<PAGE>   1
                                        J.P. Morgan & Co. Incorporated




                                        1 9 9 6

                                        Annual report




                                        [J.P. Morgan LOGO]
<PAGE>   2
         J.P. Morgan is a leading global financial firm that meets critical
         financial needs for business enterprises, governments, financial
         institutions, and individuals worldwide. We advise on corporate
         strategy and structure, raise capital, make markets in a range of
         financial instruments, and manage investment assets. Morgan also
         commits its own capital to promising enterprises and invests and trades
         to capture market opportunities.

                  We are committed to offering advice and execution of the
         highest quality, conducting our business in a principled way, and
         maintaining the global market power that helps our clients succeed
         while enhancing returns for our stockholders.


         FINANCIAL HIGHLIGHTS
         J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
         In millions, except per share data                                1996            1995
         --------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>     
         FOR THE YEAR
         Pretax income .........................................       $  2 332        $  1 906
         Net income ............................................          1 574           1 296
         Dividends declared on common stock ....................            617             574
         --------------------------------------------------------------------------------------
         PRIMARY EARNINGS PER SHARE ............................       $   7.63        $   6.42
         --------------------------------------------------------------------------------------
         PER COMMON SHARE
         Dividends declared ....................................       $   3.31        $   3.06
         Book value ............................................          54.43           50.71
         --------------------------------------------------------------------------------------
         AT YEAR-END
         Total stockholders' equity ............................       $ 11 432        $ 10 451
         Total assets ..........................................        222 026         184 879
         --------------------------------------------------------------------------------------
         SELECTED RATIOS
         Return on average common stockholders' equity .........           14.9%           13.6%
         Common stockholders' equity as % of year-end assets ...            4.8             5.4
         Total stockholders' equity as % of year-end assets ....            5.2             5.7
         Tier 1 risk-based capital ratio .......................            8.8             8.8
         Total risk-based capital ratio ........................           12.2            13.0
         --------------------------------------------------------------------------------------
</TABLE>




       CONTENTS
<TABLE>
<S>      <C>    
   1     Introduction
   2     Business sector analysis
  11     Risk management
  18     Financial review
  33     Responsibility for financial reporting 
  34     Report of independent accountants
  35     Consolidated statement of income 
  36     Consolidated balance sheet
  37     Consolidated statement of changes in
         stockholders' equity
  38     Consolidated statement of cash flows
  39     Consolidated statement of condition --
         Morgan Guaranty Trust Company
         of New York
  40     Notes to consolidated financial statements
  78     Additional selected data
  80     Consolidated average balances and
         taxable-equivalent net interest
         earnings
  83     Asset-quality analysis
  89     Derivatives used for purposes
         other-than-trading
  90     Capital and funding analysis
  93     Selected consolidated quarterly
         financial data
  95     Form 10-K cross-reference index
  97     Description of business
 101     Management and Senior officers
 104     J.P. Morgan directory
 109     Corporate information
</TABLE>
<PAGE>   3
INTRODUCTION


         We are proud to report vigorous, diversified growth in J.P. Morgan's
         earnings last year. Net income rose to $1.6 billion, up 21 percent.
         Per share, earnings were $7.63 compared with $6.42 in 1995.

             In December 1996, the Board of Directors approved an 8.6% increase 
         in the quarterly dividend on common stock to 88 cents per share, the
         twenty-first consecutive annual increase. The Board also authorized
         the repurchase of up to $750 million of J.P. Morgan common stock,
         which is expected to be completed in 1997. In addition, the Board
         approved the purchase of up to 7 million shares of common stock to
         lessen the dilutive impact on earnings per share of the firm's 
         employee benefit plans.

             Growth in earnings generated by our activities for clients, and a 
         shift in the mix of earnings toward client-related income, were
         notable achievements last year. They reflect more than a decade of
         investment in an expanded set of core capabilities and success in
         putting more of those capabilities to work for our clients.

             In this Annual report, we explain the firm's results for 1996 in 
         detail, starting with a discussion of performance in five sectors of
         business activity and continuing with a presentation of our approach
         to risk management and an extensive financial review. Consolidated
         financial statements for the firm follow.

             To complement the detailed presentation of results provided here, 
         we publish a companion Annual review that offers my added perspective
         on our strategy and performance, a visual and textual review of our
         work for clients around the world, information on our history, and a
         summary of the year's financial results. We encourage you to read
         these two publications in tandem for a rounded view of our firm and 
         its business.


         /s/ Douglas A. Warner III

         Douglas A. Warner III
         Chairman of the Board
         Chief Executive Officer

         March 7, 1997




         For a copy of J.P. Morgan's Annual review, the companion publication
         to this Annual report, please write to Corporate Communication -
         Publications, J.P. Morgan & Co. Incorporated, 60 Wall Street, New
         York, NY 10260-0060, or call our publications request line at
         1-212-648-9607.


                                                                              1
<PAGE>   4
BUSINESS SECTOR ANALYSIS




         J.P. Morgan produced strong earnings growth in 1996, as our business
         around the world expanded across the range of the firm's advisory,
         capital raising, asset management, risk management, and market-making
         activities. Pretax income rose 22% to $2.3 billion, benefiting, in
         part, from favorable global markets.

                  The environment for our business in 1996 featured active
         markets and opportunities that increased client demand for the firm's
         array of global capabilities. In the U.S., the logic of strategic
         business consolidation and the low cost of capital contributed to
         record levels of merger and acquisition activity and continued strength
         in capital raising activities. Elsewhere in the world,
         decentralization, deregulation, and a continuing trend toward more open
         markets generated investor interest in emerging markets and a greater
         demand for risk management strategies and tools.

                  Revenues rose 16% to $6.9 billion and reflected a significant
         shift in revenue mix, with a greater proportion of total revenues - 82%
         versus 72% in 1995 - generated by client-focused activities, more than
         offsetting the decline in revenues from proprietary activities
         undertaken solely for Morgan's own account. Roughly 60% of pretax
         income, compared with 40% last year, was earned from services we
         provide for clients. Pretax income from client-focused business rose to
         $1.7 billion from $1.0 billion in 1995, and proprietary activities
         generated pretax income of $1.0 billion, compared with $1.5 billion in
         1995.

                  Expenses for the year rose 13%. Continued allocation of
         resources to areas of strategic importance, including investment
         banking, equities, asset management, and private client services, more
         than offset the reduction in expenses achieved through Morgan's exit
         from securities custody and cash processing activities. Employee
         compensation and benefits costs increased as a result of higher
         incentive compensation. The growth of earnings, the increasing
         proportion of revenues earned in client-focused activities (more people
         intensive than proprietary activities), and more competitive market
         conditions accounted for this rise. The growth of client-focused
         activities was also an important factor in the rise of the firm's other
         expenses.

                  We describe the activities of J.P. Morgan using five business
         sectors, as discussed below. Three of these sectors - Finance and
         Advisory, Market Making, and Asset Management and Servicing - focus on
         services we provide for clients, including positions taken to
         facilitate client transactions. Two sectors comprise activities that we
         conduct exclusively for our own account: Equity Investments and
         Proprietary Investing and Trading.

                  While presenting our results in sector format helps simplify
         the complexity of Morgan's business, it is also important to understand
         the shared benefits of our strategy: our focus on building long-term
         client relationships; the synergy we create by acting as one firm with
         singular dedication to clients, not a collection of separate
         businesses; the global diversification of activities across a range of
         products and locations; our comprehensive approach to risk management;
         the integration of global capabilities to capitalize on opportunities;
         and commitment to high standards of business conduct, for which J.P.
         Morgan has been known throughout its 150-year history.




2
<PAGE>   5
         SUMMARY OF SECTOR RESULTS

<TABLE>
<CAPTION>
                                                   Asset        TOTAL            
                           Finance               Manage-      CLIENT-    Equity   Proprietary         TOTAL
                               and    Market    ment and      FOCUSED   Invest-     Investing   PROPRIETARY    Corporate    CONSOL-
         In millions      Advisory    Making   Servicing   ACTIVITIES     ments   and Trading    ACTIVITIES        Items     IDATED
         ---------------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>      <C>         <C>          <C>       <C>           <C>            <C>           <C>   
         1996                                                         
         Total revenues     $1 620    $2 622      $1 413       $5 655      $296        $  904        $1 200        $  --      $6 855
         Total expenses      1 108     1 739       1 140        3 987        34           153           187          349       4 523
         ---------------------------------------------------------------------------------------------------------------------------
         Pretax income         512       883         273        1 668       262           751         1 013         (349)      2 332
         ---------------------------------------------------------------------------------------------------------------------------
         1995
         Total revenues      1 296     1 661       1 304        4 261       512         1 120         1 632           11       5 904
         Total expenses        872     1 462         920        3 254        24           129           153          591       3 998
         ---------------------------------------------------------------------------------------------------------------------------
         Pretax income         424       199         384        1 007       488           991         1 479         (580)      1 906
         ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

         The firm's management reporting system and policies were used to
         determine the revenues and expenses directly attributable to each
         business sector. Earnings on stockholders' equity were allocated based
         on management's assessment of the inherent risk of the components of
         each sector. In addition, certain overhead expenses not allocated for
         management reporting purposes were allocated to each business sector.
         Overhead expenses were allocated based primarily on staff levels and
         represent costs associated with various support functions that exist
         for the benefit of the firm as a whole. Certain prior-year amounts have
         been reclassified to conform with the 1996 presentation. See
         Description of business on page 97 for further information.

         Intensive efforts to expand our business with existing clients and to
         add new clients produced substantial gains in the client-focused
         sectors of our business in 1996. Market Making reported the biggest
         gain, with pretax income rising to $883 million from a relatively low
         $199 million in 1995, as client demand increased for securities and
         derivatives products in highly active developed and emerging markets.
         Finance and Advisory pretax income was up 21% to $512 million, as J.P.
         Morgan increased its share of merger and acquisition and debt and
         equity capital raising activity. Asset Management and Servicing
         contributed $273 million, less than in 1995; higher revenues were more
         than offset by costs associated with further development of our global
         capabilities.

                  Equity Investments produced lower pretax income than in 1995,
         when gains on a highly profitable investment were recognized. In
         Proprietary Investing and Trading, revenues declined as higher-yielding
         instruments continued to mature. However, on a total return basis,
         which combines reported revenues and the change in net unrealized
         appreciation, results from these proprietary activities were
         essentially level with a year ago.

                  The advances of the past year represent significant progress
         toward J.P. Morgan's strategic goal: to be the leading global financial
         services firm meeting the critical needs of the world's most active and
         sophisticated financial markets participants. We will continue our
         investment in strategic areas such as investment banking, equities,
         asset management, and private client services in 1997 to complement our
         strong capabilities in fixed income, emerging markets, and other areas.
         We will also continue to strengthen our presence in Eastern Europe and
         Asia, as economic growth and deregulation in those areas continue. Our
         own risk-taking activities continue to be integral to our global
         business. Success in committing our own capital makes a critical
         contribution to producing superior returns over time for stockholders.
         In all our activities and in management of resources, we strive to
         continue to improve our return on equity to a target level of 15% to
         20%.

                  Discussion of the 1996 results of the client-focused and
         proprietary sectors of J.P.Morgan's business follows. More detailed
         information on the activities conducted within the sectors is included
         in the Description of business beginning on page 97.




                                                                               3
<PAGE>   6
         CLIENT-FOCUSED ACTIVITIES

         J.P. Morgan's clients are an increasingly global and diverse group of
         growing and established companies, governments and their agencies, and
         privately held firms, entrepreneurs, families, and individuals. We
         continue to broaden and deepen client relationships in North America;
         Latin America; Europe, Middle East, and Africa; and Asia Pacific.
         Regional results can be analyzed in a number of ways. In the table
         below, combined results for our client-focused business sectors are
         broken down by region responsible for managing the client relationship.

<TABLE>
<CAPTION>
                                                               EUROPE                     TOTAL
                                  NORTH        LATIN      MIDDLE EAST         ASIA      CLIENT-
         In millions            AMERICA      AMERICA       AND AFRICA      PACIFIC      FOCUSED
         --------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>              <C>          <C>   
         1996                                             
         Revenues ........       $2 750       $  523           $1 809       $  573       $5 655
         Expenses ........        2 063          213            1 273          438        3 987
         --------------------------------------------------------------------------------------
         Pretax income ...          687          310              536          135        1 668
         --------------------------------------------------------------------------------------
         1995                                             
         Revenues ........        2 091          438            1 327          405        4 261
         Expenses ........        1 655          173            1 023          403        3 254
         --------------------------------------------------------------------------------------
         Pretax income ...          436          265              304            2        1 007
         --------------------------------------------------------------------------------------
</TABLE>

         The firm's management reporting system was used to determine the
         revenues and expenses attributable to each region. For finance and
         advisory products, this is the location of the client's head office;
         for most other products, it is based on the location where activity is
         transacted. Market-making revenues that cannot be specifically
         attributed to individual clients (i.e., gains/losses arising from
         client-related positions) and earnings on stockholders' equity are
         generally allocated based on the proportion of other regional revenues.
         Expenses are allocated based on the estimated cost associated with
         servicing the client base in the region.

         Client revenues in North America increased 32% in 1996, reflecting
         strong performance in investment banking and fixed income market-making
         activities. We captured increased market share in mergers and
         acquisitions, and equities underwriting revenue doubled over the prior
         year. Fixed income revenues in 1996 were boosted by a greater volume of
         business with clients and gains on positions taken to facilitate client
         transactions; year to year comparisons were also made more favorable
         because of losses related to mortgage-backed securities activities in
         1995. Revenues from asset management and private client services also
         increased.

                  Revenues from our business with Latin American clients were up
         19%, as economic activity across the region rebounded from the impact
         of the December 1994 Mexican peso devaluation. Demand for financing in
         both credit and capital markets by governments, financial institutions,
         and corporations was brisk. Morgan's strategic advice continues to be
         sought throughout the region, where we are the market leader in mergers
         and acquisitions and debt and equity underwriting. Results from local
         market-making activities benefited from increased client demand for
         risk management and investment products but were offset by narrowing
         spreads between emerging and developed markets.

                  European client revenues increased 36% in 1996, spurred by
         growth in our investment banking franchise and strong market activity
         across the region, largely driven by client demand for fixed income and
         foreign exchange products. Merger and acquisition assignments were up
         significantly as we benefited from our leading market position and the
         quick pace of European restructuring activity. Increased market share
         resulting from advances in our equities capabilities led to substantial
         growth in underwriting revenues. Results also benefited from our
         growing asset management client base and private client services.

                  Asia Pacific client revenues increased 41% in 1996, driven by
         significant growth in activity across the full spectrum of our
         capabilities. Momentum was particularly strong in emerging Asia,
         reflecting rapid economic development and growing sophistication of the
         client base.

