from airlines, as most carriers have stopped paying “base” commissions to travel agents for tickets sold. Carriers have also increased the number of transactions they book directly through their Web sites and

other means. These trends have reduced the revenue opportunities for travel agents because they do not receive distribution revenue from directly booked transactions.

     Overall, intense competition among travel management companies, the ongoing trends of airline direct sales, rise of low-cost carriers and ongoing reductions in or elimination of airline commissions and fees continue to put pressure on revenue for travel agents. We believe that the restructuring of our business model over the last few years by charging customers for the services we provide and the value we create, restructuring our expense base through the rationalization of our call center locations, transitioning many of our services online, and our global presence have helped us to balance these revenue pressures.

American Express Bank

     American Express Bank (“AEB”) serves affluent and high net worth individuals and financial institutions through over 75 locations in 47 countries and regions worldwide. AEB’s operations are conducted primarily through our indirect wholly owned subsidiary, American Express Bank Ltd., and its subsidiaries. AEB serves financial institutions worldwide and individual clients outside the United States. AEB does not directly or indirectly do business in the United States except as may be incidental to its activities outside the United States. The following discussion relating to AEB generally does not distinguish between U.S.- and non-U.S.-based activities.

     AEB’s two primary business lines are