SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934

J.P. Morgan Chase & Co.

Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:

Title of each class

The Indexed Linked Notes and JPMorgan Market Participation Notes are listed on the American Stock Exchange;
all other securities named above are listed on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: none

Number of shares of common stock outstanding on February 28, 2003: 2,001,935,479

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

     The aggregate market value of J.P. Morgan Chase & Co. common stock held by non-affiliates of J.P. Morgan Chase & Co. on June 28, 2002 was approximately $67,549,000,000.

Document Incorporated by Reference: Portions of Registrant’s proxy statement for the annual meeting of stockholders to be held May 20, 2003, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12 and 13 of Part III.

Form 10-K Index

Part I

Item 1: Business

Overview

J.P. Morgan Chase & Co. (“JPMorgan Chase” or “the Firm”) is a financial holding company incorporated under Delaware law in 1968. As of December 31, 2002, JPMorgan Chase was one of the largest banking institutions in the United States, with $759 billion in assets and $42 billion in stockholders’ equity.

On December 31, 2000, J.P. Morgan & Co. Incorporated (“J.P. Morgan”) merged with and into The Chase Manhattan Corporation (“Chase”). Upon completion of the merger, Chase changed its name to “J.P. Morgan Chase & Co.” The merger was accounted for as a pooling of interests. As a result, the financial information provided herein presents the combined results of Chase and J.P. Morgan as if the merger had been in effect for all periods presented. In addition, certain prior-period amounts for the predecessor institutions’ financial statements have been reclassified to conform to the current presentation.

JPMorgan Chase is a global financial services firm with operations in more than 50 countries. Its principal bank subsidiaries are JPMorgan Chase Bank (“JPMorgan Chase Bank”), a New York banking corporation headquartered in New York City, and Chase Manhattan Bank USA, National Association (“Chase USA”), headquartered in Delaware. The Firm’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”).

The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and affiliated banks.

The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished, pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).

Business segments

JPMorgan Chase’s activities are internally organized, for management reporting purposes, into five major business segments (Investment Bank, Treasury & Securities Services, Investment Management & Private Banking, JPMorgan Partners and Chase Financial Services). A description of the Firm’s business segments and the products and services they provide to their respective client bases are discussed in the “Segment results” section of Management’s discussion and analysis (“MD&A”) beginning on page 24, and in Note 33 on page 108.

Competition

JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. JPMorgan Chase’s businesses compete with these other firms with respect to the range of products and services offered and the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a regional basis. JPMorgan Chase’s ability to compete effectively depends on the relative performance of its products, the degree to which the features of its products appeal to customers, and the extent to which the Firm is able to meet its clients’ objectives or needs. The Firm’s ability to compete also depends on its ability to attract and retain its professional and other personnel, and on its reputation.

The financial services industry has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial services industries have merged, of which the merger of Chase and J.P. Morgan is an example. This convergence trend is expected to continue and could result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. It is possible that competition will become even more intense as the Firm continues to compete with financial institutions that may be larger, or better capitalized, or may have a stronger local presence in certain geographies.

Supervision and regulation

Permissible business activities: The Firm is subject to regulation under state and federal law, including the Bank Holding Company Act of 1956, as amended (the “BHCA”). In November 1999, the Gramm-Leach-Bliley Act (“GLBA”) was enacted which eliminated certain legal barriers separating the conduct of various types of financial services businesses, such as commercial banking, investment banking and insurance. In addition, GLBA substantially revamped the regulatory scheme within which financial institutions such as JPMorgan Chase operate.

Under GLBA, bank holding companies meeting certain eligibility criteria may elect to become “financial holding companies,” which may engage in any activities that are “financial in nature,” as well as in additional activities that the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the United States Department of the Treasury (“U.S. Treasury Department”) determine are financial in nature or incidental or complementary to financial activities. Under GLBA, “financial activities” specifically include insurance, securities underwriting and dealing, merchant banking, investment advisory and lending activities. JPMorgan Chase elected to become a financial holding company as of March 13, 2000.

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Part I

Under regulations implemented by the Federal Reserve Board, if any depository institution controlled by a financial holding company ceases to be “well-capitalized” or “well-managed” (as defined below), the Federal Reserve Board may impose corrective capital or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies.

In addition, the Federal Reserve Board may require divestiture of the holding company’s depository institutions if the deficiencies persist. The regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act (“CRA”), the Federal Reserve Board must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The depository institution subsidiaries of JPMorgan Chase currently meet the capital, management and CRA requirements necessary to permit the Firm to conduct the broader activities permitted under GLBA. However, there can be no assurance that this will continue to be the case in the future.

Regulation by Federal Reserve Board under GLBA: Under GLBA’s system of “functional regulation,” the Federal Reserve Board acts as an “umbrella regulator,” and certain of JPMorgan Chase’s subsidiaries are regulated directly by additional regulatory authorities based on the particular activities of those subsidiaries (e.g., securities and investment advisory activities are regulated by the SEC, and insurance activities are regulated by state insurance commissioners). The Firm must continue to file reports and other information with, and submit to examination by, the Federal Reserve Board as umbrella regulator. However, under GLBA, with respect to matters affecting functionally regulated subsidiaries, the Federal Reserve Board is required to defer to the applicable functional regulators unless the Federal Reserve Board concludes that the activities at issue pose a risk to a depository institution or breach a specific law the Federal Reserve Board has authority to enforce.

Effect of GLBA on bank broker-dealer and investment advisory activities: To promote the system of functional regulation described above, GLBA provides for the amendment of certain federal securities laws to eliminate various exemptions previously available to banks. For example, banks will no longer be generally exempt from the broker-dealer provisions of the Securities Exchange Act of 1934. As a result, JPMorgan Chase’s bank subsidiaries will either need to register with the SEC as broker-dealers or cease conducting many activities deemed broker-dealer activities. GLBA does retain a more limited exemption from broker-dealer registration for certain “banking” products and activities, including, among others, municipal and exempted securities transactions; safekeeping and custody arrangements; and trust, securitization and derivatives products and activities. The Investment Advisers Act of 1940 has also been amended to eliminate certain provisions exempting banks from the registration requirements of that statute, and the Investment Company Act of 1940 has been amended to provide the SEC with regulatory authority over various bank mutual fund activities. The provisions discussed in this paragraph had an original effective date of May 12, 2001. The SEC has delayed the effective date of the provisions dealing with dealer registration until September 30, 2003. The provisions dealing with registration as a broker are currently scheduled to be effective May 12, 2003. However, the SEC has stated that it intends to promulgate proposed regulations prior to that date, and the staff has indicated that there will be further extensions of the effective date to give banks sufficient time to comply with the SEC’s implementing regulations.

Dividend restrictions: Federal law imposes limitations on the payment of dividends by the subsidiaries of JPMorgan Chase that are chartered by a state and are member banks of the Federal Reserve System (a “state member bank”) or national banks. Nonbank subsidiaries of JPMorgan Chase are not subject to those limitations. The amount of dividends that may be paid by a state member bank, such as JPMorgan Chase Bank, or by a national bank, such as Chase USA, is limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the bank obtains the approval of its appropriate federal banking regulator (which, in the case of a state member bank, is the Federal Reserve Board and, in the case of a national bank, is the Office of the Comptroller of the Currency (the “Comptroller of the Currency”)). Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits.” Similar restrictions on the payment of dividends by JPMorgan Chase Bank are imposed by New York law. See Note 25 on page 99 for the amount of dividends that the Firm’s principal bank subsidiaries could pay, at December 31, 2002 and 2001, to their respective bank holding companies without the approval of their relevant banking regulators.

In addition to the dividend restrictions described above, the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the “FDIC”) have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

Capital requirements: The federal banking regulators have adopted risk-based capital and leverage guidelines that require the Firm’s capital-to-assets ratios meet certain minimum standards.

The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into four weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital and Tier 2 capital. For a further discussion of Tier 1 capital and Tier 2 capital, see Note 26 on page 99. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital.

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Banking organizations are required to maintain a total capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%.

The risk-based capital requirements explicitly identify concentrations of credit risk and certain risks arising from non-traditional banking activities, and the management of those risks, as important factors to consider in assessing an institution’s overall capital adequacy. Other factors taken into consideration by federal regulators include: interest rate exposure; liquidity, funding and market risk; the quality and level of earnings; the quality of loans and investments; the effectiveness of loan and investment policies; and management’s overall ability to monitor and control financial and operational risks, including the risks presented by concentrations of credit and non-traditional banking activities. In addition, the risk-based capital rules incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. The market risk-based capital rules require banking organizations with large trading activities (such as JPMorgan Chase) to maintain capital for market risk in an amount calculated by using the banking organizations’ own internal Value-at-Risk models (subject to parameters set by the regulators).