                  Following is a discussion of the results of the sectors that
         cover services we provide globally to clients - Finance and Advisory,
         Market Making, and Asset Management and Servicing.



4
<PAGE>   7
         FINANCE AND ADVISORY (Advisory, Debt and Equity Underwriting, and
         Credit)

<TABLE>
<CAPTION>
         In millions                                           1996         1995
         -----------------------------------------------------------------------
<S>                                                          <C>          <C>   
         Investment banking revenue ..................       $  880       $  559
         Net interest revenue ........................          488          505
         Fees and commissions ........................          152          141
         Other sector revenues .......................          100           91
         -----------------------------------------------------------------------
         Total revenues ..............................        1 620        1 296
         Total expenses ..............................        1 108          872
         -----------------------------------------------------------------------
         Pretax income ...............................          512          424
         -----------------------------------------------------------------------
</TABLE>


         Fueled by the availability of low cost funds, record levels of merger
         and acquisition activity, strength in most equities markets, and
         improving economies in emerging countries, investment banking activity
         surged in 1996. New debt and equity issues surpassed the record levels
         of 1993.

                  In 1996, J.P. Morgan continued to benefit from its strategic
         development of investment banking expertise. Revenues rose for the
         sector as business with new and existing clients expanded worldwide and
         we participated in some of the most noteworthy transactions of the
         year.

                  Advisory revenue increased over 70%. Morgan advised on 141
         merger and acquisition transactions with a value of $123 billion,
         including seven of the 15 largest transactions announced in 1996, and
         in a number of the most active industries, including
         telecommunications, defense, and health care. Transactions completed
         for clients enabled Morgan to remain the leading merger and acquisition
         advisor in Latin America for the third consecutive year and, for the
         second year, ranked second in Europe. We advanced to sixth in the U.S.
         and were fifth in completed mergers and acquisitions globally.

                  Revenues from debt and equity underwriting, in both developed
         and emerging markets, increased more than 75% in 1996 as a growing
         number of issuers took advantage of favorable market conditions. Morgan
         ranked as the sixth largest underwriter of U.S. debt and equity issues,
         up from seventh a year ago. As an underwriter of non-U.S. securities,
         Morgan ranked seventh in both 1996 and 1995.

                  Revenues from global credit activities accounted for
         approximately one-half of total Finance and Advisory revenues and were
         flat compared with 1995. Increased demand for credit products,
         particularly in the U.S. and Latin America, was offset by tighter
         pricing, reflecting increasingly competitive market conditions. Morgan
         ranked as the second largest arranger of syndicated loans in 1996, up
         from third a year ago.

                  This sector includes all of the costs associated with our
         global network of senior client relationship managers who market the
         full spectrum of our capabilities and provide the link between our
         clients' needs and J.P. Morgan's financing, advisory, asset management,
         market-making, and risk management products and services.

                  Total Finance and Advisory revenues increased $324 million to
         $1,620 million in 1996. Expenses increased to $1,108 million from $872
         million in 1995, due to higher employee compensation and benefits,
         largely incentive compensation in line with higher earnings.




                                                                               5
<PAGE>   8
         MARKET MAKING (Fixed Income, Equities, Foreign Exchange, and
         Commodities)

<TABLE>
<CAPTION>
         In millions                                          1996          1995
         -----------------------------------------------------------------------
<S>                                                         <C>           <C>   
         Trading revenue ...........................        $2 088        $1 111
         Net interest revenue ......................           378           424
         Fees and commissions ......................            95            61
         Other sector revenues .....................            61            65
         -----------------------------------------------------------------------
         Total revenues ............................         2 622         1 661
         Total expenses ............................         1 739         1 462
         -----------------------------------------------------------------------
         Pretax income .............................           883           199
         -----------------------------------------------------------------------
</TABLE>


         Market Making results grew significantly in 1996, reflecting the
         continuation of favorable market conditions and increased demand by a
         wide variety of clients for our fixed income, equity, and foreign
         exchange products, including related derivatives. Expansion into new
         markets, for example in Eastern Europe, and new products, such as
         credit derivatives, continued. In making markets, we also take
         positions to facilitate client transactions and to benefit from our
         role as an intermediary.

                  Fixed income revenues in developed markets rose dramatically
         in 1996, accounting for more than 75% of the total sector increase and
         approximately one-half of the sector's total revenues. An increase in
         demand for swaps and swap derivatives, including more complex,
         customized transactions, fueled the rise, and volumes increased across
         most of our fixed income products. Revenues included gains on
         client-related positions. In addition, 1995 included losses recorded
         when we curtailed mortgage-backed activities in a strategic realignment
         of resources.

                  J.P. Morgan continued to be a leading participant in emerging
         markets, with revenues growing 12% for the year and accounting for
         about a fifth of total sector revenues. Client demand was strong for
         external and local country debt and derivatives across Latin America,
         Eastern Europe, and Asia. Gains on positions taken to capitalize on
         short-term trading opportunities also added to revenues.

                  Most major equity markets continued to rally throughout 1996.
         J.P. Morgan benefited from this trend, with equities revenues
         increasing 50% as our client base in both the cash and derivative
         markets broadened. Market Making revenues from equities accounted for
         approximately 15% of the sector's revenues. Equity derivative revenues
         were up 50%, reflecting increased client demand. Equity commissions
         increased more than 30% on higher volumes, primarily on U.S. exchanges.

                  Foreign exchange revenue rose 19%, as client demand and
         transaction volumes grew, primarily in developed markets; commodities
         revenues were 30% lower, reflecting declines in base metal trading.

                  Total Market Making revenues increased $961 million to $2,622
         million in 1996. Expenses increased $277 million from $1,462 million in
         1995, reflecting increased incentive compensation in line with higher
         earnings and expansion of our equities capabilities as part of our
         strategic objectives.




6
<PAGE>   9
         ASSET MANAGEMENT AND SERVICING (Asset Management, Private Client
         Services, Futures and Options Brokerage, and Euroclear System)

<TABLE>
<CAPTION>
         In millions                                          1996         1995
         -----------------------------------------------------------------------
<S>                                                         <C>          <C>   
         Investment management revenue .............        $  681       $  580
         Fees and commissions ......................           405          397
         Net interest revenue ......................           312          329
         Other sector revenues .....................            15           (2)
         -----------------------------------------------------------------------
         Total revenues ............................         1 413        1 304
         Total expenses ............................         1 140          920
         -----------------------------------------------------------------------
         Pretax income .............................           273          384
         -----------------------------------------------------------------------
</TABLE>


         This was a year of continued growth in our asset management and private
         client activities. We continued to invest in people and technology to
         expand our global platform, develop additional distribution channels,
         and broaden our core investment capabilities. Assets under management
         for both private and institutional clients grew 16% to $208 billion in
         1996 and are widely diversified by asset class among money market,
         fixed income, equity, and real estate products and across markets
         globally.

                  Revenues generated by asset management and services for
         private clients increased 14% in 1996, providing over 60% of the
         sector's revenues. J.P. Morgan won a record level of new business from
         institutional clients around the world. More than 40% of new assets
         were awarded to manage international portfolios.

                  J.P. Morgan assists individuals, families, and privately held
         enterprises worldwide in structuring and managing wealth through a
         range of advisory, investment, and liquidity products. We manage $49
         billion of private client assets, up approximately 20% in 1996. Our
         full service brokerage unit, which offers investors who manage their
         own portfolios access to a complete range of global securities,
         generated sharply higher revenues due to significant growth in volume
         from both new and existing clients. While most of the revenues from our
         private client business are reported in this sector, approximately $100
         million are included in our Finance and Advisory and Market Making
         sectors, reflecting transactions undertaken for private clients in
         other business areas. Private clients accounted for approximately $500
         million of our revenues from all client-focused activities, up 20% from
         the prior year.

                  Our futures and options brokerage unit experienced volume
         growth of approximately 20% in 1996 as we increased our market share on
         most major exchanges. Revenues earned increased slightly from the prior
         year as revenue gains from increased volume were offset by competitive
         pricing pressures. As a futures and options broker, we are active
         dealers on 53 exchanges around the world, establishing a presence on 12
         exchanges in 1996.

                  Morgan operates the Euroclear System, the world's largest
         clearance and settlement house for internationally traded securities,
         and provides credit and deposit services to Euroclear System
         participants. Euroclear-related revenues, primarily included in Net
         interest revenue and Fees and commissions, were essentially unchanged
         from the prior year.

                  Total Asset Management and Servicing revenues increased $109
         million to $1,413 million. Expenses increased $220 million from $920
         million in 1995 due to strategic investments in our private client and
         institutional asset management businesses.




                                                                               7
<PAGE>   10
         PROPRIETARY ACTIVITIES

         J.P. Morgan employs a small group of professionals who use their
         expertise and Morgan's resources, within clearly established risk
         parameters, to enter into proprietary transactions for our own account.
         The results of these activities, which complement our client-focused
         activities, are provided below.

         EQUITY INVESTMENTS (Equity Investment Portfolio Management)

<TABLE>
<CAPTION>
         In millions                                         1996           1995
         -----------------------------------------------------------------------
<S>                                                          <C>            <C> 
         Investment securities revenue ...........           $293           $503
         Other sector revenues ...................              3              9
         -----------------------------------------------------------------------
         Total revenues ..........................            296            512
         Total expenses ..........................             34             24
         -----------------------------------------------------------------------
         Pretax income ...........................            262            488
         -----------------------------------------------------------------------
         Total return ............................            363            365
         -----------------------------------------------------------------------
</TABLE>


         J.P. Morgan invests globally in privately held growth companies,
         management buyouts, privatizations, and recapitalizations. Investments
         are made and managed with the objective of maximizing total return,
         which is a measure of both long term appreciation and recognized gains.
         Our $842 million portfolio, at cost, consists of approximately 90
         investments diversified by industry, geographic area, and stage of
         investment. Approximately 25% of our investments are committed to
         opportunities in Latin America, Europe, and Asia.

                  In 1996, we invested a record $356 million globally in the
         private equity of 34 companies in the insurance, retail,
         telecommunications, health care, and technology industries. Our largest
         investment was $200 million in Travelers/Aetna Property Casualty Corp.

                  We expanded the team dedicated to private equity investing in
         1996, with particular emphasis on increasing our presence in Latin
         America, Asia, and Europe -- regions where we see increasingly
         attractive investment opportunities. In addition, the team worked
         closely with other areas of the firm to capture the competitive
         advantage of Morgan's global presence and expertise in sourcing,
         evaluating, and managing investments. Opportunities often develop
         through relationships with clients. We have also managed initial public
         offerings and high yield debt issues, arranged credit facilities, and
         provided mergers and acquisitions advice to portfolio companies at
         later stages of their development.

                  Reported revenues of $296 million in 1996 were down from the
         high level attained in 1995 when significant gains were harvested from
         a large position in Columbia/HCA Healthcare Corporation. Total return,
         which equals reported revenues plus the change in net unrealized
         appreciation, was $363 million in 1996, essentially level with 1995.


         Net unrealized appreciation as of December 31 is presented below.

<TABLE>
<CAPTION>
         In millions                                        1996    1995    1994
         -----------------------------------------------------------------------
<S>                                                         <C>     <C>     <C> 
         Marketable equity investment securities .......    $477    $440    $576
         Nonmarketable equity investment securities ....     115      85      96
         -----------------------------------------------------------------------
         Total net unrealized appreciation .............     592     525     672
         -----------------------------------------------------------------------
</TABLE>




8
<PAGE>   11
         PROPRIETARY INVESTING AND TRADING (Market Risk Positioning and Capital
         and Liquidity Management)

<TABLE>
<CAPTION>
         In millions                                          1996          1995
         -----------------------------------------------------------------------
<S>                                                         <C>           <C>   
         Net interest revenue ......................        $  623        $  868
         Trading revenue ...........................           241           154
         Investment securities revenue .............            12            20
         Other sector revenues .....................            28            78
         -----------------------------------------------------------------------
         Total revenues ............................           904         1 120
         Total expenses ............................           153           129
         -----------------------------------------------------------------------
         Pretax income .............................           751           991
         -----------------------------------------------------------------------
         Total return ..............................           594           601
         -----------------------------------------------------------------------
</TABLE>


         J.P. Morgan actively takes market risk positions for its own account,
         employing directional and relative value risk-taking strategies,
         diversified across markets and instruments.

                  Directional strategies anticipate changes in absolute rate and
         price levels, while relative value strategies anticipate changes in
         relationships between markets and classes of instruments. These
         strategies are conducted across many currencies and types of
         instruments, both on- and off-balance-sheet, where we perceive
         opportunities exist to generate value for the firm. Instruments
         typically used in these positioning activities include fixed income
         securities, foreign exchange, equity securities, commodity products,
         and related derivative instruments. Positions may be held for short or
         long periods of time, depending on our strategy and actual market
         performance. Certain longer-term strategies are considered to be
         investment activities and primarily utilize government and
         mortgage-backed fixed income securities and interest rate swaps. The
         securities and interest rate swaps used in these investment activities
         are classified as "available-for-sale" and "risk-adjusting"
         respectively.

                  In addition to these risk-taking activities, and included in
         this sector's results, are the firm's capital and liquidity management
         activities.

                  Revenues declined 19% in 1996 to $904 million, primarily due
         to lower net interest earnings as higher-yielding investments,
         principally interest rate swaps, continue to mature. Expenses increased
         19% to $153 million, primarily as a result of higher employee
         compensation and benefits.

                  Total return, which combines reported revenues and the change
         in net unrealized appreciation, is the more meaningful measure of
         performance for this sector. Total return for 1996 of $594 million was
         essentially unchanged from the $601 million reported in 1995. Returns
         from activities in Asia were strong in 1996, but were down from the
         particularly high levels of 1995. This decline was offset primarily by
         higher returns in most activities in the U.S.

                  The following table represents the components of net
         unrealized appreciation for this sector. Net unrealized appreciation
         declined to $243 million in 1996, mainly as a result of the recognition
         of net interest revenue.

         UNREALIZED APPRECIATION (DEPRECIATION)

<TABLE>
<CAPTION>
         In millions                                 1996       1995        1994
         -----------------------------------------------------------------------
<S>                                                 <C>        <C>        <C>   
         Debt investment securities ...........     $ 255      $ 484      $  154
         Risk-adjusting swaps .................       123        389         776
         Long-term repurchase agreements ......       (80)      (152)         46
         Other financial instruments ..........       (55)      (168)         96
         -----------------------------------------------------------------------
         Total net unrealized appreciation ....       243        553       1 072
         -----------------------------------------------------------------------
</TABLE>




                                                                               9
<PAGE>   12
         CORPORATE ITEMS

         Corporate Items include revenues and expenses that have not been
         allocated to the five business sectors, intercompany eliminations, and
         the taxable-equivalent adjustment, which is calculated to gross-up tax
         exempt interest to a taxable basis. Corporate Items also include the
         results of sold or discontinued businesses.

