<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.
                                     20549
                                  ___________

                                   FORM 10-Q

               Quarterly Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

                                  ___________

For the 13 week and 39 week periods              Commission file number 1-4947-1
ended October 26, 1996

                       J. C. PENNEY FUNDING CORPORATION
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


                 Delaware                                   51-0101524
--------------------------------------------------------------------------------
      (State or other jurisdiction of                    (I.R.S. Employer
      incorporation or organization)                    Identification No.)


     6501 Legacy Drive, Plano, Texas                        75024-3698
--------------------------------------------------------------------------------
(Address of principal executive offices)                    (Zip Code)


Registrant's telephone number, including area code    (972)431-1000
                                                     --------------

                              -------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   x     No 
    -----      -----           

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

500,000 shares of Common Stock of $100 par value, as of October 26, 1996.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED 
DISCLOSURE FORMAT.
<PAGE>
 
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
         --------------------

The following interim financial information of J. C. Penney Funding Corporation
("Funding"), a wholly owned subsidiary of J. C. Penney Company, Inc.
("JCPenney"), is unaudited; however, in the opinion of Funding, it includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation.  The financial information should be read in conjunction with the
audited financial statements included in Funding's Annual Report on Form 10-K
for the 52 weeks ended January 27, 1996.

Statements of Income and Reinvested Earnings
(Dollars in millions)
<TABLE>
<CAPTION>
                                       13 weeks ended           39 weeks ended
                                    --------------------    --------------------
                                    Oct. 26,    Oct. 28,    Oct. 26,    Oct. 28,
                                      1996        1995        1996        1995
                                    --------    --------    --------    --------
<S>                                 <C>         <C>         <C>         <C>
 
Interest earned from
     JCPenney and affiliates          $ 36        $ 52        $101         $148
                                                                      
Interest expense                        24          34          67           97
                                      ----        ----        ----         ----
                                                                      
Income before income taxes              12          18          34           51
                                                                      
Income taxes                             4           6          12           18
                                      ----        ----        ----         ----
                                                                      
Net income                               8          12          22           33
                                                                      
Reinvested earnings at                                                
   beginning of period                 940         904         926          883
                                      ----        ----        ----         ----
                                                                      
Reinvested earnings at                                                
   end of period                      $948        $916        $948         $916
                                      ====        ====        ====         ====
</TABLE>

                                       1
<PAGE>
 
Balance Sheets
(Dollars in millions except share data)
<TABLE>
<CAPTION>
                                          Oct. 26,        Oct. 28,      Jan. 27,
                                            1996            1995          1996
                                          --------        --------      --------
<S>                                       <C>             <C>           <C>
ASSETS (Current)                                                      
                                                                        
Loans to JCPenney and affiliates          $3,097        $3,403           $2,563
                                          ------        ------           ------
                                                                        
                                          $3,097        $3,403           $2,563
                                          ======        ======           ======
                                                                      
LIABILITIES AND EQUITY OF JCPENNEY                                      

Short-term debt                           $2,003        $2,338           $1,482
 
Due to JCPenney                                1             4               10
                                          ------        ------           ------
                                           
Total liabilities                          2,004         2,342            1,492
                                         
                                           
Equity of JCPenney:                      
  Common stock (including contributed        
   capital), par value $100:               
   Authorized, 750,000 shares            
   Issued, 500,000 shares                    145           145              145
                                         
Reinvested earnings                          948           916              926
                                          ------        ------           ------
                                           
Total equity of JCPenney                   1,093         1,061            1,071
                                          ------        ------           ------
                                           
                                          $3,097        $3,403           $2,563
                                          ======        ======           ======
</TABLE>

                                       2
<PAGE>
 
Consolidated Statements of Cash Flows
(Dollars in millions)
<TABLE>
<CAPTION>
                                                               39 weeks ended
                                                          ----------------------
                                                          Oct. 26,      Oct. 28,
                                                            1996          1995
                                                          --------      --------
<S>                                                       <C>           <C> 
Operating Activities

   Net income                                              $  22          $  33

   (Increase) Decrease in loans to JCPenney                 (534)          (289)
   (Decrease) Increase in amount due to JCPenney              (9)            (8)
                                                           -----          -----

                                                            (521)          (264)
                                                           ------         -----
Financing Activities

   Increase in short-term debt                               521            264
                                                           -----          -----

Increase (Decrease) in cash                                 -0-            -0-

Cash at beginning of year                                   -0-            -0-
                                                           -----          -----

Cash at end of third quarter                               $-0-           $-0-
                                                           =====          =====
</TABLE>

                                       3
<PAGE>
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.


Under the terms of the loan agreement which provides for unsecured loans to be
made by Funding to JCPenney and the receivables agreement pursuant to which
Funding may purchase an undivided interest in certain JCPenney customer
receivables, Funding derives earnings on loans to JCPenney and income from
charges to JCPenney.  This income, when combined with other income of Funding,
is designed to cover Funding's fixed charges (interest expense) at a coverage
ratio mutually agreed upon by Funding and JCPenney.  The earnings to fixed
charges coverage ratio has historically been at least one and one-half times.

Since 1986, Funding has provided financing to JCPenney in accordance with the
loan agreement and no receivable balances have been purchased.

Funding is not and has not been involved in the administration of JCPenney's
retail credit operation and does not bear any expenses or receive any finance
charge revenue connected therewith.

For the 1996 third quarter and the nine-month period, income, expenses, and
provision for taxes decreased, as compared with the same periods of 1995, as a
result of both lower interest rates and lower borrowing levels.  Borrowing
levels averaged $1,804 million in the 1996 third quarter and $1,661 million
during the 1996 nine-month period as compared with $2,334 million and $2,162
million, respectively, during the comparable 1995 periods.  At the end of the
third quarter of 1996, borrowing levels were $2,003 million as compared with
$2,338 million at the end of the 1995 third quarter.  For the third quarter and
nine-month periods in 1996, average interest rates decreased 41 basis points and
58 basis points, respectively, as compared with the same periods in 1995.

On December 3, 1996, Funding and JCPenney entered into four syndicated revolving
credit facilities totaling $6.0 billion with a group of 46 domestic and
international banks.  The new facilities are comprised of a $1.5 billion, 364-
day revolver, and a $1.5 billion, five year revolver arranged by J.P. Morgan
Securities Inc. and a $1.5 billion, 364-day revolver, and a $1.5 billion, five
year revolver arranged by Credit Suisse.  The J.P. Morgan facilities support
JCPenney's short term borrowing program and will replace Funding's existing
credit lines.  The Credit Suisse facilities provide short term funding for
JCPenney's acquisition of Eckerd Corporation.

Item 6.  Exhibits and Reports on Form 8-K

    (a)  Exhibits
         --------

         The following documents are filed as exhibits to this report:

                                       4
<PAGE>
 
         3(ii)  Bylaws of Funding, as amended to May 19, 1995

         27     Financial Data Schedule for the nine months ended October 26,
                1996.

    (b)  Reports on Form 8-K
         -------------------

         None

                                       5
<PAGE>
 
                                  SIGNATURES
                                  ----------

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



                                J. C. PENNEY FUNDING CORPORATION



                                By:    /s/ W. J. Alcorn
                                    ---------------------------------     
                                       W. J. Alcorn
                                       Controller
                                       (Principal Accounting Officer)
 



Date: December 9, 1996

                                       6