The federal banking agencies amended their regulatory capital standards, effective January 1, 2002, to address the treatment of residual interests, recourse obligations and direct credit substitutes. The amendment defines “residual interests” as on-balance sheet interests that are retained by a seller after a securitization or other transfer of financial assets and that expose the seller to a greater than pro rata share of the credit risk in such assets. Under the amendment, risk-based capital must be held in an amount equal to such residual interests even if that amount exceeds the full risk-based capital charge that would have been required to be held against the assets transferred. The amendment also imposes a concentration limit of 25% of Tier 1 capital on credit-enhancing interest-only strips (a type of residual interest), requiring any amount in excess of that limit to be deducted from Tier 1 capital. The amendment also treats recourse obligations and direct credit substitutes (such as letters of credit) more consistently for risk-based capital purposes than previously. The amendment introduces a multi-level approach to assessing capital requirements to positions in certain asset securitizations based on the credit ratings assigned to such position by nationally recognized statistical rating organizations (NRSROs). For certain unrated positions other than residual interests, the amendment provides alternative methods for assessing capital requirements, including the limited use of a banking organization’s internal risk rating system, and, for positions arising under securitization programs covering multiple participants, ratings assigned to the program by NRSROs.

The federal banking agencies have also adopted, effective April 1, 2002, regulations that impose increased capital charges on a banking organization’s equity investments in nonfinancial companies. In general, the new risk-based capital requirements apply to such investments regardless of the legal authority under which they are made. The level of capital charge increases as the banking organization’s concentration in such investments increases. If the aggregate value of a banking organization’s nonfinancial equity investments is less than 15% of its Tier 1 capital, then 8% of such value is required to be deducted from the banking organization’s Tier 1 capital. If the aggregate value of a banking organization’s nonfinancial equity investments is more than 15% but less than 25% of the banking organization’s Tier 1 capital, the deduction increases to 12% of such value, and if such aggregate value is more than 25% of the banking organization’s Tier 1 capital, the deduction rises to 25%. The new charges do not apply to investments made prior to March 13, 2000. Equity investments made through small business investment companies in an amount equal to up to 15% of the banking organization’s Tier 1 capital are exempt from the new charges, but the full amount of the equity investments is still included when calculating the aggregate value of the banking organization’s nonfinancial equity investments.

The federal banking regulators have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by average total assets (net of allowance for loan losses, goodwill and certain intangible assets). The minimum leverage ratio is 3% for strong bank holding companies (i.e., those rated composite 1 under the Bank subsidiaries, Other subsidiaries, Parent company, Earnings and Capital adequacy, or “BOPEC,” rating system) and for bank holding companies that have implemented the Federal Reserve Board’s risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank holding companies may be expected to maintain ratios well above the minimum levels depending upon their particular condition, risk profile and growth plans.

Tier 1 components: capital surplus and common stock remain the most important forms of capital at JPMorgan Chase. Because common equity has no maturity date and because dividends on common stock are paid only when and if declared by the Board of Directors, common equity is available to absorb losses over long periods of time. Noncumulative perpetual preferred stock is similar to common stock in its ability to absorb losses. If the Board of Directors does not declare a dividend on noncumulative perpetual preferred stock in any dividend period, the holders of the instrument are never entitled to receive that dividend payment. JPMorgan Chase’s outstanding noncumulative preferred stock is a type commonly referenced as a “FRAP”: a fixed-rate/adjustable preferred stock. However, because the interest rate on FRAPs may increase (up to a predetermined ceiling), the Federal Reserve Board treats the Firm’s noncumulative FRAPs in a manner similar to cumulative perpetual preferred and trust preferred securities. The Federal Reserve Board permits cumulative perpetual preferred stock and trust preferred securities to be included in Tier 1 capital but only up to certain limits, as these financial instruments do not provide as strong protection against losses as common equity and noncumulative, non-FRAP securities. Cumulative perpetual preferred stock does not have a maturity date, similar to other forms of Tier 1 capital. However, any dividends not declared on cumulative preferred stock accumulate and thus continue to be due to the holder of the instrument until all arrearages are satisfied. Trust preferred securities are a type of security generally issued by a special-purpose trust established and owned by JPMorgan Chase. Proceeds from the issuance to the public of the trust preferred security are lent to the Firm for at least 30 (but not more than 50) years. The intercompany note

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Part I

that evidences this loan provides that the interest payments by JPMorgan Chase on the note may be deferred for up to five years. During the period of any such deferral, no payments of dividends may be made on any outstanding JPMorgan Chase preferred or common stock or on the outstanding trust preferred securities issued to the public.

Tier 2 components: Long-term subordinated debt (generally having an original maturity of 10-12 years) is the primary form of JPMorgan Chase’s Tier 2 capital. Subordinated debt is deemed a form of regulatory capital because payments on the debt are subordinated to other creditors of JPMorgan Chase, including holders of senior and medium long-term debt and counterparties on derivative contracts.

Under GLBA, all financial holding companies are bank holding companies for purposes of the capital requirements described above. However, GLBA specifically prohibits the Federal Reserve Board from imposing capital adequacy rules on certain functionally regulated subsidiaries (such as broker-dealers and insurance companies) that are in compliance with the applicable capital requirements of their functional regulators.

The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. The Basel Committee, which is comprised of bank supervisors and central banks from the Group of Ten countries, issued its Capital Accord in 1988 to achieve convergence in the capital regulations applicable to internationally active banking organizations. The Basel Committee issued a proposed replacement for the Capital Accord in January, 2001 and, subsequently, issued a number of working papers supplementing various aspects of that replacement (the “New Accord”). Based on these documents, the New Accord would adopt a three-pillar framework for addressing capital adequacy. These pillars would include minimum capital requirements, more emphasis on supervisory assessment of capital adequacy and greater reliance on market discipline. Under the New Accord, minimum capital requirements would be more differentiated based upon perceived distinctions in creditworthiness. Such requirements would be based either on ratings assigned by rating agencies or, in the case of a banking organization that met certain supervisory standards, on the organization’s internal credit ratings. The minimum capital requirements in the New Accord would also incorporate a capital charge for operational risk. At present, the target date for implementing the New Accord is the end of 2006.

FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) revised certain provisions of the Federal Deposit Insurance Act, as well as certain other federal banking statutes. In general, FDICIA provides for expanded regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators and, among other things, requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards.

Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the Comptroller of the Currency adopted regulations setting forth a five-tier scheme for measuring the capital adequacy of the depository institutions they supervise. Under the regulations (commonly referred to as the “prompt corrective action” rules), an institution would be placed in one of the following five capital categories when these ratios fall within the prescribed ranges:

An institution may be treated as being in a capital category lower than that indicated based on other supervisory criteria.

Supervisory actions by the appropriate federal banking regulator under the “prompt corrective action” rules generally will depend upon an institution’s classification within the five capital categories. The regulations apply only to banks and not to bank holding companies such as JPMorgan Chase; however, subject to limitations that may be imposed pursuant to GLBA, as described below, the Federal Reserve Board is authorized to take appropriate action at the holding company level based on the undercapitalized status of the holding company’s subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary and may be liable for civil money damages for failure to fulfill its commitments on that guarantee.

As of December 31, 2002, each of JPMorgan Chase’s banking subsidiaries was “well-capitalized.”

FDIC Insurance Assessments: FDICIA also required the FDIC to establish a risk-based assessment system for FDIC deposit insurance. Under the FDIC’s risk-based insurance premium assessment system, each depository institution is assigned to one of nine risk classifications based upon certain capital and supervisory measures and, depending upon its classification, is assessed insurance premiums on its deposits.

Depository institutions insured by the Bank Insurance Fund are required to pay premiums ranging from 0 basis points to 27 basis points of U.S. deposits. Each of JPMorgan Chase’s banks, including JPMorgan Chase Bank and Chase USA, currently qualifies for the 0 basis point assessment. Legislation has been introduced in Congress that, if enacted, would give the FDIC discretion to impose deposit insurance premiums on all depository institutions. In addition, if the ratio of insured deposits to money in the Bank Insurance Fund drops below specified levels, the FDIC would be required to impose premiums on all banks insured by the Bank Insurance Fund. All depository institutions must also pay an annual assessment so that the Financing Corporation (“FICO”) may pay interest on bonds it issued in connection with the resolution of savings association insolvencies occurring prior to 1991. The FICO assessment for the first quarter of 2003 is 1.68 basis points

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of U.S. deposits. The rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time, subject to certain limitations specified in the Deposit Insurance Funds Act.

Powers of the FDIC upon insolvency of an insured depository institution: An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being in “default” or “in danger of default” (commonly referred to as “cross-guarantee” liability). “Default” is generally defined as the appointment of a conservator or receiver and “in danger of default” is defined as certain conditions indicating that a default is likely to occur absent regulatory assistance. An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.

If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; (2) to enforce the terms of the depository institution’s contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. The above provisions would be applicable to obligations and liabilities of those of JPMorgan Chase’s subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank and Chase USA, including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as “public noteholders”) in the public markets.

Under federal law, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution, including public noteholders, in the event of the liquidation or other resolution of the institution. As a result, whether or not the FDIC ever sought to repudiate any obligations held by public noteholders of any subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank or Chase USA, the public noteholders would be treated differently from, and could receive, if anything, substantially less than, the depositors of the depository institution.