                  In line with strategic steps begun in 1995, we completed the
         sale of our institutional U.S. cash processing business in December.
         The sale did not have a material impact on earnings. This disposition
         was made in addition to the sale of our securities custody and clearing
         activities and the discontinuance of certain cash services during 1995.
         Revenues and expenses included in Corporate Items for 1996 and 1995
         related to these businesses were as follows: Total revenues were $144
         million in 1996, down from $397 million in 1995; total expenses were
         $149 million in 1996, down from $433 million in 1995. Our role as
         operator of the Euroclear System and the cash management and processing
         services we offer private clients were not affected by these sales.

                  Revenues reported in Corporate Items in 1996 also included a
         gain of $77 million related to the partial sale of a minority
         investment. Expenses in 1996 included a $71 million technology-related
         special charge.

                  Revenues in 1995 included a $40 million gain related to the
         sale of the firm's global and local custody and U.S. commercial paper
         issuing and paying agency businesses. Expenses included a $55 million
         charge related to expense management efforts.




10
<PAGE>   13
RISK MANAGEMENT




         The major risks inherent in J.P. Morgan's businesses are market,
         liquidity, credit, and operating risk. Comprehensive risk management
         processes have been established to facilitate, control, and monitor
         risk-taking. These processes are built on a foundation of early
         identification and analytically rigorous measurement of risks by each
         of our businesses. Control mechanisms are in place at different levels
         throughout the organization. The Corporate Risk Management Group and
         individual businesses, as well as the audit, legal, financial, and
         operations groups, are all involved in monitoring risks from a variety
         of perspectives with the objective of determining whether the
         businesses are operating within established corporate policies and
         limits. New businesses and material changes to existing businesses are
         subjected to reviews to assure management that significant risks are
         identified and appropriate control procedures are in place.

                  Morgan's business managers are responsible for managing risks
         in the activities and markets in which they do business. These
         managers, located in markets around the world, have firsthand knowledge
         of changes in market, industry, credit, economic, and political
         conditions in their host countries and use their experience and
         insights, supported by various risk management tools, to adjust
         positions and revise strategies in an efficient and timely manner. Our
         business managers protect against losses from unexpected events by
         limiting the magnitude of the risks they take and diversifying
         exposures and activities across a variety of instruments, markets,
         clients, and geographic regions.

                  The Corporate Risk Management Group oversees our firmwide risk
         management processes. The primary objective of the group is to preserve
         our capital base by developing, communicating, and implementing an
         institutional view of and process for managing risk across Morgan. The
         Corporate Risk Management Group also supports the firm in efforts to
         identify and implement opportunities to optimize return on capital.
         This unit, which is independent of our business groups, is managed by
         the head of the Market Risk and Credit Policy committees.

                  The Corporate Risk Management Group performs independent
         reviews of significant risk concentrations and has the authority to
         challenge any risk position. The group establishes and controls market
         risk limits and concentration limits for credit risk by considering
         exposure to particular products, counterparties, industries, and
         geographic regions. The Corporate Risk Management Group maintains a
         common risk management framework by developing, communicating, and
         assisting business groups in implementing corporate risk management
         policies, information systems, and methodologies. The group also
         supports Morgan's professionals with training related to risk
         management policies and methodologies.

                  The Market Risk and Credit Policy committees, along with the
         Operating Risk and Investment committees, are composed of members of
         senior management. The Market Risk Committee reviews trends in the
         firm's market and liquidity risk profiles, and the Credit Policy
         Committee reviews credit risk developments. The Operating Risk
         Committee is primarily responsible for monitoring Morgan's overall
         operating environment and anticipating future operating trends in the
         marketplace. The Investment Committee provides oversight for our Equity
         Investments activities, approving all investments made in excess of
         defined limits, advising on portfolio strategy, and monitoring
         portfolio issues. The Board of Directors periodically reviews trends in
         our risk profiles and performance as well as any significant
         developments in risk management policies and controls.

                  The processes and procedures by which we manage our risk
         profile continually evolve as our business activities change in
         response to market, credit, product, and other developments. We are
         always seeking to strengthen the risk management process through
         continuous investments in technology and training. Periodic reviews
         performed by internal auditors, regulators, and independent accountants
         subject our practices to additional scrutiny and further strengthen our
         processes.




                                                                              11
<PAGE>   14
         MARKET RISK

         Market risk is the uncertainty to which future earnings are exposed as
         a result of changes in the value of portfolios of financial
         instruments. This risk is a consequence of our trading and investing
         activities in the interest rate, foreign exchange, equity, and
         commodity markets.

                  The estimation of potential losses that could arise from
         adverse changes in market conditions is a key element of managing
         market risk. J.P. Morgan generally employs a value at risk methodology
         to estimate such potential losses; our Equity Investments activities
         are monitored separately by the Investment Committee as discussed
         earlier. The firm's primary measure of value at risk is referred to as
         "Daily Earnings at Risk" (DEaR). This measure takes into account
         numerous variables that may cause a change in the value of our
         portfolios, including interest rates, foreign exchange rates,
         securities and commodities prices, and their volatilities, as well as
         correlations among these variables. Option risks are measured using
         simulation analysis and other analytical techniques. These methods
         produce risk measures that are comparable to those generated for
         nonoption positions in trading and investing activities assuming normal
         market conditions and market liquidity. These estimates also take into
         account the potential diversification effect of the different positions
         in each of our portfolios.

                  On a regular basis, the Corporate Risk Management Group, with
         support from the financial group, calculates, reviews, and updates the
         historic volatilities and correlations that serve as the basis for
         these estimates.

                  DEaR's one-day horizon allows for a consistent and uniform
         measure of market risk across all applicable products and activities.
         It also facilitates regular comparison of risk estimates to daily
         trading results, providing an indication of the quality of these
         estimates as well as opportunities to enhance our risk measurement
         processes. DEaR measures potential losses that are expected to occur
         within a 95% confidence level, implying that a loss might exceed DEaR
         approximately 5% of the time. In estimating DEaR, it is necessary to
         make assumptions about market behavior. The standard forecast used by
         J.P. Morgan assumes normal distributions and an adverse market movement
         of 1.65 standard deviations.

                  Morgan utilizes DEaR as one tool to estimate potential market
         risk related to our trading and investing activities. In addition, the
         Corporate Risk Management Group sets DEaR limits for each trading
         activity, as well as firmwide limits for all trading activities
         combined, and for investing and trading activities combined (aggregate
         market risk). The level of risk to be assumed by a business is based on
         our overall objectives, business manager experience, client
         requirements, market liquidity, and volatility. Within these limits,
         business managers set regional, local, product, currency, and trader
         limits as appropriate.

                  On a daily basis, we estimate DEaR for each trading activity,
         as well as for firmwide trading and aggregate market risk. Management
         reviews daily reports of profit and loss, aggregate positions, and the
         firm's market risk profile. These reports compare estimated DEaR for
         the above-mentioned activities by individual business and by principal
         market with relevant DEaR limits, and include a description of
         significant positions and a discussion of market conditions. Risk
         managers meet daily to discuss the firm's global market risk profile
         and trading and investing strategies.

                  The DEaR methodology is a uniform measure to communicate and
         evaluate the relative level of market risk within and across businesses
         and major markets. However, since no single measure can capture all the
         dimensions of market risk, we supplement DEaR with additional market
         risk information and tools such as stress testing. Stress tests measure
         the effect on portfolio values of unusual market movements and are
         performed on a portfolio and firmwide basis to help identify potential
         sensitivities to abnormal events. Stress testing can take several
         forms, including simulation analysis; sensitivity analysis, for moves
         in values of specific key variables such as volatilities and shifts in
         yield curves; and specific event analysis, for measuring the impact of
         abnormal market conditions associated with a specific market event. In
         selective cases, we supplement DEaR with "tail risk" limits (i.e., risk
         of loss beyond the expected confidence level) for portfolios that are
         particularly susceptible to extreme market-related valuation losses.




12
<PAGE>   15
         MARKET RISK PROFILES

         The following presents the market risk profiles for the firm as of and
         for the years ended December 31, 1996 and 1995. The level of market
         risk, which is measured on a diversified basis, will vary with market
         factors, the level of client activity, and our expectations of price
         and market movements.

         AGGREGATE MARKET RISK ACTIVITIES

         DEaR for our aggregate trading and investing activities across all
         market risks averaged approximately $31 million and ranged from $24
         million to $44 million in 1996. This compares with average DEaR of
         approximately $26 million and a range from $20 million to $38 million
         in 1995. Aggregate market risk levels increased in 1996, primarily as a
         result of higher risk levels in our proprietary investing activities.

         Trading market risk activities

         The market risk profiles as measured by DEaR for our trading activities
         combined for each business day in 1996 and 1995 are presented in the
         table below.


                                    [GRAPH]


         In 1996, average DEaR for our trading activities across all market
         risks was approximately $21 million, as compared with approximately $19
         million in 1995. The modest increase reflects higher risk levels in
         most trading businesses offset by lower risk levels in emerging markets
         activities. The primary sources of market risk associated with our
         trading activities relate to movements in interest rates, foreign
         exchange rates, and equity and commodity prices, each of which is
         measured on a diversified basis. For 1996, average DEaR of
         approximately $21 million represented the combination of interest rate
         risk of approximately $14 million, foreign exchange rate risk of
         approximately $6 million, equities risk of approximately $5 million,
         commodity risk of approximately $4 million and all other market risks
         of approximately $6 million, offset by approximately ($14) million
         reflecting additional diversification among these risks.




                                                                              13
<PAGE>   16
                  The frequency distribution of our 1996 daily trading-related
         revenues, generated by our trading businesses, is presented below.


                                    [GRAPH]


         The above distribution around average daily revenue of $12.6 million
         (which includes trading, trading-related net interest revenue, and
         other related sources of revenue) reflects the diversified and
         client-oriented nature of our global trading market risk activities.
         Average daily revenue was $7.6 million in 1995.

                  J.P. Morgan evaluates the reasonableness of DEaR estimates by
         comparing DEaR to actual trading results. In 1996, the quality of our
         risk estimates remained strong. The number of occurrences where daily
         revenue fell short of expected daily results by amounts greater than
         related DEaR estimates was consistent with statistical expectations. In
         addition, the confidence bands depicted in the above histogram, which
         represent 1.65 standard deviations around average daily revenue, would
         imply an average DEaR of $19 million, compared to our actual average
         DEaR estimate of $21 million for 1996.

                  We also evaluate various downside risk indicators. For
         example, average daily revenue, for the nine days that fell short of
         the downside confidence band, was a loss of ($12) million in 1996,
         compared with a loss of ($15) million for 10 days in 1995.

         Proprietary investing activities

         The primary sources of market risk associated with our proprietary
         investing activities relate to interest rate risk associated with fixed
         income securities and interest rate swaps and spread risk associated
         with our mortgage-backed securities portfolio. Average DEaR for
         proprietary investing activities was approximately $22 million and
         ranged from $10 million to $37 million in 1996 as compared with
         approximately $17 million and a range from $12 million to $25 million
         in 1995. The increase in average DEaR is primarily related to the
         mortgage-backed securities portfolio.

                  Due to the longer-term nature of our investing activities, we
         use a weekly time horizon to evaluate our risk estimates relative to
         total return. In 1996, the number of occurrences where weekly total
         return fell short of expected weekly results by amounts greater than
         related weekly risk estimates was consistent with statistical
         expectations.




14
<PAGE>   17
         LIQUIDITY RISK

         Liquidity risk arises in the general funding of the firm's activities
         and in the management of positions. It includes both the risk of being
         unable to fund our portfolio of assets at appropriate maturities and
         rates and the risk of being unable to liquidate a position in a timely
         manner at a reasonable price.

                  The Global Liquidity Management Group is responsible for the
         identification, measurement, and monitoring of Morgan's liquidity
         risks, for maintaining an adequate liquidity surplus, and for long-term
         liquidity planning. Funds are raised globally from a broad range of
         instruments including deposits, commercial paper, bank notes,
         repurchase agreements, federal funds purchased, long-term debt, capital
         securities and stockholders' equity. A strong capital position is
         integral to our ability to manage liquidity.

                  Morgan's liquidity policy is to maintain sufficient capital
         plus long-term debt and capital securities in order to maintain the
         capacity to be funded on a fully collateralized basis. The strategy
         ensures that, even under adverse conditions, we have access to funds
         necessary to cover client needs, maturing liabilities, and the capital
         requirements of our subsidiaries. In addition, stress tests are
         performed to monitor future funding requirements under various market
         conditions that might adversely impact our ability to liquidate
         investment and trading positions or our ability to access the markets.

                  The Liquidity Risk Committee, which is composed of senior
         business, financial, and credit risk management officers, meets monthly
         to review trends in the firm's overall liquidity risk profile and
         communicates any significant changes to the Market Risk Committee.

                  The liquidity of trading asset inventories is monitored
         continuously by the appropriate business managers. On a periodic basis
         the Corporate Risk Management Group reviews the liquidity and turnover
         of inventories as part of its overall business risk review.

         CREDIT RISK

         Credit risk arises from the possibility that counterparties may default
         on their obligations to the firm. These obligations arise from our
         lending activities, the extension of credit in our trading and
         investment activities, and participation in payment and securities
         settlement transactions on our own behalf and as agent for our clients.
         The growing diversity of our business through an expanded range of
         products and services and participation in international markets has
         increased the complexity of managing credit risk.

                  J.P. Morgan manages credit risk on an individual transaction,
         counterparty level, and portfolio basis. Credit limits for individual
         clients and counterparties are established by credit officers with
         direct knowledge of the client's creditworthiness. These officers and
         our business managers are responsible for credit screening and
         monitoring. At a portfolio level, exposure concentrations that do not
         relate to individual counterparties, such as country, industry, and
         product exposures, are reviewed regularly by the Credit Policy
         Committee. Credit concentration limits for various industries,
         products, and countries are set by the Corporate Risk Management Group.

                  The Global Credit Group is responsible for evaluating the
         likelihood that a counterparty will be able to fulfill its obligations
         in a particular transaction or group of transactions, including an
         assessment of the covenants, collateral, and other protections
         available to the firm in the event a counterparty's creditworthiness
         deteriorates. An internal credit rating, which is analogous to those of
         public rating agencies in the United States, is established as a result
         of this evaluation. To reduce individual counterparty credit risk, we
         attempt to deal with creditworthy counterparties, obtain collateral
         where appropriate, and utilize master netting agreements, primarily in
         connection with derivative products.