The USA PATRIOT Act: Following the September 11, 2001 attacks on New York and Washington, D.C., the United States government acted in several ways to tighten control on activities perceived to be connected to money laundering and terrorist funding. Beginning on September 23, 2001, President Bush issued a series of orders which identify terrorists and terrorist organizations and require the blocking of property and assets of, as well as prohibiting all transactions or dealing with, such terrorists, terrorist organizations and those that assist or sponsor them. On October 26, 2001, President Bush signed into law The USA PATRIOT Act of 2001 (the “Act”).

The Act substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of non-U.S. institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The Act mandates the U.S. Treasury Department to issue a number of regulations to further clarify the Act’s requirements or provide more specific guidance on their application.

The Act requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit function to review and test the program. JPMorgan Chase has had in place, pursuant to previously existing laws and regulations, a “Know Your Customer” policy and an anti-money laundering compliance program which requires, as appropriate based on a risk-based analysis, performing due diligence with respect to establishing the identity and address of the beneficial owners of an account, the source of the account’s funds and the proposed use of the account, as well as requiring the identification and reporting of suspicious transactions to appropriate law enforcement authorities. JPMorgan Chase believes its programs satisfy the requirements of the Act.

The Act requires financial institutions that maintain correspondent accounts for non-U.S. institutions or persons or that are involved in private banking for “non-United States persons” or their representatives, to establish “appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.” In furtherance of these provisions, the Act mandates specific minimum standards regarding the establishment of private banking accounts and prohibits financial institutions from establishing, maintaining, administering or managing correspondent accounts with any non-U.S. bank that does not have a physical presence in any jurisdiction unless the so-called “shell bank” is affiliated with a regulated physically-established bank. JPMorgan Chase will continue to revise and update its “Know Your Customer” policy and its anti-money laundering programs to reflect changes required by the Act, and the U.S. Treasury Department regulations to be issued thereunder, in order to remain in compliance with the Act and its provisions.

Other supervision and regulation: Under current Federal Reserve Board policy, JPMorgan Chase is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support the bank subsidiaries in circumstances where it might not do so absent such policy. However, because GLBA provides for functional regulation of financial holding company activities by various regulators, GLBA prohibits the Federal Reserve Board from requiring payment by a holding company or subsidiary to a depository institution if the functional regulator of the payor objects to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.

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Part I

Any loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level will be assumed by the bankruptcy trustee and entitled to a priority of payment.

The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Firm and certain other affiliates and on investments in stock or securities of JPMorgan Chase and those affiliates. These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts.

The Firm’s bank and certain of its nonbank subsidiaries are subject to direct supervision and regulation by various other federal and state authorities (many of which will be considered “functional regulators” under GLBA). JPMorgan Chase Bank as a New York State-chartered bank and a state member bank, is subject to supervision and regulation by the New York State Banking Department as well as by the Federal Reserve Board and the FDIC. JPMorgan Chase’s national bank subsidiaries, such as Chase USA, are subject to substantially similar supervision and regulation by the Comptroller of the Currency. Supervision and regulation by each of the foregoing regulatory agencies generally include comprehensive annual reviews of all major aspects of the relevant bank’s business and condition, as well as the imposition of periodic reporting requirements and limitations on investments and other powers. The Firm also conducts securities underwriting, dealing and brokerage activities through JPMSI and other broker-dealer subsidiaries, all of which are subject to the regulations of the SEC and the National Association of Securities Dealers, Inc. JPMSI is a member of the New York Stock Exchange. The operations of JPMorgan Chase’s mutual funds also are subject to regulation by the SEC. The types of activities in which the non-U.S. branches of JPMorgan Chase Bank and the international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed by the Federal Reserve Board. Those non-U.S. branches and international subsidiaries also are subject to the laws and regulatory authorities of the countries in which they operate.

The activities of JPMorgan Chase Bank and Chase USA as consumer lenders also are subject to regulation under various federal laws, including the Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as various state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that need to be made in connection with such loans.

In addition, under the requirements imposed by GLBA, JPMorgan Chase and its subsidiaries are required periodically to disclose to their retail customers the Firm’s policies and practices with respect to (1) the sharing of non-public customer information with JPMorgan Chase affiliates and others and (2) the confidentiality and security of that information. Under GLBA, retail customers also must be given the opportunity to “opt out” of information sharing arrangements with non-affiliates, subject to certain exceptions set forth in GLBA.

Important factors that may affect future results

From time to time, the Firm has made and will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe” or other words of similar meaning. Forward-looking statements give JPMorgan Chase’s current expectations or forecasts of future events, circumstances or results. JPMorgan Chase’s disclosure in this report, including in the MD&A section, contains forward-looking statements. The Firm also may make forward-looking statements in its other documents filed with the SEC and in other written materials. In addition, the Firm’s senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others.

Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are made. JPMorgan Chase does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature JPMorgan Chase may make in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K.

All forward-looking statements, by their nature, are subject to risks and uncertainties. The Firm’s actual future results may differ materially from those set forth in JPMorgan Chase’s forward-looking statements. Factors that might cause JPMorgan Chase’s future financial performance to vary from that described in its forward-looking statements include the credit, market, operational, liquidity, interest rate and other risks discussed in the MD&A section of this report and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that the Firm believes could cause its actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in JPMorgan Chase’s reports to the SEC also could adversely affect the Firm’s results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Business conditions and general economy. The profitability of JPMorgan Chase’s businesses could be adversely affected by a worsening of general economic conditions in the United States or abroad. The difficult global market and economic conditions that existed in 2001 continued in 2002 and this challenging environment could persist for some period of time in 2003. Uncertainties in the financial markets have been exacerbated by investor concerns over the integrity of the U.S. financial markets and uncertainty surrounding terrorists threats and the possible outbreak of war. Factors such as the liquidity of the global financial markets, the level and volatility of equity prices and interest rates, investor sentiment, inflation, and the availability and cost of credit could significantly affect the activity level of clients with respect to size, number and timing of transactions effected by the Firm’s investment banking business, including its underwriting and advisory

6

businesses, and also may affect the realization of cash returns from JPMorgan Chase’s private equity business. A further market downturn would likely lead to a decline in the volume of transactions that JPMorgan Chase executes for its customers and, therefore, lead to a decline in the revenues it receives from trading commissions and spreads. Higher interest rates or continued weakness in the market also could affect the willingness of financial investors to participate in loan syndications or underwritings managed by JPMorgan Chase. The Firm generally maintains large trading portfolios in the fixed income, currency, commodity and equity markets and has significant investment positions, including merchant banking investments at JPMorgan Partners. The revenues derived from mark-to-market values of JPMorgan Chase’s business are affected by many factors, including JPMorgan Chase’s credit standing; its success in proprietary positioning; volatility in interest rates and in equity and debt markets; and the economic, political and business factors described below. JPMorgan Chase anticipates that these revenues will experience volatility from time to time. Continued market weakness or worsening of the economy could cause the Firm to incur mark-to-market losses in the values of these positions.

A market downturn also could result in a decline in the fees JPMorgan Chase earns for managing assets. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in trading markets could affect the flows of moneys to or from the mutual funds managed by the Firm. Moreover, even in the absence of a market downturn, below-market performance by JPMorgan Chase’s mutual funds could result in a decline in assets under management and, therefore, in the fees the Firm receives.

An economic downturn or significantly higher interest rates could adversely affect the credit quality of JPMorgan Chase’s on-balance sheet and off-balance sheet assets by increasing the risk that a greater number of the Firm’s customers would become delinquent on their loans or other obligations to JPMorgan Chase. Further, a continuing challenging economic environment could lead to a higher rate of delinquencies by customers or counterparties which, in turn, would result in a higher level of charge-offs and a higher level of provision for credit losses for JPMorgan Chase, all of which could adversely affect the Firm’s earnings. The Firm’s consumer businesses are particularly affected by domestic economic conditions, including U.S. interest rates, the rate of unemployment, the level of consumer confidence, changes in consumer spending, and the number of personal bankruptcies, as these factors will affect the level of consumer loans and credit quality.

Competition. JPMorgan Chase operates in a highly competitive environment and expects various factors to cause competitive conditions to continue to intensify. For example, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products and for financial institutions to compete with technology companies in providing electronic and Internet-based financial solutions. In addition, the Firm expects cross-industry competition to continue to intensify, particularly as continued merger activity in the financial services industry produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services, and at more competitive prices.

Non-U.S. operations; trading in non-U.S. securities. The Firm does business throughout the world, including in developing regions of the world commonly known as emerging markets. JPMorgan Chase’s businesses and revenues derived from non-U.S. operations are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets and changes in legislation relating to non-U.S. ownership. JPMorgan Chase also invests in the securities of corporations located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated because, generally, non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.

Operational risk. JPMorgan Chase, like all large corporations, is exposed to many types of operational risk, including the risk of fraud by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or errors resulting from faulty or disabled computer or telecommunications systems. Given the high volume of transactions at JPMorgan Chase, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, the Firm’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Firm may also be subject to disruptions of its operating systems, arising from events that are wholly or partially beyond its control (including, for example, computer viruses or electrical or telecommunications outages), which may give rise to losses in service to customers and to loss or liability to the Firm. The Firm is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligation to the Firm (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Firm), and to the risk that its (or its vendors’) business continuity and data security systems prove not to be sufficiently adequate. Although JPMorgan Chase maintains a system of controls designed to keep operational risk at appropriate levels, the Firm has in the past suffered losses from operational risk, and there can be no assurance that JPMorgan Chase will not suffer losses from operational risks in the future.

Government monetary policies and economic controls. JPMorgan Chase’s businesses and earnings are affected by general economic conditions, both domestic and international. JPMorgan Chase’s businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. For example, policies and regulations of the Federal Reserve Board influence, directly and indirectly, the rate of interest paid by commercial banks on their interest-bearing deposits and also may impact the value of financial instruments held by the Firm. These actions of the Federal Reserve Board also determine to a significant degree the cost to JPMorgan Chase of funds for lending and investing. The nature and impact of future changes in economic and market conditions and fiscal policies are not predictable and are beyond JPMorgan Chase’s control. In addition, these policies and conditions can impact the Firm’s cus-

7

Part I

tomers and counterparties, both in the U.S. and abroad, which may increase the risk that such customers or counterparties default on their obligations to JPMorgan Chase.

Reputational and legal risk. The Firm’s ability to attract and retain customers and employees could be adversely affected to the extent its reputation is damaged. The failure of the Firm to deal, or to appear to fail to deal, with various issues that could give rise to reputational risk could cause harm to the Firm and its business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in its products. Failure to address appropriately these issues could also give rise to additional legal risk to the Firm, which could, in turn, increase the size and number of claims and damages asserted against the Firm or subject the Firm to enforcement actions, fines and penalties.

Credit, market, liquidity and private equity risk. JPMorgan Chase’s revenues also are dependent upon the extent to which management can successfully achieve its business strategies within a disciplined risk environment. JPMorgan Chase’s ability to grow its businesses is affected by pricing and competitive pressures, as well as by the costs associated with the introduction of new products and services and the expansion and development of new distribution channels. The ability of management to utilize the “Shareholder Value Added” methodology to evaluate investment opportunities and the ability to maintain expense discipline will be important factors in determining the extent to which the Firm achieves its financial targets. In addition, to the extent any of the instruments and strategies JPMorgan Chase uses to hedge or otherwise manage its exposure to market, credit and private equity risk are not effective, the Firm may not be able to mitigate effectively its risk exposures in particular market environments or against particular types of risk. JPMorgan Chase’s balance sheet growth will be dependent upon the economic conditions described above, as well as on its determination to securitize, sell, purchase or syndicate particular loans or loan portfolios. JPMorgan Chase’s trading revenues and interest rate risk are dependent upon its ability to identify properly, and mark-to-market, changes in the value of its financial instruments caused by changes in market prices or rates. The Firm’s earnings will also be dependent upon how effectively it determines and assesses the cost of credit, and manages risk concentrations, including exposure limits for industry and single-name obligors. To the extent its assessment of migrations in credit quality, risk concentrations, or assumptions or estimates used in establishing its loan loss reserves prove inaccurate or not predictive of actual results, the Firm could suffer higher-than-anticipated credit losses. The successful management of credit, market, operational and private equity risk is an important consideration in managing the Firm’s liquidity risk, as evaluation by rating agencies of the management of these risks affects their determinations as to the Firm’s credit ratings and, therefore, its cost of funds.

Non-U.S. operations

For geographic distributions of total revenue, total expense, income before income tax expense and net income, see Note 32 on page 107. For a discussion of non-U.S. loans, see Note 9 on page 81 and the sections entitled “Country exposure” in the MD&A on page 53 and “Cross-border outstandings” on page 122.

Item 2: Properties

The headquarters of JPMorgan Chase is located in New York City at 270 Park Avenue, which is a 50-story bank and office building owned by JPMorgan Chase. This location contains approximately 1.3 million square feet of commercial office and retail space.

JPMorgan Chase entered into 2 leases for approximately 2.2 million square feet of office space in two midtown Manhattan office buildings, 277 Park Avenue and 245 Park Avenue. The 277 Park Avenue building is fully occupied, and 245 Park Avenue is in the process of being prepared for occupancy. JPMorgan Chase also has a number of other large office leaseholds in various locations in Manhattan.

JPMorgan Chase owns and occupies a 60-story building at One Chase Manhattan Plaza in New York City. This location has approximately 2 million square feet of commercial office and retail space, of which approximately 800,000 square feet is leased to outside tenants.

JPMorgan Chase also owns and occupies a 22-story building at 4 New York Plaza, New York City. This location has 900,000 square feet of commercial office and retail space, none of which is leased to outside tenants.

On May 31, 2001, JPMorgan Chase had entered into a contract with the City of New York to sell to the City of New York, or its designee, the two-building complex at 23 Wall Street/15 Broad Street in New York City. The two buildings comprise approximately 1 million square feet of commercial office and retail space. The City of New York and the New York Stock Exchange had previously announced their intention to build a new Exchange on the land currently occupied by these facilities. The City of New York elected to cancel its purchase contract with JPMorgan Chase in September 2002. The two-building complex is currently being marketed for sale.

JPMorgan Chase built and fully occupies a two-building complex known as Chase MetroTech Center in downtown Brooklyn, New York that was completed in 1992. This facility contains approximately 1.75 million square feet and houses operations and product support functions.

In 2000 JPMorgan Chase entered into leases for two “build to suit” office buildings at The Newport Office Center in Jersey City, New Jersey. The two buildings, comprising approximately 1.1 million square feet of office and retail space, were occupied by JPMorgan Chase during 2002.

JPMorgan Chase and its subsidiaries also own and occupy administrative and operational facilities in Hicksville, New York; Tampa, Florida; Tempe, Arizona; Newark, Delaware; and in Houston, Arlington and El Paso, Texas.

JPMorgan Chase occupies, in the aggregate, approximately 2.6 million square feet of space in the United Kingdom. The most significant components of leased space in London are 350,000 square feet at 125 London Wall, 325,000 square feet at Aldermanbury, and a 450,000 square-foot office complex at 60 Victoria Embankment in London. JPMorgan Chase also owns and occupies a 350,000 square-foot operations center in Bournemouth.

In addition, JPMorgan Chase and its subsidiaries occupy branch offices and other administrative and operational facilities throughout the U.S. and in non-U.S. countries under various types of ownership and leasehold agreements.

8

The majority of the properties occupied by JPMorgan Chase are used across all of JPMorgan Chase’s business segments and for corporate purposes.

In the third quarter of 2002, JPMorgan Chase incurred a $98 million charge to cover the costs of exiting excess vacant space on the West Coast. JPMorgan Chase’s space requirements continue to be affected by the present economic downturn and by the consolidation of operations as a result of the merger. JPMorgan Chase will continue to evaluate its current and projected space requirements and, as opportunities arise, may dispose of additional premises, although there is no assurance that it will be able to do so, nor is there any assurance that the Firm will not have to incur additional charges in connection with any such disposition.

Item 3: Legal proceedings

Enron litigation. JPMorgan Chase is involved in a number of lawsuits and investigations arising out of its banking relationships with Enron Corp. and its subsidiaries (“Enron”). On January 2, 2003, the Firm settled its dispute with eleven insurance companies that had issued surety bonds guaranteeing obligations of Enron Corp., and received from the insurance companies $502 million in cash and $75 million of unsecured claims. Still pending in London is a lawsuit by the Firm against Westdeutsche Landesbank Girozentrale seeking to compel payment of $165 million under an Enron-related letter of credit issued by the bank.

Actions involving Enron have also been initiated by other parties against JPMorgan Chase and its directors and certain of its officers. These lawsuits include a series of purported class actions brought on behalf of shareholders of Enron, including the lead action captioned Newby v. Enron Corp., and a series of purported class actions brought on behalf of Enron employees who participated in various employee stock ownership plans, including the lead action captioned Tittle v. Enron Corp., both of which are pending in U.S. District Court in Houston. The consolidated complaint filed in Newby named as defendants, among others, JPMorgan Chase, several other investment banking firms, two law firms, Enron’s former accountants and affiliated entities and individuals and other individual defendants, including present and former officers and directors of Enron and purports to allege claims against JPMorgan Chase and the other defendants under federal and state securities laws. The Tittle complaint named as defendants, among others, JPMorgan Chase, several other investment banking firms, a law firm, Enron’s former accountants and affiliated entities and individuals and other individual defendants, including present and former officers and directors of Enron and purports to allege claims against JPMorgan Chase and certain other defendants under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state common law. On December 20, 2002, the Court denied the motions of JPMorgan Chase and other defendants to dismiss the Newby action.

Additional actions against JPMorgan Chase or its affiliates relating to Enron have been filed. These actions include a purported consolidated class action lawsuit by JPMorgan Chase stockholders alleging that JPMorgan Chase issued false and misleading press releases and other public documents relating to Enron in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; shareholder derivative actions alleging breaches of fiduciary duties and alleged failures to exercise due care and diligence by the Firm’s directors and named officers in the management of JPMorgan Chase; and various actions in disparate courts by Enron investors and creditors alleging state law and common law claims against JPMorgan Chase and many other defendants.