                                                                              15
<PAGE>   18
                  Established credit limits and actual levels of exposures are
         reviewed regularly by senior management on both an individual
         counterparty and portfolio basis. When our credit review procedures
         identify counterparty, country, industry, or product exposures that
         require a higher-than-normal degree of scrutiny, these exposures are
         carefully monitored by the Asset Quality Review Committee, which meets
         quarterly. In assessing the adequacy of our aggregate allowance for
         credit losses, this group of senior officers recommends the portion of
         credit exposures that should be charged off and the amount of any
         provisions needed for credit losses. The size of our aggregate
         allowance is based upon senior management's evaluations of required
         reserves to cover potential losses on either an individual
         counterparty, industry, or country basis, along with statistical
         evaluations of the inherent default losses within J.P. Morgan's
         remaining credit exposures.

                  From a portfolio perspective, the estimation of potential
         default losses that could arise from adverse changes in our
         counterparties' credit quality is a key element of managing credit
         risk. J.P. Morgan employs a number of qualitative and quantitative
         processes and methodologies to estimate such potential losses. The
         primary qualitative aspect is determining the creditworthiness of our
         counterparties, which we express in terms of the internal credit
         ratings described above. Through statistical analysis, these ratings
         are used to estimate the default probabilities and volatilities of our
         counterparties. The correlation of default among different
         counterparties, and the recoveries the firm may realize in the event of
         a default, are other variables that reflect the judgment of senior
         credit officers.

                  The quantitative aspect of potential default loss estimation
         incorporates measurements of credit exposure to our counterparties. The
         Corporate Risk Management Group is responsible for establishing the
         framework of policies and practices required to measure such exposure.
         We measure credit exposure in terms of both current and potential
         credit exposure. Current credit exposure is generally represented by
         the notional or principal value of on-balance-sheet financial
         instruments and off-balance-sheet direct credit substitutes such as
         standby letters of credit and guarantees. Current credit exposure also
         includes the positive market value of derivative instruments. Since
         many of our exposures vary with changes in market prices and the
         borrowing needs of our clients, we also estimate the potential credit
         exposure over the remaining term of transactions through statistical
         analysis of market prices and borrowing patterns.

                  We estimate the likelihood of various potential default losses
         by evaluating credit exposures in the context of our counterparties'
         creditworthiness. These estimates incorporate management's evaluation
         of several variables including the credit quality of our
         counterparties, the amount and duration of our credit exposure, default
         probabilities, collateral values, and expected recovery rates in the
         event of default. We also consider the volatility of corporate defaults
         as well as our portfolio's diversification across counterparties,
         industries, and geographic regions.

                  The development of uniform estimates of credit exposure and
         potential loss is useful in evaluating the relative level of credit
         risk within and across counterparties, products, industries, and
         geographic regions of our global credit portfolio. However, no single
         measure can capture all dimensions of credit risk. To ensure our
         understanding about the potential range of adverse outcomes from the
         firm's credit risk, we supplement these measures with additional credit
         risk information and tools, including stress tests and sensitivity
         analyses aimed at estimating the potential exposure and losses
         resulting from changes to the parameters of J.P. Morgan's credit risk
         models. A strong capital position provides the firm and its
         shareholders with additional protection in the event of adverse
         outcomes.




16
<PAGE>   19
         OPERATING RISK

         Operating risk is the potential for loss arising from firm activities
         or external events caused by breakdowns in information, communication,
         physical safeguards, business continuity, supervision, transaction
         processing, settlement systems and procedures, and the execution of
         legal, fiduciary, and agency responsibilities. J.P. Morgan attempts to
         mitigate operating risk by maintaining a comprehensive system of
         internal controls.

                  The goal of an internal control framework begins with the
         identification and prioritization of business objectives, and the
         business processes through which they are attained. J.P. Morgan's
         business managers are responsible for establishing and maintaining an
         appropriate system of internal controls after considering the risks of
         their businesses and the standards and policies of the firm. Risks
         inherent in business processes are identified, and control objectives
         and associated procedures required are established to mitigate those
         risks. The impact of the controls is evaluated against business
         objectives to ensure that cost and benefit remain in balance.
         Monitoring the effectiveness of our control procedures by means of
         performance measures is also a component of this framework.

                  In addition to the establishment of a system of internal
         controls, we also invest in the development of key backup facilities
         worldwide, and update systems and equipment as required in response to
         changes in business conditions and technology needs. Contingency plans
         are periodically tested and communicated throughout the firm.

                  The Operating Risk Committee monitors necessary changes to the
         firm's operating environment, in response to changes in the
         marketplace, in technology, and in the firm's strategic initiatives and
         organizational structures. J.P. Morgan's business managers are
         responsible for establishing and maintaining internal control
         procedures that are appropriate for their local operating environments.
         Local operating committees also evaluate the control environment on a
         regular basis. The firm's achievement of its operational control
         objectives is further enhanced by a strategic alliance with a
         consortium of world-class technology firms that assist in the
         management of Morgan's global technology infrastructure.

                  Legal risk, a component of operating risk, arises from the
         uncertainty of the enforceability, through legal or judicial processes,
         of the obligations of J.P. Morgan's clients and counterparties,
         including contractual provisions intended to reduce credit exposure by
         providing for the offsetting or netting of mutual obligations. The firm
         seeks to minimize such uncertainty through consultation with internal
         and external legal advisors in all countries in which we conduct
         business.

                  Fiduciaries and agents have obligations to act on behalf of
         others. Fiduciary or agency risks exist in our investment management
         activities and to a lesser extent in many of our other agency and
         brokerage activities. The firm has a number of policies and procedures
         to ensure that our obligations to clients are discharged faithfully and
         in compliance with applicable legal and regulatory requirements. Such
         policies and procedures include "know your client" and suitability
         policies and procedures regarding management of the firm's investment
         products, trade execution, counterparty selection, and the evaluation
         of potential investment opportunities.

                  Our control environment encompasses all of the above elements
         and is enhanced by the integrity and competence of our professionals,
         the way our professionals are developed and supervised, and
         management's philosophy and operating style. This comprehensive system
         of internal controls enables management to ensure compliance with firm
         policies and external regulations.




                                                                              17
<PAGE>   20
FINANCIAL REVIEW



         NET INTEREST REVENUE

         Net interest revenue aggregates interest revenue and expense
         generated from the firm's client-focused and proprietary activities,
         which use a variety of asset, liability, and off-balance-sheet
         instruments. Net interest revenue is affected by changes in interest
         rates, funding strategies, and the relative proportion and composition
         of interest-bearing and noninterest-bearing financial instruments. The
         levels of equity capital and net noninterest-bearing liabilities reduce
         the requirement to incur interest-bearing liabilities to fund the
         firm's activities. Proprietary Investing and Trading sector activities
         remain the largest contributor to net interest revenue, representing
         approximately one-third of total net interest revenue, down from
         approximately 45% in the prior year. The Finance and Advisory and Asset
         Management and Servicing sectors, which generate net interest revenue
         from loans and other credit and deposit products, account for about
         one-half of the firm's net interest revenue. In addition, net interest
         revenue is generated from various financial instruments used in our
         trading-related businesses within the Market Making sector.

                  Net interest revenue was $1,702 million in 1996, compared with
         $2,003 million in 1995. The 15% decline from 1995 is primarily
         attributable to a decline in net interest revenue from Proprietary
         Investing and Trading positions as a result of the continuing maturity
         of higher-yielding financial instruments.

                  Net interest revenue was $2,003 million in 1995, compared with
         $1,981 million in 1994. Net interest revenue in 1994 included $66
         million of interest revenue primarily related to past due interest
         claims from Brazil and Argentina, and $50 million of interest revenue
         associated with income tax refunds. Excluding these items, net interest
         revenue was 7% higher in 1995 than in 1994. Net interest revenue
         associated with the Finance and Advisory sector increased in 1995,
         primarily driven by increases from credit-related products. Net
         interest revenue from Proprietary Investing and Trading activities in
         the United States and Asia also increased, while net interest revenue
         related to the Market Making sector declined.

         TRADING REVENUE

         Trading revenue is generated primarily by activities included
         within the Market Making and Proprietary Investing and Trading sectors.
         Trading revenue increased 80% to $2,477 million in 1996 from 1995 and
         35% to $1,376 million in 1995 from 1994, due to strong client demand in
         the firm's market-making activities in both developed and emerging
         markets, and higher results in our proprietary trading activities.

                  The following table presents trading revenue, disaggregated by
         principal product groupings. Such revenue represents only a portion of
         the total revenues generated by the business activities discussed in
         the Business sector analysis, and does not include related net interest
         revenue.

<TABLE>
<CAPTION>
In millions                                 1996           1995            1994
--------------------------------------------------------------------------------
<S>                                       <C>              <C>           <C>
Fixed Income .....................         $1 540          $  668         $  766
Equities .........................            330             249            115
Foreign Exchange .................            320             253            168
Commodities ......................             34              42             82
Proprietary Trading ..............            253             164           (112)
--------------------------------------------------------------------------------
Total trading revenue ............          2 477           1 376          1 019
--------------------------------------------------------------------------------
</TABLE>

18
<PAGE>   21
         Fixed Income

         Fixed Income includes the results of making markets in both developed
         and emerging countries in government securities, interest rate and
         currency swaps, options and other derivative instruments, money market
         instruments, U.S. government agency securities, and corporate debt
         securities.

                  Trading revenue of $1,540 million in 1996 grew $872 million
         from 1995. The growth in 1996 is due to increased demand for swaps and
         swap derivatives, including more complex, customized transactions, and
         for government and corporate securities. In addition, results were
         positively impacted by gains on client-related positions compared with
         losses in the prior year.

                  Trading revenue of $668 million in 1995 decreased $98 million
         from 1994. While demand for risk management products was higher,
         revenue declined from 1994 due to losses in positions arising from some
         client activities. Additionally, losses were recorded in 1995 when we
         curtailed mortgage-backed activities in a strategic realignment of
         resources. Partially offsetting these declines were higher results from
         emerging markets activities.

         Equities

         Equities include the results of making markets in global equity
         securities and equity derivatives such as swaps, options, futures, and
         forward contracts.

                  Trading revenue advanced $81 million to $330 million in 1996,
         and $134 million to $249 million in 1995, reflecting strong client
         demand in our equity derivatives activities.

         Foreign Exchange

         Foreign Exchange includes the results of making markets in spot,
         options, and short-term interest rate products, including forwards and
         forward rate agreements in multiple currencies.

                  Trading revenue grew $67 million to $320 million in 1996, and
         $85 million to $253 million in 1995, primarily as a result of an
         increase in client demand and greater volatility in the foreign
         exchange markets.

         Commodities

         Commodities include the results of making markets in spot, forwards,
         options, and swaps, and advising clients on developing hedging,
         investment, and commodity-linked financing strategies.

                  Trading revenue of $34 million in 1996 decreased $8 million
         from 1995, due primarily to declines in base metals revenues caused by
         extreme market movements.

                  Trading revenue of $42 million in 1995 decreased $40 million
         from the exceptional 1994 results, due primarily to declines in base
         metals revenues.

         Proprietary Trading

         The Proprietary Investing and Trading sector engages in transactions
         for our own account across all markets.

                  Trading revenue increased $89 million to $253 million in 1996,
         reflecting an increase in revenues from relative value trading
         activities.

                  Trading revenue of $164 million in 1995 reflected gains,
         primarily in Asian markets, compared with losses of $112 million in
         1994, primarily in European markets.

                                                                              19
<PAGE>   22
         TRADING-RELATED ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
         In billions: Average balances                                     1996           1995           1994
         ----------------------------------------------------------------------------------------------------
         <S>                                                              <C>            <C>            <C>
         TRADING-RELATED ASSETS:
            Trading account assets .............................          $78.2          $68.0          $62.0
            Securities purchased under agreements to resell ....           42.7           31.6           32.1
            Securities borrowed ................................           25.3           15.2           15.6

         TRADING-RELATED LIABILITIES:

            Trading account liabilities ........................           49.1           45.2           38.6
            Securities sold under agreements to repurchase .....           59.8           40.1           45.5
         ----------------------------------------------------------------------------------------------------
</TABLE>

         The level of trading account assets, securities purchased under
         agreements to resell (resale agreements), securities borrowed, trading
         account liabilities, and securities sold under agreements to repurchase
         (repurchase agreements) fluctuates daily depending upon client needs as
         well as market opportunities.

                  The firm uses resale agreements and securities borrowed to
         facilitate deliveries to customers and to meet the inventory financing
         needs of clients. We use repurchase agreements as a source of
         short-term financing for trading-related positions and as one source of
         financing for the debt investment securities portfolio.

                  Trading account assets and liabilities are mainly composed of
         U.S. Treasury and foreign government securities, trading-related
         derivatives, and corporate debt and equity securities. Average trading
         account assets grew 15% in 1996, and 10% in 1995, as a result of
         increased holdings of government securities and corporate debt and
         equity securities, reflecting the continued expansion of activities
         within the Market Making sector. Additionally, average balances for
         resale agreements, securities borrowed, and repurchase agreements have
         increased to meet the needs of clients and to profit from interest rate
         spreads. The average balance of trading-related assets represented 68%
         of average total assets in 1996, compared with 64% in 1995 and 1994.

                  For financial statement reporting purposes, beginning December
         31, 1996, a portion of the aggregate allowance for credit losses
         relating to derivatives, amounting to $350 million, which had
         previously been reported as a reduction of loans, is presented as a
         reduction of Trading account assets. Such change in presentation had no
         material impact on 1996 averages. Refer to page 28 for a detailed
         discussion of the aggregate allowance for credit losses.

         DERIVATIVES

         In general terms, derivative instruments are contracts or agreements
         whose value is derived from interest rates, foreign exchange rates,
         prices of securities, or financial or commodity indices. Derivatives
         include swaps, futures, forwards, and option contracts.

                  Derivatives are generally either negotiated over-the-counter
         contracts or standardized contracts executed on an exchange.
         Standardized exchange-traded derivatives include futures and option
         contracts. Negotiated over-the-counter derivatives include forwards,
         swaps, and option contracts. Over-the-counter derivatives are generally
         not traded like securities; however, in the normal course of business,
         with the agreement of the original counterparty, they may be terminated
         or assigned to another counterparty. The timing of cash receipts and
         payments related to derivatives is generally determined by contractual
         agreement.

                  J.P. Morgan's competitive strength in derivatives activities
         results from our strong capital base, expertise developed over many
         years, global distribution capabilities, long-standing client
         relationships, sophisticated research and technological support, and
         integrated approach to these activities.

                  J.P. Morgan utilizes derivatives in its trading and investing
         activities. As part of our trading activities, we act as a dealer in
         derivative instruments to satisfy the risk management needs of our
         clients by structuring transactions that allow clients to manage their
         exposure to interest rates, foreign exchange rates, prices of
         securities, and financial or commodity indices. In addition, we assume
         trading positions based on our market expectations and to benefit from
         price differentials between instruments and markets. We also utilize
         derivatives as hedges of trading instruments. Derivative instruments
         used for trading purposes include interest rate swaps, currency swaps,
         foreign exchange forward contracts, interest


20
<PAGE>   23
         rate futures, forward rate agreements, commodity forwards, equity
         swaps, equity futures, interest rate options, foreign exchange options,
         commodity options, and equity options.