In addition, a number of federal, state and local regulatory and law enforcement authorities and Congressional committees, and an examiner appointed in the Enron bankruptcy case, have initiated investigations of Enron and of certain of the Firm’s financial transactions with Enron. In that regard, the Firm has delivered, or is currently in the process of delivering, voluntarily and pursuant to subpoena, information to the House Energy and Commerce Committee, the Senate Government Affairs Committee, the Senate Permanent Subcommittee on Investigations, U.S. Representative Henry Waxman, the Securities and Exchange Commission, the Federal Reserve Bank of New York, the New York State Banking Department, the New York County District Attorney’s Office, the U.S. Department of Justice, and the Enron bankruptcy examiner. The Firm intends to continue to cooperate with these authorities and with such other agencies and authorities as may request information from JPMorgan Chase.

WorldCom litigation. JPMSI and JPMorgan Chase have been named as defendants in fifteen actions that were filed in either United States District Courts or state courts in six states and the District of Columbia and in one arbitral panel beginning in July 2002 arising out of alleged accounting irregularities in the books and records of WorldCom Inc. Plaintiffs in all but one of these actions are institutional investors, including state pension funds, who purchased debt securities issued by WorldCom pursuant to public offerings in May 2000 and May 2001. JPMSI acted as an underwriter of both of those offerings. In addition to JPMSI and JPMorgan Chase, the defendants in various of the actions include other underwriters, certain executives of WorldCom and WorldCom’s auditors. In the actions, plaintiffs allege that defendants either knew or were reckless or negligent in not knowing that the securities were sold to plaintiffs on the basis of misrepresentations and omissions of material facts concerning the financial condition of WorldCom. The complaints against JPMorgan Chase and JPMSI assert claims under federal and state securities laws, ERISA, other state statutes and under common law theories of fraud and negligent misrepresentation.

Commercial Financial Services litigation. JPMSI (formerly known as Chase Securities, Inc.) has been named as a defendant or third-party defendant in 14 actions that were filed in or transferred to the United States District Court for the Northern District of Oklahoma or filed in Oklahoma state court beginning in October 1999 arising out of the failure of Commercial Financial Services, Inc. (“CFSI”). Plaintiffs in these actions are institutional investors who purchased over $1.6 billion in original face amount of asset-backed securities issued by CFSI. The securities were backed by delinquent credit card receivables. In addition to JPMSI, the defendants in various of the actions are the founders and key executives of CFSI, as well as its auditors and outside counsel. JPMSI is alleged to have been the investment banker to CFSI and to

9

Part I

have acted as an initial purchaser and as placement agent in connection with the issuance of certain of the securities. Plaintiffs allege that defendants either knew or were reckless in not knowing that the securities were sold to plaintiffs on the basis of misleading misrepresentations and omissions of material facts. The complaints against JPMSI assert claims under the Securities Exchange Act of 1934, the Oklahoma Securities Act, and under common law theories of fraud and negligent misrepresentation. In the actions against JPMSI, damages in the amount of approximately $1.6 billion allegedly suffered as a result of defendants’ misrepresentations and omissions, plus punitive damages, are being claimed. JPMSI also has entered into tolling agreements with certain investors. CFSI has commenced an action against JPMSI in Oklahoma state court and has asserted claims against JPMSI for professional negligence and breach of fiduciary duty. CFSI alleges that JPMSI failed to detect and prevent its insolvency. CFSI seeks unspecified damages.

IPO allocation litigation. Beginning in May 2001, JPMorgan Chase and certain of its securities subsidiaries have been named, along with numerous other firms in the securities industry, as defendants in a large number of putative class action lawsuits filed in the United States District Court for the Southern District of New York. These suits purport to challenge alleged improprieties in the allocation of stock in various public offerings, including some offerings for which a JPMorgan Chase entity served as an underwriter. The suits allege violations of securities and antitrust laws arising from alleged material misstatements and omissions in registration statements and prospectuses for the initial public offerings and with respect to aftermarket transactions in the offered securities. The securities claims allege, among other things, misrepresentations concerning commissions paid to JPMorgan Chase and aftermarket transactions by customers who received allocations of shares in the respective initial public offerings. The antitrust claims allege an illegal conspiracy to require customers, in exchange for initial public offering allocations, to pay undisclosed and excessive commissions and to make after-market purchases of the initial public offering securities at a price higher than the offering price as a precondition to receiving allocations. On February 13, 2003, the Court denied the motions of JPMorgan Chase and others to dismiss the securities complaints. JPMorgan Chase also has received various subpoenas and informal requests from governmental and other agencies seeking information relating to initial public offering allocation practices. On February 20, 2003, the National Association of Securities Dealers (“NASD”) censured JPMSI and fined it $6 million for activities it found to constitute unlawful profit sharing by Hambrecht & Quist Group prior to its acquisition in 2000. In agreeing to the resolution of the charges, JPMSI neither admitted nor denied the NASD’s contentions. JPMSI has been advised by the SEC that it is also considering bringing a disciplinary action against JPMSI. JPMSI has submitted to the staff of the SEC a letter outlining the basis for JPMSI’s position that no such action is warranted and is currently in discussions with the SEC.

Research analysts’ conflicts. On December 20, 2002, the Firm reached an agreement in principle with the SEC, the NASD, the New York Stock Exchange, the New York State Attorney General’s Office, and the North American Securities Administrators Association, on behalf of state securities regulators, to resolve their investigations of JPMorgan Chase relating to research analyst independence. Pursuant to the agreement in principle, JPMorgan Chase will agree, among other things (i) to pay $50 million for retrospective relief, (ii) to adopt internal structural and operational reforms that will further augment the steps it has already taken to ensure the integrity of JPMorgan Chase analyst research, (iii) to contribute $25 million spread over five years to provide independent third-party research to clients, and (iv) to contribute $5 million towards investor education. The settlement is subject to finalization of mutually satisfactory settlement documents and must be approved by the SEC and state regulatory authorities.

Litigation reserve and other. During the fourth quarter of 2002, the Firm established a reserve of $900 million related to costs anticipated to be incurred in connection with the various private litigations and regulatory inquiries involving Enron and the other material legal actions, proceedings and investigations discussed above. This reserve represents management’s best estimate, after consultation with counsel, of the current probable aggregate costs associated with these matters. Of the $900 million, $600 million has been allocated to the various cases, proceedings and investigations associated with Enron. The balance of $300 million has been allocated to the various litigations, proceedings and investigations involving the Firm’s debt and equity underwriting activities and equity research practices, and includes the $80 million settlement in December 2002 relating to equity research practices. It is possible that the reserve could be subject to revision in the future.

In addition to the various cases, proceedings and investigations for which the reserve has been established, JPMorgan Chase and its subsidiaries are named as defendants in a number of other legal actions and governmental proceedings arising in connection with their respective businesses. Additional actions, investigations or proceedings may be brought from time to time in the future. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages or where the cases present novel legal theories or involve a large number of parties, the Firm cannot state with confidence what the eventual outcome of the pending matters (including the pending matters as to which the reserve has been established) will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter will be. Subject to the foregoing caveat, JPMorgan Chase anticipates, based upon its current knowledge, after consultation with counsel and after taking into account the establishment of the aforementioned $900 million reserve, that the outcome of the legal actions, proceedings and investigations currently pending against it should not have a material adverse effect on the consolidated financial condition of the Firm, although the outcome of a particular proceeding or the imposition of a particular fine or penalty may be material to JPMorgan Chase’s operating results for a particular period depending upon, among other factors, the size of the loss or liability and the level of JPMorgan Chase’s income for that period.

10

Item 4: Submission of matters to a vote of security holders

None.

Executive officers of the registrant

Unless otherwise noted, during the five fiscal years ended December 31, 2002, all of JPMorgan Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan Chase or its predecessor institutions, J.P. Morgan & Co. Incorporated and The Chase Manhattan Corporation. There are no family relationships among the foregoing executive officers.

11

Parts II & III

Part II

Item 5: Market for registrant’s common equity and related stockholder matters

The outstanding shares of JPMorgan Chase’s common stock are listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. For the quarterly high and low prices of JPMorgan Chase’s common stock on the New York Stock Exchange for the last two years, see the section entitled “Supplementary information – selected quarterly financial data (unaudited)” on page 111. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.34 per share for each quarter of 2002 and 2001. The common dividend payout ratio based on reported net income was 171% for 2002, 168% for 2001 and 42% for 2000. At February 28, 2003, there were 126,759 holders of record of JPMorgan Chase’s common stock. For information regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Note 24 on page 96.

Item 6: Selected financial data

For five-year selected financial data, see “Five-year summary of financial highlights (unaudited)” on page 112.

Item 7: Management’s discussion and analysis of financial condition and results of operations

Management’s discussion and analysis of the financial condition and results of operations, entitled “Management’s discussion and analysis,” appears on pages 17 through 69. Such information should be read in conjunction with the Consolidated financial statements and Notes thereto, which appear on pages 71 through 110.

Item 7A: Quantitative and qualitative disclosures about market risk

For information related to market risk, see the “Market risk management” section on pages 58 through 62 and Note 28 on page 101.