                  As an end user, J.P. Morgan utilizes derivative instruments in
         the execution of its investing strategies. Such derivatives primarily
         include interest rate swaps, foreign exchange forward contracts,
         interest rate futures, and debt securities forwards. Derivatives are
         used to hedge exposures to interest rate or currency fluctuations,
         primarily on or related to debt investment securities, and to modify
         the interest rate characteristics of related balance sheet instruments,
         principally loans, short-term borrowings, and long-term debt. In
         addition, we utilize derivatives to adjust our overall interest rate
         risk profile, primarily through the use of risk-adjusting swaps. These
         swaps do not contain leverage or embedded option features and are used
         to replicate the cash flows of nonamortizing cash instruments.

                  As with balance sheet financial instruments, derivatives are
         subject to market and credit risk. As discussed in the Risk management
         section, we evaluate the risks associated with derivatives in much the
         same way as the risks associated with balance sheet financial
         instruments. However, unlike balance sheet financial instruments, where
         the credit exposure is generally represented by the notional or
         principal value, the credit exposure associated with derivatives is
         generally a small fraction of the notional value of the instrument and
         is represented by the positive market value of the derivative
         instrument.

                  The following table presents the percentages of credit
         exposure associated with all derivatives by counterparty credit
         quality, based on J.P. Morgan's internal credit ratings. J.P. Morgan's
         internal ratings are analogous to those of public rating agencies in
         the United States. Ratings of AAA, AA, A, and BBB represent investment
         grade ratings, and ratings of BB and below represent noninvestment
         grade ratings. The percentages presented below do not consider the
         credit enhancement effect of collateral securing these instruments or
         the benefit of master netting agreements.

         Total derivative credit exposure by counterparty credit quality

         Percentage at December 31                  1996          1995
         -------------------------------------------------------------
         AAA, AA ..........................           42%           45%
         A ................................           37            38
         BBB ..............................           16            12
         BB and below .....................            5             5
         -------------------------------------------------------------
         Total ............................          100           100
         -------------------------------------------------------------

         The following tables provide the aggregate notional amount of each
         category of derivative financial instruments and the contractual
         maturities for the 1996 balances. For detail of the notional amounts
         segregated by trading and investing activities, refer to Note 9 to the
         consolidated financial statements, Off-balance-sheet financial
         instruments. The following tables also provide the total amount of
         credit exposure, after considering the benefit of $36.5 billion, $27.7
         billion, and $12.7 billion of master netting agreements in effect at
         December 31, 1996, 1995, and 1994, respectively, and the contractual
         maturities for the 1996 balances. Our use of master netting agreements
         has increased as our market-making activities have grown since 1994 and
         as the legal enforceability of these agreements has expanded to new
         jurisdictions. The expanded use of these agreements resulted in a
         decrease in credit exposure in 1996 for interest rate and currency
         swaps and foreign exchange spot, forward, and futures contracts.

         Interest rate and currency swaps

<TABLE>
<CAPTION>
                                                         After one   After five
                                                  Within  year but    years but    After
                                                     one    within       within      ten      Total
         In billions: December 31                   year      five          ten    years       1996      1995     1994
         ---------------------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>         <C>        <C>     <C>        <C>         <C>
         Notional amount ...................      $681.1    $999.2      $382.6     $58.0   $2 120.9   $1 515.6    $974.9
         Credit exposure ...................         1.6       4.6         4.3       1.2       11.7       12.4      10.9
         ---------------------------------------------------------------------------------------------------------------
</TABLE>

         A swap is a contractual agreement in which a series of cash flows are
         exchanged at specified intervals. The notional principal is not
         exchanged for interest rate swaps, but is generally exchanged for
         currency swaps. The notional amount of swaps, particularly interest
         rate swaps, grew during 1996 and 1995 as client demand for risk
         management products increased.

                                                                              21
<PAGE>   24
         Foreign exchange spot, forward, and futures contracts

<TABLE>
<CAPTION>
                                                       After one  After five
                                              Within    year but   years but    After
                                                 one      within      within      ten          Total
         In billions: December 31               year        five         ten    years           1996         1995         1994
         ---------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>        <C>        <C>          <C>          <C>
         Notional amount ............       $  599.9     $  19.4      $  0.8     $ --       $  620.1     $  461.8     $  397.7
         Credit exposure ............            2.3         0.2        --         --            2.5          3.3          3.6
         ---------------------------------------------------------------------------------------------------------------------
</TABLE>

         Foreign exchange contracts involve an agreement to exchange the
         currency of one country for the currency of another country at an
         agreed-upon price and settlement date. The contracts reported above
         primarily include forwards. The increases in notional amounts of
         foreign exchange contracts during 1996 and 1995 reflect increased
         activity in foreign exchange forward contracts consistent with our
         increased market-making activities.

         Interest rate futures, forward rate agreements, and debt securities
         forwards

<TABLE>
<CAPTION>
                                                       After one  After five
                                              Within    year but   years but    After
                                                 one      within      within      ten          Total
         In billions: December 31               year        five         ten    years           1996         1995         1994
         ---------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>        <C>        <C>          <C>          <C>

         Notional amount ............       $  476.7     $  85.9     $  5.6     $ --       $  568.2     $  415.4     $  426.5
         Credit exposure ............            0.3         0.1       --         --            0.4          0.5          0.2
         ---------------------------------------------------------------------------------------------------------------------
</TABLE>

         Interest rate futures, with a notional amount of $270.1 billion, $180.5
         billion, and $210.4 billion at December 31, 1996, 1995, and 1994,
         respectively are standardized exchange-traded agreements to receive or
         deliver a specified financial instrument at a specified future date and
         price. The credit risk associated with futures contracts is limited due
         to the daily settlement of open contracts with the exchange on which
         the instrument is traded. The contracts reported above also include
         forward rate agreements and debt securities forwards. A forward rate
         agreement is an agreement that provides for payment or receipt of the
         difference between a specified interest rate and a reference rate at a
         future settlement date. Debt securities forwards include
         to-be-announced and when-issued securities contracts. These contracts
         represent agreements to purchase or sell fixed income securities and
         are executed prior to issuance of the security. The increase in the
         notional amounts during 1996 is in line with the growth of activity in
         our market-making businesses.

         Commodity and equity swaps, forward, and futures contracts

<TABLE>
<CAPTION>
                                                       After one  After five
                                              Within    year but   years but     After
                                                 one      within      within       ten       Total
         In billions: December 31               year        five         ten     years        1996        1995        1994
         -----------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>        <C>        <C>          <C>          <C>

         Notional amount ................    $  62.4     $  14.1     $  0.6     $  0.1     $  77.2     $  65.1     $  43.9
         Credit exposure ................        2.0         0.8       --         --           2.8         1.4         1.1
         -----------------------------------------------------------------------------------------------------------------
</TABLE>

         The contracts shown above primarily include swaps and futures in the
         commodity and equity markets, and commodity forward agreements. The
         growth in the notional amounts during 1996 is primarily related to an
         increase in client demand for energy contracts and the execution of
         several large precious metals transactions. The increase in notional
         amounts during 1995 reflects increased activity in equity contracts in
         line with our strategy to expand our market-making capabilities.

22
<PAGE>   25
         Option contracts

<TABLE>
<CAPTION>
                                                                After one  After five
                                                        Within   year but   years but    After
                                                           one     within      within      ten      Total
         In billions: December 31                         year       five         ten    years       1996       1995       1994
         ----------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>          <C>       <C>      <C>        <C>        <C>
         Notional amount:
         Purchased option contracts .............     $  366.7   $  215.6     $  32.5   $  2.1   $  616.9   $  464.8   $  280.6
         Written option contracts ...............        394.6      254.8        60.3      3.3      713.0      524.0      348.9
         ----------------------------------------------------------------------------------------------------------------------
</TABLE>

         An option contract provides the option purchaser with the right but not
         the obligation to buy or sell the underlying item at a set price during
         a period or at a specified date. The option writer is obligated to buy
         or sell the underlying item if the option purchaser chooses to
         exercise. The options reported above include contracts in the interest
         rate, foreign exchange, equity, and commodity markets. Interest rate
         options also include caps and floors. For caps and floors, the notional
         amounts are used to calculate periodic cash flows. The notional amount
         of options, particularly interest rate options, grew in 1996 and 1995,
         primarily due to increased market-making activities.

                  Option contracts are either negotiated over-the-counter or
         standardized contracts executed on an exchange. The notional amount of
         purchased options executed on an exchange amounted to $165.5 billion
         and those negotiated over-the-counter amounted to $451.4 billion at
         December 31, 1996. Written options executed on an exchange amounted to
         $181.8 billion and those negotiated over-the-counter amounted to $531.2
         billion at December 31, 1996.

                  Credit exposure exists for purchased options and is measured
         as the positive market value of the option contract. At December 31,
         1996, the credit exposure of purchased option contracts was $8.5
         billion compared with $5.2 billion at December 31, 1995, and $3.7
         billion at December 31, 1994. The increase in purchased option credit
         exposure reflects an increase in market-making activity, primarily in
         interest rate options. There is no credit exposure associated with
         written option contracts, as these contracts represent obligations,
         rather than assets, of J.P. Morgan.

         INVESTMENT BANKING REVENUE

         Investment banking revenue is earned globally by providing strategic
         and financial advice and by arranging financing for clients and
         includes advisory, loan syndication, and underwriting revenue.
         Substantially all of this revenue is reported in the Finance and
         Advisory sector.

                  Investment banking revenue in both developed and emerging
         markets increased 58% to the record level of $921 million in 1996, as
         the continued strategic development of our ability to deliver a broader
         array of financial services enabled the firm to benefit from increased
         global investment banking activity.

                  Advisory and syndication fees rose 44% to $568 million in
         1996, primarily from higher advisory fees reflecting increased merger
         and acquisition activity from a growing and diverse client base
         worldwide. Revenues from the arrangement of syndicated lending
         facilities also rose in 1996 due to advances in the U.S. and Latin
         American markets.

                  Underwriting revenue increased 87% to $353 million in 1996, as
         we continued to raise more debt and equity for a broad range of clients
         in the global marketplace.

                  Investment banking revenue increased 35% to $584 million in
         1995 from 1994 on higher levels of activity. Advisory and syndication
         fees rose 27% in 1995 to $395 million. Underwriting revenue increased
         52% in 1995 to $189 million, as debt and equity securities underwriting
         activities grew.

         INVESTMENT MANAGEMENT REVENUE

         Investment management revenue is derived from providing investment
         management services to institutional and private clients and includes
         fees from the administration of trusts and estates. These activities
         are primarily reported in the Asset Management and Servicing sector.

                                                                              23
<PAGE>   26
                  Investment management revenue increased 18% to $675 million in
         1996 compared with 1995. The increase was primarily due to net new
         business from both institutional and private clients, and to a lesser
         extent, market appreciation, that resulted in higher assets under
         management.

                  Investment management revenue increased 11% to $574 million in
         1995 compared with 1994, reflecting an increase in assets under
         management primarily from institutional net new business.

                  Assets under management increased 16% to $208 billion in 1996
         compared with 1995, and 19% to $179 billion in 1995 compared with 1994.

         FEES AND COMMISSIONS

         Fees and commissions include revenue previously classified as
         operational service fees and credit-related fees. Fees and commissions
         are earned from providing brokerage of futures and options and equity
         securities, as well as securities custody and clearing, trust and
         agency and cash management services. In addition, fees are earned from
         commitments to extend credit, standby letters of credit and guarantees,
         and securities lending activities. This revenue is included primarily
         in the Finance and Advisory and Asset Management and Servicing sectors,
         while certain commissions are included in the Market Making sector.
         Fees and commissions were $582 million, $708 million, and $750 million
         in 1996, 1995, and 1994 respectively. Included in fees and commissions
         is $45 million, $205 million, and $250 million in 1996, 1995, and 1994
         respectively of revenue related to the exited custody and cash
         processing businesses.

                  Excluding revenue from the exited custody and cash processing
         businesses, fees and commissions increased 7% from the prior year due
         to higher transaction volumes. Particularly strong growth in equity and
         other brokerage commissions accounted for the majority of the increase.
         Futures and options brokerage also rose as increased transaction levels
         more than offset lower commission rates.

                  Fees and commissions were essentially flat in 1995 as compared
         with 1994 after excluding revenue generated from the exited custody and
         cash processing businesses. Increased revenue from equity commissions
         due to increased market penetration and volumes was offset by lower
         fees generated on securities lending transactions, commitments to
         extend credit, and standby letters of credit.

         CREDIT-RELATED FINANCIAL INSTRUMENTS

         Credit-related financial instruments include loans, commitments to
         extend credit, standby letters of credit and guarantees, and
         indemnifications in connection with securities lending activities.
         These instruments primarily result from the activities engaged in by
         our Finance and Advisory sector. The maximum credit risk associated
         with credit-related financial instruments is measured by the
         contractual amounts of these instruments. For off-balance-sheet
         credit-related financial instruments this balance represents the amount
         at risk should the contract be fully drawn upon, the client default,
         and any existing collateral become worthless. A significant amount of
         these commitments expire without being drawn upon. In addition, in the
         event of client default, commitment obligations of the firm are
         protected by financial covenants and/or material adverse clauses in
         contracts of credit-related financial instruments.

                  The following table presents the percentages of credit
         exposure associated with credit-related financial instruments by
         counterparty credit quality, based on J.P. Morgan's internal credit
         ratings, as discussed on page 21. At December 31, 1996 and 1995, over
         85% of the total credit exposure was with counterparties considered to
         be of investment grade quality.

         Total credit exposure by counterparty credit quality

         Percentage at December 31                1996            1995
         -------------------------------------------------------------
         AAA, AA ......................             24%             23%
         A ............................             41              41
         BBB ..........................             22              22
         BB and below .................             13              14
         -------------------------------------------------------------
         Total ........................            100             100
         -------------------------------------------------------------

24
<PAGE>   27
         Loans

         The extension of credit, including loans, remains one of the many ways
         we provide our clients with the broad array of financial services that
         they require. Our portfolio of loans is diversified by borrower,
         industry, and geographic area. At December 31 for each of the past
         three years, the loan portfolio consisted mainly of shorter-term
         outstandings, with over 45% of total loans maturing within one year and
         over 85% maturing within five years.

         Commitments to extend credit

         Commitments to extend credit are conditional contracts to lend money to
         a client in the future under specific terms. A majority of, and
         increases in, J.P. Morgan's commitments during the past three years
         relate to those issued to support clients' commercial paper programs.

         Standby letters of credit and guarantees

         Standbys are unconditional contracts issued to support clients'
         obligations to third parties, the beneficiaries. In the event a client
         fails to perform a contractual obligation, payment is made to the
         beneficiary upon demand. The client is required to reimburse J.P.
         Morgan for any payment made in connection with the standbys.

                  The following table provides the contractual amount of
         commitments to extend credit and standby letters of credit and
         guarantees and a maturity profile of such instruments by contractual
         maturity for 1996.

<TABLE>
<CAPTION>
                                                     After one
                                           Within     year but         More
                                              one       within    than five       Total
         In billions: December 31            year         five        years        1996           1995           1994
         ------------------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>          <C>         <C>            <C>            <C>
         Contractual amount:
         Commitments to
            extend credit ........        $  18.4      $  38.1      $   8.2     $  64.7        $  55.1        $  44.6
         Standby letters of credit
            and guarantees .......            7.4          5.0          1.5        13.9           11.7            9.9
         ------------------------------------------------------------------------------------------------------------
</TABLE>

         For financial reporting purposes, beginning December 31, 1996, a
         portion of the aggregate allowance for credit losses amounting to $200
         million has been reclassified to Other liabilities, related to
         undertakings to extend credit that are not currently reflected on the
         balance sheet. This amount had previously been reported as a reduction
         of loans in the consolidated balance sheet. Refer to page 28 for a
         detailed discussion of the aggregate allowance for credit losses.

         Securities lending indemnifications

         Securities lending indemnifications are contractual obligations under
         which J.P. Morgan guarantees that a third party lender of securities
         will be protected against a borrower's failure to return such
         securities. J.P. Morgan, acting as agent, receives from the borrower
         collateral, in the form of cash, securities, or letters of credit, that
         generally equals the market value of the securities borrowed plus some
         specified margin. The borrowers of these securities are mainly nonbank
         financial institutions. Generally, securities are lent for an average
         period of less than 30 days. The contractual amount of securities
         lending indemnifications declined from the levels in 1994 as a result
         of the sale of the firm's custody businesses in 1995.

<TABLE>
<CAPTION>
         In billions: December 31             1996           1995           1994
         -----------------------------------------------------------------------
<S>                                          <C>            <C>            <C>
         Contractual amount .....            $ 5.5          $ 5.4          $19.5
         -----------------------------------------------------------------------
</TABLE>

         At December 31, 1996, 1995, and 1994, J.P. Morgan held cash and other
         collateral in support of securities lending indemnifications.

                                                                              25
<PAGE>   28
         INVESTMENT SECURITIES REVENUE

         Investment securities revenue includes gains and losses on debt and
         equity investment securities, other-than-temporary impairments in
         value, and related dividend income.

                  In 1996, 1995, and 1994, investment securities revenue was
         $303 million, $517 million, and $751 million respectively. Net gains
         from positions associated with our Equity Investments activities were
         $269 million, $485 million, and $606 million in 1996, 1995, and 1994
         respectively. These gains are primarily related to the recognition of
         the firm's equity investment in Columbia/HCA Healthcare Corporation.

                  Investment securities revenue also includes net realized gains
         of $17 million in 1996, $21 million in 1995, and $122 million in 1994,
         primarily related to the sale of foreign and U.S. government agency
         securities acquired in connection with our Proprietary Investing and
         Trading activities and held in the debt investment securities
         available-for-sale portfolio.

         OTHER REVENUE

         Other revenue includes hedge gains and losses from the management of
         nontrading foreign currency exposures, earnings from equity in
         affiliates, and the results of certain other transactions.

                  Other revenue of $195 million in 1996 included a gain of $77
         million from a partial sale of a minority investment and $52 million of
         foreign currency hedging gains. Other revenue of $142 million in 1995
         included a net gain of $40 million on the sales of the firm's global
         and local custody and U.S. commercial paper issuing and paying agency
         businesses. Other revenue of $65 million in 1994 included $54 million
         related to a gain on the sale of our domestic corporate trust business
         and $56 million of foreign currency hedging losses.

         OPERATING EXPENSES

<TABLE>
<CAPTION>
         In millions                                 1996       1995       1994
         -----------------------------------------------------------------------
<S>                                                <C>        <C>        <C>
         Employee compensation and benefits.....   $2 884     $2 498     $2 217
         Net occupancy .........................      296        322        275
         Technology and communications .........      785        671        645
         Other expenses ........................      558        507        555
         -----------------------------------------------------------------------
         Total operating expenses ..............    4 523      3 998      3 692
         -----------------------------------------------------------------------
</TABLE>

         J.P. Morgan's strategy for expense management is critical to the firm's
         goal of maximizing long-term profitability. This strategy focuses on
         making disciplined investments and ensuring maximum efficiency in, as
         well as accountability for, existing activities. As part of this
         strategy, we review our business activities regularly to ensure that
         they are valued by clients and are areas where we can achieve
         competitive distinction.

                  As part of J.P. Morgan's expense management focus, we entered
         into an agreement in July 1996 with a consortium of firms to form the
         Pinnacle Alliance (Alliance) to manage parts of the firm's global
         technology infrastructure, representing approximately one-third of our
         $1.0 billion total technology and communications expenditures. The
         Alliance expands our access to world-class technological resources and
         provides flexibility in meeting changing business needs. Other ongoing
         expense initiatives include redesigning our European branch network and
         processing operations, optimizing the firm's process for procuring and
         managing required resources, and responding to the technological
         challenges presented by the year 2000 and the anticipated formation of
         the European Monetary Union.

                  Total operating expenses increased 13% to $4,523 million in
         1996, as we continued to allocate resources to areas of strategic
         importance, including investment banking, equities, asset management,
         and private client activities, which more than offset the reduction in
         expenses resulting from the exit from the custody and cash processing
         businesses. In 1995, total operating expenses increased 8% to $3,998
         million as compared with 1994.

         Employee compensation and benefits

         Employee compensation and benefits, which represented 64% of total
         operating expenses in 1996, is composed of salaries, incentive
         compensation, and benefits. An essential component of our success is
         the ability to hire and retain the most competent and highly skilled
         professionals. In this regard, we compensate


26
<PAGE>   29
         employees in accordance with their performance and that of the firm. A
         significant component and an increasing proportion of the firm's senior
         officers' compensation is tied to the firm's results, with a portion
         paid in restricted stock in order to align compensation with
         longer-term shareholder returns.

                  Employee compensation and benefits expense increased 15% in
         1996 compared with 1995. Excluding the 1995 severance-related charge of
         $55 million and expenses associated with the exited custody and cash
         processing businesses, employee compensation and benefits expense
         increased 21%. The increase was a result of higher incentive
         compensation - attributable to higher earnings, the increasing
         proportion of revenue earned in client business areas, and more
         competitive market conditions.

                  At December 31, 1996, the total number of staff was 15,527, as
         compared with 15,613 employees at December 31, 1995, and 17,055
         employees at December 31, 1994. The decline in 1996 was primarily the
         result of the transfer of employees to Alliance firms as discussed
         below, offset by new hires in areas of strategic importance.

                  Employee compensation and benefits expense in 1995, excluding
         the $55 million severance-related charge, increased 10% compared with
         1994. The increase was primarily due to higher incentive compensation
         linked to improved earnings over 1994, and higher salary expense
         reflecting the full-year impact of the 1994 growth in staff levels.

         Net occupancy

         Net occupancy decreased 8% to $296 million in 1996 compared with 1995,
         reflecting the rationalization of the firm's space requirements
         concurrent with the sale of our custody and cash processing businesses.

                  In 1995, net occupancy increased 17% to $322 million compared
         with 1994, reflecting the full-year impact of expansions in prior
         years.

         Technology and communications

         Reported technology and communications expense includes all costs
         associated with operating and enhancing the firm's global technology
         capabilities, such as consulting, equipment, software, market
         information costs, and fees paid to the Alliance.

                  J.P. Morgan completed the Alliance agreement with the goal of
         achieving an aggregate savings over the seven-year life of the
         agreement of approximately 15% on projected technology costs associated
         with activities now managed by the Alliance - approximately one-third
         of total technology and communications spending - including a $71
         million technology-related special charge incurred in 1996. The special
         charge recorded in the third quarter related primarily to payments for
         training and other personnel costs incurred and to the sale, at a loss,
         of certain technology equipment to the Alliance. Approximately 700
         employees in areas covered by the agreement were transferred to
         Alliance firms. Such employee costs, previously reflected in employee
         compensation and benefits, are now reflected in payments to the
         Alliance and are included in technology and communications expense.

                  Reported technology and communications expense increased 17%
         during 1996 to $785 million. Excluding the 1996 technology-related
         special charge and expenses associated with the custody and cash
         processing businesses, technology and communications expense increased
         12%. The increase is due to higher levels of business activity and the
         firm's expansion of its investment banking, equities, asset management,
         and private client activities, as well as the inclusion of costs
         associated with employees transferred to the Alliance beginning in
         July. In 1995, reported technology and communications expense increased
         4% from 1994, as a result of higher depreciation and increased use of
         external resources and market information services.

                  Excluding the special charge, total technology and
         communications spending, which includes other technology-related costs,
         primarily employee compensation and benefits, was $1,045 million in
         1996, $1,040 million in 1995, and $984 million in 1994. Spending on
         total technology and communications was essentially flat in 1996 as
         compared to 1995, due to an increase in business activity which was
         offset by the reduction in spending related to the exited custody and
         cash processing businesses.

         Other expenses

         Other expenses include professional fees, costs for outside services,
         travel, brokerage fees, taxes other than income taxes, and training
         costs.

                                                                              27
<PAGE>   30
                  Other expenses increased 10% in 1996 on a reported basis, or
         22% excluding expenses associated with the custody and cash processing
         businesses. The increase reflects higher professional fees,
         travel-related expenses, and costs incurred for outside services,
         including advertising fees and employment agency fees, reflecting
         increased business activity.

                  The 9% decrease in other expenses in 1995 compared with 1994
         was primarily due to a reduction in travel-related expenses and in
         costs incurred for outside services, including advertising and
         promotion fees and employment agency fees.

         INCOME TAXES

         Income tax expense of $758 million in 1996 increased $148 million from
         1995, reflecting an increase in pretax income and a higher effective
         tax rate. Income tax expense was unchanged at $610 million in 1995
         compared with 1994, reflecting an increase in pretax income, offset by
         a lower effective tax rate. The effective tax rates for 1996, 1995, and
         1994 were 32.5%, 32.0%, and 33.4% respectively.

         AGGREGATE ALLOWANCE FOR CREDIT LOSSES

         Credit risk arises from the possibility that counterparties may default
         on their obligations to the firm. Given the global and diversified
         nature of our activities, these obligations may arise from our lending
         activities, from the extension of credit in our trading and investment
         activities, and from our participation in payment and securities
         transactions on our own behalf and as agent for our clients. J.P.
         Morgan maintains an aggregate allowance for credit losses to absorb
         losses inherent in the existing portfolios of loans and other
         undertakings to extend credit, such as unused loan commitments, or to
         make payments to others for which a client is ultimately liable, such
         as standby letters of credit and guarantees, commercial letters of
         credit and acceptances, and all other credit exposures, including
         derivatives.

                  Prior to December 31, 1996, the aggregate allowance for credit
         losses was displayed in the consolidated balance sheet as a reduction
         of the carrying value of loans. For financial statement reporting
         purposes, beginning December 31, 1996, in accordance with the American
         Institute of Certified Public Accountants Banks and Savings
         Institutions Audit Guide, while we consider it in the aggregate, the
         total allowance of $1,116 million has been apportioned and displayed as
         follows: $566 million as a reduction of loans, $350 million as a
         reduction of trading account assets relating to derivatives, and $200
         million as other liabilities related to undertakings to extend credit
         that are not currently reflected on the balance sheet, such as standby
         letters of credit, guarantees, and commitments. Given the global and
         diversified nature of our business, expected shifts in the relative
         level of credit risk among financial instruments, and the numerous
         estimates and assumptions necessary to derive such allocated amounts,
         it is expected that portions of the aggregate allowance may be
         reclassified from time to time. Prior period amounts have not been
         reclassified.

                  An analysis of the aggregate allowance for credit losses is
         presented in the following table.

<TABLE>
<CAPTION>
         In millions                           1996        1995        1994
         -------------------------------------------------------------------
<S>                                          <C>         <C>         <C>
         Balance, January 1 ..............   $1 130      $1 131      $1 157
         Recoveries ......................       25          54          45
         Charge-offs:

            Commercial and industrial.....      (30)        (39)        (37)
            Restructuring countries ......       --          --         (18)
            Other ........................       (9)        (16)        (17)
         -------------------------------------------------------------------
         Net charge-offs .................      (14)         (1)        (27)
         Translation adjustment ..........       --          --           1
         -------------------------------------------------------------------
         Balance, December 31 ............    1 116       1 130       1 131
         -------------------------------------------------------------------
</TABLE>

28
<PAGE>   31
         No provision for credit losses was deemed necessary in 1996, 1995, or
         1994. In assessing the probability of losses that have not yet been
         identified and the adequacy of the aggregate allowance, we have taken
         into consideration economic conditions; regulatory requirements; our
         historical experience; concentrations of risk by country, industry,
         product, and client; and the relatively large size of many of our
         credit exposures given our wholesale banking orientation.

                  Charge-offs in 1996, 1995, and 1994 were $39 million, $55
         million, and $72 million respectively, related to relatively few
         borrowers primarily in the U.S., and were diversified by industry.

         NONPERFORMING ASSETS

         Total nonperforming assets, net of charge-offs, are presented in the
         following table:

<TABLE>
<CAPTION>
         In millions: December 31            1996        1995        1994
         ----------------------------------------------------------------
<S>                                          <C>         <C>         <C>
         Impaired loans:
            Commercial and industrial        $ 89        $ 67        $136
            Other ...................          29          48          81
         ----------------------------------------------------------------
                                              118         115         217
         Restructuring countries ....           2           2           2
         ----------------------------------------------------------------
         Total impaired loans .......         120         117         219
         Other nonperforming assets .          --           1           1
         ----------------------------------------------------------------
         Total nonperforming assets .         120         118         220
         ----------------------------------------------------------------
</TABLE>

         Impaired loans remained essentially flat in 1996, as commercial and
         industrial new classifications were offset by repayments and
         charge-offs. Impaired loans declined $102 million during 1995 as new
         classifications were more than offset by loan repayments, loan sales,
         and charge-offs.

         SOURCES OF FUNDS

         J.P. Morgan's strong capital base and international presence have
         allowed us to develop a global funding base consisting of a variety of
         sources. As a result, J.P. Morgan is able to limit its dependence on
         any individual source and choose the funding instruments that best meet
         management's strategies. Our sources include interest-bearing and
         noninterest-bearing deposits, commercial paper, bank notes, federal
         funds purchased, long-term debt, capital securities, and stockholders'
         equity. Other important sources of funding are trading account
         liabilities and repurchase agreements, which are presented in the
         Trading-related assets and liabilities section of the Financial review.
         In determining the most appropriate funding source at a particular
         point in time, management considers market conditions, prevailing
         interest rates, liquidity needs, and our desired maturity profile.