Item 8: Financial statements and supplementary data

The consolidated financial statements, together with the notes thereto and the report of PricewaterhouseCoopers LLP dated January 21, 2003 thereon, appear on pages 70 through 110.

Supplementary financial data for each full quarter within the two years ended December 31, 2002 are included on page 111 in the table entitled “Supplementary information – selected quarterly financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 113 and 114.

Item 9: Changes in and disagreements with accountants on accounting and financial disclosure

None.

Part III

Item 10: Directors and executive officers of JPMorgan Chase

See Item 13 on page 13.

Item 11: Executive compensation

See Item 13 on page 13.

Item 12: Security ownership of certain beneficial owners and management and related stockholder matters

For security ownership of certain beneficial owners and management, see Item 13 on page 13. For stockholders’ matters regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Note 24 on page 96.

12

Item 13: Certain relationships and related transactions

Information related to JPMorgan Chase’s Executive Officers is included on page 11. Pursuant to Instruction G (3) to Form 10-K, the remainder of the information to be provided in Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) is incorporated by reference to JPMorgan Chase’s definitive proxy statement for the annual meeting of stockholders, to be held May 20, 2003, which proxy statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of JPMorgan Chase’s 2002 fiscal year.

Item 14: Controls and procedures

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the Firm’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Pages 14-15 not used

13

Table of contents

Financial:

This section of the Annual Report provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See Glossary of terms on pages 113 and 114 for a definition of terms used throughout this Annual Report.

Certain forward-looking statements

The MD&A contains certain forward-looking statements. Those forward-looking statements are subject to risks and uncertainties, and JPMorgan Chase’s actual results may differ from those set forth in the forward-looking statements. See JPMorgan Chase’s reports filed with the Securities and Exchange Commission for a discussion of factors that could cause JPMorgan Chase’s actual results to differ materially from those described in the forward-looking statements.

16

Management’s discussion and analysis

Overview

J.P. Morgan Chase & Co. is a leading global financial services firm with assets of $759 billion and operations in more than 50 countries. The Firm serves more than 30 million consumer customers and the world’s most prominent corporate, institutional and government clients. The Firm’s wholesale businesses are comprised of the Investment Bank, Treasury & Securities Services, Investment Management & Private Banking and JPMorgan Partners. Chase Financial Services is composed of the Firm’s retail and middle market businesses.

Financial performance of JPMorgan Chase

J.P. Morgan Chase &Co. (“JPMorgan Chase” or the “Firm”) reported 2002 net income of $1.7 billion, or $0.80 per share, compared with net income of $1.7 billion, or $0.80 per share, in 2001. The results for the year were negatively affected by sluggish capital markets, by concentrated exposures in certain segments of the Firm’s private equity and commercial credit portfolios, by large charges related to litigation and by continuing integration expenses resulting from the merger of J.P. Morgan and Chase. On the positive side, the consumer businesses reported record results, and Treasury & Securities Services (“T&SS”) had a solid year, highlighting the benefits of the Firm’s diversified business model.

As a result of the Firm’s balance of businesses, 2002 total reported revenues of $29.6 billion were up 1% from 2001. The national consumer credit businesses at Chase Financial Services (“CFS”) benefited from the low-interest rate environment, with the mortgage company, in particular, having an exceptional year. T&SS reported modest revenue growth, as strong gains in Treasury Services and Institutional Trust Services offset a decline in Investor Services. At the Investment Bank (“IB”), the slower-than-expected economic recovery and diminished investor confidence led to continued weakness in capital markets activity, which was reflected in lower trading revenue and investment banking fees. Investment Management & Private Banking (“IMPB”) revenues declined as a result of lower global equity valuations and reduced investor activity; assets under supervision declined primarily due to market depreciation and institutional outflows. Deterioration in equity markets adversely affected JPMorgan Partners (“JPMP”); write-offs and write-downs of private holdings and net mark-to-market losses on public securities were not offset by cash gains, as financing and exit opportunities remained constrained.

The Firm’s total reported noninterest expense declined 4% from 2001 and included several large charges in both years. In 2002, the costs associated with merger and restructuring initiatives were $1.2 billion, versus $2.5 billion the previous year. Also in 2002, the Firm recorded a $1.3 billion charge in connection with the settlement of its Enron-related surety litigation and the establishment of a reserve related to certain material litigation, proceedings and investigations and recorded a $0.1 billion charge related to excess real estate. Excluding the impact of these charges in both years, the Firm’s full-year 2002 noninterest expense of $20.2 billion was lower than that of 2001.

In addition, in 2002, the Firm announced several programs aiming to align expense levels with lower revenue prospects. Severance and related costs from these initiatives added $890 million to noninterest expense for the year, approximately 70% of which were in IB. Despite those costs, all business segments reported lower-to-flat noninterest expenses, except CFS, where higher business volumes drove expense growth. IB reduced headcount in line with lower market activity levels. IMPB has reduced its expense run-rate by more than half a billion dollars since the beginning of 2001. In T&SS, tight expense management allowed for investments while keeping expense levels flat with 2001 levels. The Firm’s expenses were further reduced by the adoption in 2002 of SFAS 142, which eliminated the amortization of goodwill.

The provision for credit losses increased 36% from 2001. This was principally attributable to troubled commercial credits in the telecommunications and cable sectors, partially offset by a decrease in the consumer provision.

In addition to analyzing results on a reported basis, management looks at results on an “operating basis” to assess the overall Firm and each of its business segments and to facilitate an estimate of future earnings for the business segments, absent unusual events. JPMorgan Chase’s operating earnings, which exclude merger and restructuring costs and special items, were $3.4 billion, compared with $3.8 billion in 2001. For additional information and a reconciliation between the Firm’s reported and operating results, see pages 22 and 23.

Risk management

Management of credit, market, operational and private equity risk is central to the Firm’s businesses.

Total nonperforming assets rose to $4.8 billion at December 31, 2002, an increase of 22% from year-end 2001, primarily as a result of significant and rapid deterioration in credit quality in the telecommunications, cable and merchant energy sectors. The Firm established a more stringent exposure review process and lower absolute exposure limits for industry and single-name concentrations, including investment-grade obligors.

17		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

Market risk parameters across the Firm remained stable, and trading results were within Value-at-risk (“VAR”) limits throughout the year.

The Firm continued to develop its self-assessment, operational risk-event monitoring and internal control processes to enhance its operational risk management discipline.

The Firm created a Policy Review Office to enhance the procedures it uses to examine transactions with clients in terms of appropriateness, ethical issues and reputational risk. The Policy Review Office has intensified the scrutiny of the Firm’s transactions from the client’s point of view, with the goal that these transactions are not used to deceive investors or others.

Finally, the Firm reviewed the level of private equity risk in its portfolio and has decided to reduce, over time, the amount of capital invested in private equity to approximately 10% of the Firm’s common stockholders’ equity, from approximately 20% at December 31, 2002.

Capital and liquidity management

At December 31, 2002, the Firm’s Tier 1 capital ratio was 8.2%, compared with 8.3% at year-end 2001. In the third quarter, the Board of Directors declared its intention to continue the current quarterly dividend of $0.34 per share on the Firm’s common stock, provided that capital ratios remain strong and earnings prospects exceed the current dividend.

Sound liquidity management remains an important factor in maintaining the Firm’s credit ratings. Liquidity management takes into account the need to fund both on- and off-balance sheet liabilities and commitments. It seeks to ensure that the Firm’s obligations will be met even if access to funding is temporarily impaired. Although the Firm’s debt ratings were downgraded one notch this year to AA-/Aa3 at JPMorgan Chase Bank and to A+/A1 at the holding company, the Firm’s funding costs and capital markets businesses were not materially adversely affected.

Corporate governance

The Firm has adopted the New York Stock Exchange proposals relating to corporate governance practices for boards of directors and has posted the board’s practices, as well as charters of the principal board committees, on the Firm’s website, www.jpmorganchase.com. The Firm seeks to be a leader in corporate governance and disclosure practices.

Business outlook

Global economic conditions and activity in financial markets are expected to remain uncertain in 2003. Accordingly, the outlook for the Firm’s investment banking and capital markets activities remains cautious. Earnings improvements in IB are anticipated to be primarily driven in 2003 by lower credit costs in a still challenging — but stabilizing — credit environment and by lower expenses. At CFS, continuation of the current low-interest rate environment should enable the credit-related businesses (mortgage, credit card and auto) to perform well, although it is likely revenues and earnings will be lower than the record set in 2002, which included large net gains on hedging of mortgage servicing rights (“MSRs”).

Expenses for the Firm in 2003 may be slightly higher than in 2002 (excluding from 2002 expenses the impact of the litigation and merger charges). Expensing stock options, higher pension and occupancy costs and increased spending (primarily at CFS) are likely to more than offset the savings anticipated from IB right-sizing initiatives and lower severance costs.

Despite this cautious view for the short term, the Firm remains committed to its diversified business model and believes that it is well positioned to produce higher returns when economic conditions improve and capital markets recover.

Results of operations

This section discusses JPMorgan Chase’s results of operations on a reported basis. The accompanying financial data conforms with U.S. generally accepted accounting principles (“GAAP”). The section should be read in conjunction with the financial statements and footnotes beginning on page 71.