<TABLE>
<CAPTION>
         In billions: Average balances                  1996           1995           1994
         ---------------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>
         Interest-bearing deposits ..........        $  49.1        $  43.8        $  39.9
         Noninterest-bearing deposits .......            3.0            4.7            5.2
         Commercial paper ...................            4.1            2.8            4.2
         Other liabilities for borrowed money           16.4           12.1           10.3
         ---------------------------------------------------------------------------------
</TABLE>

         Interest-bearing deposits are short-term in nature and central to our
         operations. Noninterest-bearing deposits are mainly composed of items
         in the process of collection and clients' compensating balances placed
         with us in lieu of fees for certain services. Other liabilities for
         borrowed money primarily include bank notes, term federal funds
         purchased, and other short-term borrowings.

                                                                             29
<PAGE>   32
         Long-term debt

<TABLE>
<CAPTION>
         In billions: December 31                                      1996           1995           1994
         ------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>            <C>
         Long-term debt qualifying as risk-based capital ...        $   3.7        $   3.6        $   3.2
         Long-term debt not qualifying as risk-based capital            9.4            5.7            3.6
         ------------------------------------------------------------------------------------------------
         Total long-term debt ..............................           13.1            9.3            6.8
         ------------------------------------------------------------------------------------------------
</TABLE>

         In 1996, favorable market conditions allowed us to increase our
         activity in the term markets, particularly in non-U.S. dollar markets
         and the domestic medium-term note market, resulting in the issuance of
         $5.3 billion of long-term debt, of which approximately $260 million
         qualified as risk-based capital. Offsetting the additions to long-term
         debt were approximately $1.2 billion of maturities during 1996 and
         early redemptions at par of $264 million of debt.

                  In 1995, we issued $3.8 billion of long-term debt, of which
         approximately $695 million qualified as risk-based capital. Offsetting
         the additions to long-term debt were approximately $511 million of
         maturities during 1995 and early redemptions at par of $800 million of
         debt.

         Other capital securities

         In November 1996, JPM Capital Trust I, a wholly owned subsidiary of
         J.P. Morgan, issued $750 million of 7.54% Trust Preferred Securities
         qualifying as tier 1 risk-based capital under the Board of Governors of
         the Federal Reserve System (Federal Reserve Board) guidelines.

                  In January 1997, JPM Capital Trust II, a wholly owned
         subsidiary of J.P. Morgan, issued $400 million of 7.95% Trust Preferred
         Securities qualifying as tier 1 risk-based capital.

         STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
         In billions: December 31                                1996            1995            1994
         --------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>             <C>
         Common stockholders' equity .................        $  10.7         $  10.0         $   9.1
         Total stockholders' equity ..................           11.4            10.5             9.6
         --------------------------------------------------------------------------------------------
         Total stockholders' equity to year-end assets            5.2%            5.7%            6.2%
         --------------------------------------------------------------------------------------------
</TABLE>

         Common and total stockholders' equity increased in 1996 due to the
         retention of earnings in excess of common and preferred dividends. In
         addition, total stockholders' equity was increased by the issuance of
         preferred stock. These increases were offset in part by lower
         unrealized gains on investment securities, net of taxes. Common and
         total stockholders' equity increased in 1995 due primarily to the
         retention of earnings in excess of common and preferred dividends and
         higher unrealized gains on investment securities, net of taxes.

                  The ratio of total stockholders' equity to year-end assets
         decreased in 1996 and 1995 primarily as a result of the growth of $37
         billion and $30 billion in year-end assets respectively.

                  In February 1996, J.P. Morgan issued $200 million of perpetual
         6 5/8% cumulative preferred stock, series H, with a stated value of
         $500 per share. These shares are represented by 4 million depositary
         shares with a stated value of $50 per share, each representing
         one-tenth of a preferred share.

                  During 1996, 1995, and 1994, the firm purchased approximately
         7 million, 4 million, and 7 million shares respectively of common stock
         to reduce the dilutive impact on earnings per share of the firm's
         employee benefit plans. In December 1996, the Board of Directors
         approved the purchase of up to 7 million additional shares of J.P.
         Morgan common stock for the same purpose. These shares may be purchased
         periodically in 1997 or beyond in the open market or through privately
         negotiated transactions.

                  Additionally, in December 1996, the Board of Directors
         approved the purchase of up to $750 million of J.P. Morgan common stock
         in the open market or through privately negotiated transactions. This
         stock repurchase, which is expected to be completed in 1997, will be
         funded principally with proceeds from the issuance of $750 million of
         7.54% Trust Preferred Securities as discussed above in the Sources of
         funds section.

30
<PAGE>   33
         CAPITAL STRENGTH

         J.P. Morgan and its subsidiaries, as well as certain foreign branches
         of its bank subsidiary, Morgan Guaranty Trust Company of New York
         (Morgan Guaranty), are subject to the capital adequacy rules of several
         U.S. and foreign regulators. The Federal Reserve Board, J.P. Morgan's
         primary regulator, establishes minimum capital requirements for the
         consolidated bank holding company as well as for certain of its
         subsidiaries, including Morgan Guaranty. The Federal Reserve Board has
         risk-based capital guidelines for evaluating the capital adequacy of
         bank holding companies and banks. In addition, guidelines for a
         leverage ratio designed to complement the risk-based capital ratios
         have been established. A bank holding company and bank are considered
         "well capitalized" if certain minimum risk-based capital and leverage
         ratios are maintained. The capital of J.P. Morgan and its principal
         subsidiaries exceeded the minimum standards set by each regulator at
         December 31, 1996. Further, the capital ratios of J.P. Morgan and
         Morgan Guaranty exceeded the minimum standards for a "well capitalized"
         bank holding company and bank respectively at December 31, 1996.

         Capital strength of J.P. Morgan and Morgan Guaranty

         J.P. Morgan's risk-based capital and leverage ratios at December 31
         were as follows.
         <TABLE>
         <CAPTION>
                                                 1996             1995
         --------------------------------------------------------------
         <S>                                     <C>             <C>   
         Tier 1 capital .............             8.8%             8.8%
         Total risk-based capital ...            12.2             13.0
         --------------------------------------------------------------
         Leverage ...................             5.9              6.1
         --------------------------------------------------------------
         </TABLE>

         In accordance with Federal Reserve Board guidelines, the risk-based
         capital and leverage ratios provided exclude the equity, assets, and
         off-balance sheet exposures of J.P. Morgan Securities Inc., and the
         effect of SFAS No. 115, Accounting for Certain Investments in Debt and
         Equity Securities.

         Morgan Guaranty's risk-based capital and leverage ratios at December
         31, calculated in accordance with bank regulatory accounting
         principles, were as follows.
         <TABLE>
         <CAPTION>
                                               1996               1995
         -------------------------------------------------------------
         <S>                                  <C>                <C>
         Tier 1 capital .........               8.2%               8.6%
         Total risk-based capital              11.5               11.2
         -------------------------------------------------------------
         Leverage ...............               5.3                5.7
         -------------------------------------------------------------
         </TABLE>

         In accordance with Federal Reserve Board guidelines, the risk-based
         capital and leverage ratios provided exclude the effect of SFAS No.
         115, Accounting for Certain Investments in Debt and Equity Securities.
         Prior period ratios were restated to reflect the merger of J.P. Morgan
         Delaware with Morgan Guaranty Trust Company of New York effective June
         1996.

         Risk-based capital

         The following table presents the components of J.P. Morgan's risk-based
         capital at December 31.

<TABLE>
<CAPTION>
         In millions                                                              1996               1995              1994
         ------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>               <C>
         Common stockholders' equity ..............................            $10 276             $9 393            $8 620
         Adjustable and fixed rate cumulative preferred stock .....                444                244               244
         Company-obligated mandatorily redeemable
            preferred securities of subsidiary ....................                750                 --                --
         Less: investments in certain subsidiaries and goodwill (a)                597                604               599
         ------------------------------------------------------------------------------------------------------------------
         Tier 1 capital ...........................................             10 873              9 033             8 265
         ------------------------------------------------------------------------------------------------------------------
         Variable cumulative preferred stock ......................                248                248               248
         Long-term debt qualifying as risk-based capital ..........              3 692              3 590             3 227
         Qualifying aggregate allowance for credit losses .........              1 097              1 130             1 079
         Less: investments in certain subsidiaries (a) ............                765                603               598
         ------------------------------------------------------------------------------------------------------------------
         Tier 2 capital ...........................................              4 272              4 365             3 956
         ------------------------------------------------------------------------------------------------------------------
         Total risk-based capital .................................             15 145             13 398            12 221
         ------------------------------------------------------------------------------------------------------------------
</TABLE>

         (a)  In accordance with Federal Reserve Board guidelines, certain 
              portions of our investments in certain subsidiaries (principally 
              J.P. Morgan Securities Inc.) are deducted from both tier 1 and 
              tier 2 capital.

                                                                              31
<PAGE>   34
         Risk-adjusted assets

         J.P. Morgan's risk-adjusted assets, excluding the assets and
         off-balance-sheet exposures of JPMSI, were $123.9 billion, $103.1
         billion and $86.2 billion as of December 31, 1996, 1995, and 1994,
         respectively. Additional information is provided in the Risk-adjusted
         assets section of Capital and funding analysis.

         New risk-based capital market risk measure

         The current risk-based capital guidelines require that capital be
         maintained for both balance sheet assets and off-balance-sheet
         exposures in accordance with their level of credit risk as defined by
         the Federal Reserve Board; however, currently they do not explicitly
         consider other risks, including liquidity, interest rate, and other
         market risks. In August 1996, the Federal Reserve Board issued a final
         rule, which amends the risk-based capital guidelines by incorporating a
         measure of market risk into the existing risk-based capital framework.
         The new rule is based on an amendment to the Basle Capital Accord that
         requires banking institutions with significant trading activity to
         measure and hold capital in support of their exposure to market risk.
         Under the new standard, risk-based capital ratios will take into
         account both the general market risk and specific risk of their debt
         and equity trading portfolios, and the general market risk associated
         with all trading and nontrading foreign exchange and commodity
         positions. A firm will be required to measure its exposure to market
         risk using internal models used to measure its daily value at risk,
         subject to regulatory approval that the internal models and risk
         management processes of the firm satisfy the rule's requirements.
         Internal model assumptions must be modified to conform with confidence
         levels and other assumptions specified by regulations. Upon adoption of
         the risk-based capital market risk measure, risk-based capital ratio
         requirements will be applied to J.P. Morgan, including J.P. Morgan
         Securities Inc. and Morgan Guaranty. In addition, the minimum leverage
         ratio for a bank holding company that is required to retain a "well
         capitalized" status will be reduced from 4% to 3%. Firms are required
         to adopt the risk-based capital market risk measure beginning no later
         than January 1, 1998, with earlier adoption permitted throughout 1997.
         Management believes that both J.P. Morgan and Morgan Guaranty will
         continue to exceed the minimum standards for a "well capitalized" bank
         holding company and bank respectively after adoption of the risk-based
         capital market risk measure.

         ACCOUNTING DEVELOPMENTS

         Accounting for Transfers of Assets and Servicing of Financial Assets
         and Extinguishments of Liabilities 

         In 1996, the Financial Accounting Standards Board issued Statement of
         Financial Accounting Standards No. 125, Accounting for Transfers of
         Assets and Servicing of Financial Assets and Extinguishments of
         Liabilities, which provides new accounting and reporting standards for
         sales, securitizations, and servicing of receivables and other
         financial assets, and extinguishments of liabilities. The provisions
         of the Statement are to be applied to transfers of assets, servicing
         rights, and extinguishments of liabilities occurring after December
         31, 1996, except for transfers involving repurchase agreements,
         securities borrowing/lending transactions, and financial assets
         provided as collateral. For these transactions, the Statement will be
         applied to transfers occurring after December 31, 1997. The adoption
         of this standard is expected to have no material impact on J.P.
         Morgan's consolidated financial statements for the year ending
         December 31, 1997. The firm is currently evaluating the impact of the
         new standard for the year ending December 31, 1998.

32
<PAGE>   35
RESPONSIBILITY FOR FINANCIAL REPORTING



         The consolidated financial statements in this Annual report were
         prepared by the management of J.P. Morgan. In doing so, management
         applied generally accepted accounting principles and also exercised its
         judgment and made estimates in those instances where they were deemed
         appropriate. Other financial information that is included in the Annual
         report is consistent with that of the consolidated financial
         statements.

                  In discharging its responsibility both for the integrity and
         fairness of these statements and information, and for the examination
         of the accounting systems from which they are derived, management
         maintains a system of internal control designed to provide reasonable
         assurance, weighing the costs with the benefits sought, that
         transactions are executed in accordance with management's
         authorization, assets are safeguarded, and proper records are
         maintained. An important element in management's effort to establish a
         reliable control environment is the careful selection, training, and
         development of professional personnel, including internal auditors.
         Management believes that the system of internal control, which is
         subject to close scrutiny by management and by internal auditors and is
         revised as considered necessary, supports the integrity and reliability
         of the consolidated financial statements.

                  Further, the independent accountants perform a study and
         evaluation of the system of internal accounting control for the purpose
         of expressing an opinion on the consolidated financial statements of
         J.P. Morgan.

                  The Board of Directors of J.P. Morgan appoints an Audit
         Committee responsible for monitoring the accounting practices and
         internal controls of the company. The Committee, whose membership
         consists of directors who are not officers or employees of J.P. Morgan,
         meets periodically with members of the internal auditing staff to
         discuss the nature and scope of their work and to review such reports
         and other matters as the Committee deems necessary. The Committee also
         recommends to the Board of Directors the engagement of an independent
         accounting firm and meets with representatives of that firm to discuss
         the examination of the consolidated financial statements as well as
         other auditing and financial reporting matters. Both the internal
         auditors and the independent accountants are given access to the Audit
         Committee at any time to discuss privately matters they believe may be
         of significance.

                  In addition, J.P. Morgan is examined periodically by examiners
         from the Federal Reserve System, State of New York Banking Department,
         and other regulatory agencies. The Board of Directors and management
         consider reports that arise from such examinations.