Investment banking fees were 24% lower than last year, reflecting the industry-wide slowdown in corporate M&A activities and new issuance of debt and equity securities. Advisory fees of $756 million were 39% lower than last year, and underwriting fees for debt and equity instruments of $2.0 billion were 15% lower than last year. For a table that breaks out investment banking fees, see Note 4 on page 77, and for a further discussion on these revenues, see the IB results on pages 26—28.

Revenues

The 47% decline in trading revenue was primarily attributable to the challenging market conditions that persisted throughout 2002.

J.P. Morgan Chase & Co./2002 Annual Report		18

Equity markets declined substantially, contributing to lower client activity and revenues, primarily in equity derivatives. Also contributing to lower equity trading results was a shift in the classification of broker-dealer trading revenues, from “trading revenues” in 2001 to “brokerage and investment services fees” in 2002. Beginning in 2001, bid and offer prices on Nasdaq stocks were quoted in dollars and cents, instead of fractions of whole dollars. As a result, in 2002, JPMorgan Chase began to negotiate with its institutional clients commission-based pricing structures that would support the costs of delivering enhanced brokerage services in connection with their Nasdaq trades. Revenues earned from agreed-upon commissions are now recorded as “brokerage and investment services” within Fees and commissions.

Fixed income trading revenues declined 33% from last year, as lower portfolio management results, primarily in interest rate trading, offset an overall increase in client activity.

Trading revenue, on a reported basis, excludes the impact of net interest income related to IB’s trading activities; this income is recorded within Net interest income. However, in assessing the profitability of IB’s trading business, the Firm combines these revenues for segment reporting. For a table that breaks out trading revenues, see Note 3 on page 76, and for a further discussion on these revenues, see the IB results on pages 26–28.

Fees and commissions

Fees and commissions were $10.8 billion in 2002, an increase of 13% from last year, reflecting the following:

•		Mortgage servicing fees were $298 million, compared with a loss of $230 million in 2001, stemming from the favorable impact of Chase Home Finance’s hedging of MSRs. In 2002, hedging gains resulting from wider mortgage swap spreads and a favorable interest rate environment were significantly greater than the offsetting impairment of the MSRs’ value. For a further discussion of these fees, see the Chase Home Finance discussion on page 36.
•		Credit card revenue of $2.9 billion was a record for the Firm. Revenues were 36% above 2001, reflecting the positive impact on servicing fees from the growth in securitized receivables managed by Chase Cardmember Services; average securitized receivables grew by more than $8.5 billion. The increase in credit card revenue also reflected the impact of the Providian acquisition, higher late charges and higher interchange income as a result of increased purchase volume. For a further discussion of credit card business revenues, see page 37.
•		Other lending-related service fees increased 10%, a result of higher standby letter-of-credit fees from new business volumes. Also contributing to the increase were higher auto loan servicing fees, the result of increased securitizations in 2002.
•		Deposit service fees were 10% above 2001. Lower interest rates reduced the value of customers’ compensating deposit balances; consequently, customers paid increased fees for deposit services. Also contributing to the increase were higher cash management fees, primarily at Treasury Services, reflecting growth in payment processing volumes from institutional clients.

These fees and commissions were offset by lower investment management, custody and processing service fees. These fees were down 5% to $3.8 billion in 2002, primarily a result of the lower value of equity-related assets under supervision at IMPB, as well as lower fees earned at T&SS from non-U.S. assets under custody. Both investment management and custody fees were affected by the decline in the value of assets under supervision and assets under custody, respectively, as these fees are generally calculated as a percentage of the total market value of the assets. Also contributing to the lower fees was the market-driven slowdown in securities lending, as well as a decrease in processing service fees for unit investment trusts.

Brokerage and investment services declined slightly, despite the aforementioned reclassification into this line of approximately $100 million of broker-dealer revenues related to Nasdaq transactions. The decline was the result of reduced trading volume and narrower spreads on brokerage transactions.

For a table showing the components of Fees and commissions, see Note 4 on page 77.

Private equity gains (losses)

Aggregate private equity losses (realized and unrealized) totaled $746 million in 2002, reflecting the continuing difficult capital markets environment. The private equity markets offered limited exit opportunities and constrained financing, thereby depressing realized gains. Further, the results in 2002 reflected net mark-to-market losses on public securities, as well as write-downs and write-offs on private holdings, particularly in the telecommunications and technology sectors. For a further discussion of private equity gains (losses), see JPMP results on pages 33–34.

Securities gains

Securities gains of $1.6 billion were up 80% from last year. Of these gains, $1.1 billion was attributable to the Firm’s available-for-sale (“AFS”) investment securities portfolio, which was favorably positioned in a lower interest rate environment. The balance was directly related to the hedging of MSRs that offset impairment charges due to mortgage prepayments. For a further discussion of securities gains, see both the IB and Chase Home Finance discussions on pages 26–28 and 36, respectively.

Other revenue

The increase in Other revenue of $260 million reflected the following:

•

Increased revenues from residential mortgage origination and sales activities, to $671 million in 2002 from $576 million in 2001, were driven by the surge in loan applications and originations. The growth in originations allowed for larger volumes of loan sales and securitizations. For a further discussion of this revenue, see Chase Home Finance on page 36.

19		J.P. Morgan Chase & Co./2002 Annual Report

 
 
 
 

Management’s discussion and analysis

•

Unfavorable valuation adjustments were $36 million, compared with $177 million in 2001. The adjustment in 2002 was related to residual positions held after the completion of loan syndications and commercial real estate loan securitizations. These residual positions are recorded at the lower of cost or market value. The higher negative valuation adjustments in 2001 primarily related to loans in the technology and telecommunications sectors.

For a table that breaks out Other revenue, see Note 4 on page 78.

Net interest income

Net interest income (“NII”) rose 7% to $11.5 billion, compared with $10.8 billion in 2001. The primary contributors to the increase were the significant growth in average consumer loans, which were 7% higher than last year, and higher trading-related NII. These were offset by a decline in commercial loans and the narrowing of spreads in the deposit businesses.

Average consumer loan volume grew, benefiting from low interest rates, as well as the acquisition in February 2002 of the Providian Master Trust, including $7.9 billion of credit card receivables and related relationships. Total average credit card receivables rose 11% to $21.6 billion; of this amount $4.8 billion related to Providian. NII at Chase Home Finance increased due to higher average available-for-sale mortgage loans, higher spreads and lower asset funding costs.

NII related to commercial loans declined, the result of lower outstanding volumes. At the same time, spreads narrowed, reflecting the reduction in interest rates. Also contributing to the decline was the higher level of nonperforming loans. Nonperforming commercial loans rose 84% to $3.7 billion. For a further discussion of nonperforming loans in the commercial portfolio, see page 47.

A portion of the Firm’s NII relates to trading-related assets. In 2002, this component was $1.9 billion, compared with $1.4 billion in the prior year. The increase was attributable to the change in the composition of trading assets and improved spreads.

On an aggregate basis, the Firm’s total average interest-earning assets for 2002 were $555 billion, compared with $547 billion last year. The net interest spread on these assets, on a fully taxable-equivalent basis, was 2.09% in 2002, 10 basis points higher than last year.

Expenses

Compensation expense

Compensation expense in 2002 was $11.0 billion, 7% lower than last year, and included severance costs of $746 million associated with expense initiatives undertaken during the year. In 2001, severance related to the merger of J.P. Morgan and Chase and other previously announced restructuring programs was recorded within Merger and restructuring costs. The decline reflected reductions in staffing levels, as well as lower incentives reflecting the lower level of earnings. The amounts accrued for incentives are subject to management’s discretion and to calculations that correlate incentives with income before incentives.

Expense-management programs had a significant impact in IB and, to a lesser extent, IMPB, the two business segments whose revenues were most negatively affected by the downturn in the economy. As a result, these two segments reduced the number of employees in their businesses. Also contributing to the decline in expenses was the reversal of previously accrued expenses of $120 million related to forfeitable stock-based compensation awards issued under employee benefit plans. The awards contained stock price targets that were deemed unlikely to be attained within the timeframes specified under the terms of the awards.

The decline in compensation expense was partially offset by the hiring of new employees at expanding business segments, primarily CFS and T&SS.

The total number of full-time equivalent employees at December 31, 2002, was 94,335, compared with 95,812 at the prior year-end. Although overall levels remained relatively stable, headcount in IB and IMPB was reduced by approximately 3,100 full-time equivalent employees, whereas in CFS headcount increased by more than 2,400.

The Firm reviews the actuarial assumptions for its pension and other postretirement benefit plans on an annual basis. To reflect the decline in market interest rates during 2002, the year-end discount rate for the Firm’s U.S. plans was set at 6.50%, a 75-basis point decline from the prior year. Additionally, considering the current mix of plan assets, the year-end assumed long-term rate of return was adjusted downward to 8.00% for both U.S. pension plan assets and other postretirement benefit plan assets, from 9.25% and 9.00%, respectively. The assumed long-term rate of return is a blended average of the Firm’s investment advisor’s projected long-term (10 years or more) returns for various asset classes. The impact of these changes is expected to increase 2003 U.S. pension and other postretirement benefit expenses by approximately $60 million. Additionally, the adverse effect of losses on U.S. plan assets is expected to further increase U.S. pension and other postretirement benefit expenses by approximately $70 million. In 2002, these expenses included curtailment charges and special termination benefits totaling $64 million resulting from management-initiated and outsourcing-related employee terminations. Actuarial assumptions for the Firm’s various non-U.S. plans also were adjusted to reflect local market conditions. The impact of these changes on non-

J.P. Morgan Chase & Co./2002 Annual Report		20

U.S. pension and other postretirement benefit expenses is not expected to be material. For further information on postretirement employee benefit plans, see Note 23 on pages 94–96.

Occupancy expense

Occupancy expense rose 19% from last year, partly the result of a $98 million charge in the third quarter of 2002 to cover the costs of exiting excess vacant premises on the West Coast of the United States, principally in the San Francisco area. Also contributing to the increase was the leasing of additional space in New Jersey and in midtown Manhattan, partly necessitated by the relocation of certain functions at the beginning of the year from a previously-owned building in downtown Manhattan. The Firm expects 2003 occupancy costs to increase by approximately $150 million due to the move to midtown Manhattan, extra safety measures and higher anticipated real estate taxes in New York.

Technology and communications expense

The decline in Technology and communications expense was primarily attributable to an initiative to rationalize and reshape the Firm’s technology infrastructure. This initiative resulted in reduced spending for software, equipment and workstations. Additionally, the technology sourcing process was streamlined in favor of a select list of preferred vendors, resulting in additional expense reductions. The impact of these initiatives was partially offset by the higher amortization of capitalized software, as well as expenditures to enhance the telecommunications network.

Amortization of intangibles

Amortization of intangibles declined 56% from 2001. The decline primarily reflected the implementation of SFAS 142, which now requires a periodic review of goodwill for impairment rather than the amortization of goodwill, as was the case last year. This was partly offset by the impact of the acquisition of the Providian Master Trust’s credit card relationship intangibles. In 2002, there were no impairments recognized on goodwill recorded the Consolidated balance sheet. For a discussion on the impact of SFAS 142 on the Firm’s amortization of intangibles expense and the expected level of expense for 2003, see Note 14 on page 89.

Other expense

Other expense increased 6% in 2002 compared with 2001 as a result of the following (for the table showing the components within Other expense, see Note 6 on page 79):

•		Professional services expense increased $164 million from 2001, primarily as a result of legal fees. Also contributing to the increase was the hiring of professionals who assisted in the collection of credit card accounts and fees paid by IB for sub-advisor services for a fund in Europe. These incremental expense items were partly offset by lower systems consultant costs.
•		Higher outside services expense of $106 million was driven by the costs of servicing the Providian credit card portfolio and processing higher mortgage servicing volume. During a transition period, from the acquisition in February until August 2002, Providian Financial Corp. provided servicing for the portfolio.
•		Higher marketing expense of $88 million principally stemmed from direct-marketing campaigns for credit cards.

These expense increases were partially offset by lower travel and entertainment expense of $42 million.

Surety settlement and litigation reserve

The $1.3 billion charge in 2002 reflected the settlement of the Enron-related surety litigation and the establishment of a litigation reserve. On January 2, 2003, the Firm announced it had settled its dispute with 11 insurance companies that had issued surety bonds that guaranteed obligations of Enron Corp. (“Enron”) under prepaid commodity forward contracts. The Firm settled for 60% of the principal amount of the bonds and received a cash payment of $502 million and $75 million of unsecured claims. In connection with this agreement — and one additional, ongoing lawsuit related to a prepaid contract backed by a letter of credit — the Firm took a pre-tax charge of $400 million (approximately $260 million after-tax). The Firm also established a $900 million reserve (approximately $600 million after-tax) related to litigation and regulatory matters involving Enron, as well as other material legal actions, proceedings and investigations in which it is involved.

Merger and restructuring costs

During 2002, the Firm incurred merger and restructuring costs of $1.2 billion, a 52% decline from 2001. Refer to the discussion of compensation expense on page 20 for a description of other severance costs incurred in 2002 and to Note 6 on page 78.

Provision for credit losses

The Provision for credit losses increased $1.1 billion or 36% from the prior year, primarily reflecting higher charge-offs of loans and lending-related commitments in the telecommunications and cable sectors. The consumer provision decreased 21% from last year reflecting growth in credit card securitizations, partially offset by the impact of the Providian acquisition. In 2002, the Firm increased the allowance for credit losses by $443 million (by making provisions in excess of net charge-offs), compared with an $850 million increase in the allowance last year. For further information on the Provision for credit losses, see page 56.

Income tax expense

JPMorgan Chase recognized income tax expense of $856 million in 2002, compared with $847 million in 2001. The effective tax rate was 34% in 2002, versus 33% last year. The increase in the effective tax rate was principally attributable to the level of income in certain state and local tax jurisdictions in 2002. For a further discussion of income taxes, see Note 22 on pages 93 and 94.

21		J.P. Morgan Chase & Co./2002 Annual Report

 
 
 
 

Management’s discussion and analysis

Reconciliation from reported results to operating basis

The Firm prepares its financial statements using U.S. generally accepted accounting principles (“GAAP”). The financial statements prepared in accordance with GAAP appear on pages 71–74 of this Annual Report. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be consistently tracked from year to year and enables a comparison of the Firm’s performance with other companies’ GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management looks at results on an “operating basis” to assess each of its businesses and to measure overall Firm results against targeted goals. The definition of operating basis starts with the reported GAAP results and then excludes the impact of merger and restructuring costs, credit card securitizations, the amortization of goodwill and special items (which management defined during 2002 as significant nonrecurring gains or losses of $75 million or more). Both restructuring charges and special items are viewed by management as transactions that are not part of the Firm’s normal daily business operations or are unusual in nature and therefore are not indicative of trends.

The following summary table provides a reconciliation between the Firm’s reported and operating results:

As previously mentioned, operating results exclude the impact of credit card securitizations. JPMorgan Chase periodically securitizes a portion of its credit card portfolio by selling a pool of credit card receivables to a trust, which issues securities to investors. When credit card receivables are securitized, the Firm ceases to accrue the related interest and credit costs; instead, the Firm receives fee revenue for continuing to service those receivables and additional revenue from any interest and fees on the receivables in excess of the interest paid to investors, net of credit losses and servicing fees. As a result, securitization does not change JPMorgan Chase’s reported or operating net income; however, it does affect the classification of items in the Consolidated statement of income.

The Firm also reports credit costs on a “managed” or “operating” basis. Credit costs on an operating basis are composed of the Provision for credit losses in the Consolidated statement of income (which includes a provision for credit card receivables on the Consolidated balance sheet) as well as the credit costs associated with securitized credit card loans. As the holder of the residual interest in the securitization trust, the Firm bears its share of the credit costs for securitized loans. In the Firm’s GAAP financial statements, credit costs associated with securitized credit card loans reduce the noninterest income remitted to the Firm from the trust. This income is reported in Credit card revenue in Fees and commissions over the life of the securitization.

Commencing January 1, 2002, the Firm adopted SFAS 142 and, accordingly, ceased amortizing goodwill. There was no impairment of goodwill upon adoption of SFAS 142. Prior-period operating earnings have been adjusted by adding back amortization of goodwill to report results on a basis comparable with 2002.

The following table provides a reconciliation of earnings per share (“EPS”) based on the Firm’s reported net income to EPS calculated on an operating basis.

For a five-year trend of the Firm’s results on an operating basis, see page 112. All years are calculated on a basis using the same definition for operating results.

23		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

Segment results

The wholesale businesses of JPMorgan Chase are known globally as “JPMorgan” and are comprised of the Investment Bank, Treasury & Securities Services, Investment Management & Private Banking and JPMorgan Partners. The retail and middle market businesses are known as “Chase” and make up Chase Financial Services.

JPMorgan Chase’s segment results reflect the manner in which financial information is currently evaluated by the Firm’s management. The Firm allocates equity to its business units utilizing a risk-adjusted methodology, which quantifies credit, market and operational risks within each business and, for JPMP, private equity risk. For a discussion of those risks, see the Risk management section on pages 45-65. The Firm allocates additional equity to its businesses incorporating an “asset capital tax” on managed assets and some off-balance sheet instruments. In addition, businesses are allocated equity equal to 100% of goodwill and 50% for certain other intangibles generated through acquisitions. The Firm estimates the portfolio effect on required economic capital based on correlations of risk across risk categories. This estimated diversification benefit is not allocated to the business segments.

The Firm uses the shareholder value added (“SVA”) framework to measure performance of its business segments. To derive SVA for its business segments, the Firm applies a 12% (after-tax) cost of equity to each segment, except JPMP; this business is charged a 15% (after-tax) cost of equity. The capital elements and resultant capital charges provide the businesses with the financial framework to evaluate the trade-off between the use of capital by each business unit versus its return to shareholders. Capital charges are an integral part of the SVA measurement for each business. Under the Firm’s economic capital model, economic capital is overallocated to

Segment results

Operating basis