         Douglas A. Warner III          John A. Mayer Jr.
         Chairman of the Board          Chief Financial Officer




                                                                              33
<PAGE>   36
REPORT OF INDEPENDENT ACCOUNTANTS



         To the Board of Directors and Stockholders of J.P. Morgan & Co.
         Incorporated

         We have audited the accompanying consolidated balance sheet of J.P.
         Morgan & Co. Incorporated ("J.P. Morgan") and its subsidiaries as of
         December 31, 1996 and 1995, the related consolidated statements of
         income, of changes in stockholders' equity, and of cash flows for each
         of the three years in the period ended December 31, 1996, and the
         consolidated statement of condition of Morgan Guaranty Trust Company of
         New York and its subsidiaries as of December 31, 1996 and 1995. These
         financial statements are the responsibility of J.P. Morgan's
         management. Our responsibility is to express an opinion on these
         financial statements based on our audits.

                  We conducted our audits in accordance with generally accepted
         auditing standards. Those standards require that we plan and perform
         the audit to obtain reasonable assurance about whether the financial
         statements are free of material misstatement. An audit includes
         examining, on a test basis, evidence supporting the amounts and
         disclosures in the financial statements. An audit also includes
         assessing the accounting principles used and significant estimates made
         by management, as well as evaluating the overall financial statement
         presentation. We believe that our audits provide a reasonable basis for
         our opinion.

                  In our opinion, the consolidated financial statements audited
         by us present fairly, in all material respects, the financial position
         of J.P. Morgan and its subsidiaries at December 31, 1996 and 1995, the
         results of their operations and their cash flows for each of the three
         years in the period ended December 31, 1996, and the financial position
         of Morgan Guaranty Trust Company of New York and its subsidiaries at
         December 31, 1996 and 1995, in conformity with generally accepted
         accounting principles.

         PRICE WATERHOUSE LLP
         New York, New York
         January 8, 1997




34
<PAGE>   37
CONSOLIDATED STATEMENT OF INCOME
J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
In millions, except per share data                   1996               1995               1994
-----------------------------------------------------------------------------------------------
<S>                                               <C>                 <C>               <C>
NET INTEREST REVENUE
Interest revenue.............................     $10 713             $9 937             $8 379
Interest expense.............................       9 011              7 934              6 398
-----------------------------------------------------------------------------------------------
Net interest revenue.........................       1 702              2 003              1 981

NONINTEREST REVENUES
Trading revenue..............................       2 477              1 376              1 019
Investment banking revenue...................         921                584                434
Investment management revenue................         675                574                517
Fees and commissions.........................         582                708                750
Investment securities revenue................         303                517                751
Other revenue................................         195                142                 65
-----------------------------------------------------------------------------------------------
Total noninterest revenues...................       5 153              3 901              3 536

OPERATING EXPENSES
Employee compensation and benefits...........       2 884              2 498              2 217
Net occupancy................................         296                322                275
Technology and communications................         785                671                645
Other expenses...............................         558                507                555
-----------------------------------------------------------------------------------------------
Total operating expenses.....................       4 523              3 998              3 692
-----------------------------------------------------------------------------------------------
Income before income taxes...................       2 332              1 906              1 825
Income taxes.................................         758                610                610
-----------------------------------------------------------------------------------------------
Net income...................................       1 574              1 296              1 215
-----------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (a)...............................     $  7.63             $ 6.42             $ 6.02
Dividends declared...........................        3.31               3.06               2.79
-----------------------------------------------------------------------------------------------
</TABLE>

(a)   Earnings per share amounts for 1996 and 1995 represent primary earnings
      per share. For 1996 and 1995, fully diluted earnings per share were $7.56
      and $6.36 respectively. Earnings per share for 1994 represent both primary
      and fully diluted earnings per share.

The accompanying notes are an integral part of these consolidated financial
statements.





                                                                              35
<PAGE>   38
CONSOLIDATED BALANCE SHEET
J.P. Morgan & Co. Incorporated


<TABLE>
<CAPTION>
                                                                                                             December 31
                                                                                                       ----------------------
Dollars in millions                                                                                        1996          1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>           <C>
ASSETS
Cash and due from banks ...........................................................................    $    906      $  1 535
Interest-earning deposits with banks ..............................................................       1 908         1 986
Debt investment securities available-for-sale carried at fair value (Cost: $24 610 at 1996
   and $24 154 at 1995) ...........................................................................      24 865        24 638
Trading account assets, net of allowance for credit losses of $350 at 1996 ........................      90 980        69 408
Securities purchased under agreements to resell ($32 455 at 1996
   and $32 157 at 1995) and federal funds sold ....................................................      32 505        32 157
Securities borrowed ...............................................................................      27 931        19 830
Loans, net of allowance for credit losses of $566 at 1996 and $1 130 at 1995 ......................      27 554        22 323
Customers' acceptance liability ...................................................................         212           237
Accrued interest and accounts receivable ..........................................................       3 789         3 539
Premises and equipment, net .......................................................................       1 865         1 927
Other assets ......................................................................................       9 511         7 299
-----------------------------------------------------------------------------------------------------------------------------
Total assets ......................................................................................     222 026       184 879
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
   In offices in the U.S. .........................................................................       1 501         3 287
   In offices outside the U.S. ....................................................................         708           744
Interest-bearing deposits:
   In offices in the U.S. .........................................................................       7 103         2 003
   In offices outside the U.S. ....................................................................      43 412        40 404
-----------------------------------------------------------------------------------------------------------------------------
Total deposits ....................................................................................      52 724        46 438
Trading account liabilities .......................................................................      50 919        45 289
Securities sold under agreements to repurchase ($56 117 at 1996 and
   $40 803 at 1995) and federal funds purchased ...................................................      61 429        45 099
Commercial paper ..................................................................................       4 132         2 801
Other liabilities for borrowed money ..............................................................      19 948        15 129
Accounts payable and accrued expenses .............................................................       5 935         5 643
Liability on acceptances ..........................................................................         212           237
Long-term debt not qualifying as risk-based capital ...............................................       9 411         5 737
Other liabilities, including allowance for credit losses of $200 at 1996 ..........................       1 442         4 465
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                        206 152       170 838
Long-term debt qualifying as risk-based capital ...................................................       3 692         3 590
Company-obligated mandatorily redeemable preferred securities of subsidiary .......................         750            --
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities .................................................................................     210 594       174 428
Commitments and contingencies (Notes 9, 18, 19, 20, and 23)

STOCKHOLDERS' EQUITY
Preferred stock ...................................................................................         694           494
Common stock, $2.50 par value (authorized shares: 500 000 000;
   issued: 200 688 123 at 1996 and 200 678 373 at 1995) ...........................................         502           502
Capital surplus ...................................................................................       1 446         1 430
Retained earnings .................................................................................       8 635         7 731
Net unrealized gains on investment securities, net of taxes .......................................         464           566
Other .............................................................................................         826           552
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                         12 567        11 275
Less: treasury stock (15 765 455 shares at 1996 and 13 562 755 shares at 1995) at cost ............       1 135           824
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ........................................................................      11 432        10 451
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ........................................................     222 026       184 879
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.



36
<PAGE>   39
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
J.P. Morgan & Co. Incorporated


<TABLE>
<CAPTION>
In millions                                                                               1996         1995         1994
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>          <C>           <C>
PREFERRED STOCK
Adjustable rate cumulative preferred stock balance, January 1 and December 31 ....     $   244      $   244       $  244
Variable cumulative preferred stock balance, January 1 and December 31 ...........         250          250          250
Fixed cumulative preferred stock:
   Balance, January 1 ............................................................          --           --           --
   Shares issued .................................................................         200           --           --
------------------------------------------------------------------------------------------------------------------------
Total preferred stock, December 31 ...............................................         694          494          494
------------------------------------------------------------------------------------------------------------------------

COMMON STOCK
Balance, January 1 ...............................................................         502          502          499
Shares issued or distributed under dividend reinvestment plan,
   various employee benefit plans, and conversion of debentures ..................          --           --            3
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................         502          502          502
------------------------------------------------------------------------------------------------------------------------

CAPITAL SURPLUS
Balance, January 1 ...............................................................       1 430        1 452        1 393
Shares issued under dividend reinvestment plan, various employee
   benefit plans, and conversion of debentures and income tax
   benefits associated with stock options ........................................          16          (22)          59
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................       1 446        1 430        1 452
------------------------------------------------------------------------------------------------------------------------

RETAINED EARNINGS
Balance, January 1 ...............................................................       7 731        7 044        6 386
Net income .......................................................................       1 574        1 296        1 215
Dividends declared on adjustable rate cumulative preferred stock .................         (12)         (12)         (12)
Dividends declared on variable cumulative preferred stock ........................          (9)         (12)          (8)
Dividends declared on fixed cumulative preferred stock ...........................         (12)          --           --
Dividends declared on common stock ...............................................        (617)        (574)        (530)
Dividend equivalents on common stock issuable ....................................         (20)         (11)          (7)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................       8 635        7 731        7 044
------------------------------------------------------------------------------------------------------------------------

NET UNREALIZED GAINS ON INVESTMENT SECURITIES, NET OF TAXES
Balance, January 1 ...............................................................         566          456        1 165
Net change in unrealized gains, net of taxes .....................................        (102)         110         (709)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................         464          566          456
------------------------------------------------------------------------------------------------------------------------

OTHER

COMMON STOCK ISSUABLE UNDER STOCK AWARD PLANS
Balance, January 1 ...............................................................         556          369          253
Deferred stock awards, net .......................................................         282          187          116
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................         838          556          369
------------------------------------------------------------------------------------------------------------------------

FOREIGN CURRENCY TRANSLATION
Balance, January 1 ...............................................................          (4)          (2)          (3)
Translation adjustments ..........................................................         (14)          (3)           2
Income tax benefit (expense) .....................................................           6            1           (1)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................         (12)          (4)          (2)
------------------------------------------------------------------------------------------------------------------------
Total other, December 31 .........................................................         826          552          367
------------------------------------------------------------------------------------------------------------------------

LESS: TREASURY STOCK
Balance, January 1 ...............................................................         824          747          328
Purchases ........................................................................         604          293          444
Shares distributed under various employee benefit plans ..........................        (293)        (216)         (25)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31 .............................................................       1 135          824          747
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity, December 31 ..........................................      11 432       10 451        9 568
------------------------------------------------------------------------------------------------------------------------
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                                                              37
<PAGE>   40
CONSOLIDATED STATEMENT OF CASH FLOWS
J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
In millions                                                                          1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>           <C>            <C>
NET INCOME .................................................................     $  1 574      $   1 296      $   1 215
Adjustments to reconcile to cash provided by (used in) operating activities:
   Noncash items: depreciation, amortization, deferred income taxes,
      stock award plans, and write-downs on investment securities ..........        1 055            598            390
   (Increase) decrease in assets:
      Trading account assets ...............................................      (21 919)       (12 271)       (15 772)
      Securities purchased under agreements to resell ......................         (297)       (10 974)         1 461
      Securities borrowed ..................................................       (8 101)        (7 703)        (1 309)
      Accrued interest and accounts receivable .............................         (250)         1 489            (92)
   Increase (decrease) in liabilities:
      Trading account liabilities ..........................................        5 632          8 937          18 151
      Securities sold under agreements to repurchase .......................       15 314         10 637          (6 140)
      Accounts payable and accrued expenses ................................           17           (788)            342
   Other changes in operating assets and liabilities, net ..................       (6 360)         6 655          (1 881)
   Net investment securities gains included in cash flows from
      investing activities .................................................         (294)          (539)           (747)
-----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES ..........................................      (13 629)        (2 663)         (4 382)
-----------------------------------------------------------------------------------------------------------------------
(Increase) decrease in interest-earning deposits with banks ................           78           (622)           (142)
Debt investment securities:
   Proceeds from sales .....................................................       29 754         42 262          51 091
   Proceeds from maturities, calls, and mandatory redemptions ..............        6 831          3 916           3 705
   Purchases ...............................................................      (36 923)       (46 419)        (59 062)
(Increase) decrease in federal funds sold ..................................          (50)           180            (119)
(Increase) decrease in loans ...............................................       (4 666)        (1 375)          2 209
Payments for premises and equipment ........................................         (183)          (237)          (341)
Other changes, net .........................................................          180         (1 064)          (493)
-----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES ..........................................       (4 979)        (3 359)        (3 152)
-----------------------------------------------------------------------------------------------------------------------
(Decrease) in noninterest-bearing deposits .................................       (1 822)          (428)        (1 061)
Increase in interest-bearing deposits ......................................        8 109          3 820          3 703
Increase (decrease) in federal funds purchased .............................        1 016         (1 293)         2 483
Increase (decrease) in commercial paper ....................................        1 331           (706)           934
Other liabilities for borrowed money proceeds ..............................       29 455         23 864          7 946
Other liabilities for borrowed money payments ..............................      (26 222)       (18 240)        (8 128)
Long-term debt proceeds ....................................................        5 288          3 808          2 342
Long-term debt payments ....................................................       (1 426)        (1 399)          (879)
Proceeds from issuance of Company-obligated mandatorily
    redeemable preferred securities of subsidiary ..........................          750             --             --
Capital stock issued or distributed ........................................          424            143             61
Capital stock purchased ....................................................         (604)          (293)          (445)
Dividends paid .............................................................         (643)          (583)          (541)
Other changes, net .........................................................        2 319         (3 351)         2 297
-----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES ......................................       17 975          5 342          8 712
-----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks .................            4              5             24
-----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and due from banks .............................         (629)          (675)         1 202
Cash and due from banks, beginning of year .................................        1 535          2 210          1 008
-----------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year .......................................          906          1 535          2 210
-----------------------------------------------------------------------------------------------------------------------
Cash disbursements made for:
   Interest ................................................................    $   8 898      $   7 568      $   6 178
   Income taxes ............................................................          748            560          1 223
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


38
<PAGE>   41
CONSOLIDATED STATEMENT OF CONDITION
Morgan Guaranty Trust Company of New York

<TABLE>
<CAPTION>
                                                                                           December 31
                                                                                     ----------------------
Dollars in millions                                                                      1996          1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>           <C>
ASSETS
Cash and due from banks ........................................................     $    920      $  1 429
Interest-earning deposits with banks ...........................................        1 910         1 995
Debt investment securities available-for-sale carried at fair value ............       23 510        23 767
Trading account assets, net of allowance for credit losses of $350 at 1996 .....       72 549        55 373
Securities purchased under agreements to resell and federal funds sold .........       27 762        20 996
Loans, net of allowance for credit losses of $565 at 1996 and $1 129 at 1995 ...       27 378        22 190
Customers' acceptance liability ................................................          212           237
Accrued interest and accounts receivable .......................................        3 470         3 420
Premises and equipment, net of accumulated depreciation of
   $1 116 at 1996 and $1 232 at 1995 ...........................................        1 696         1 735
Other assets ...................................................................        5 406         4 571
-----------------------------------------------------------------------------------------------------------
Total assets ...................................................................      164 813       135 713
-----------------------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing deposits:
   In offices in the U.S. ......................................................        1 495         3 275
   In offices outside the U.S. .................................................          749           839
Interest-bearing deposits:
   In offices in the U.S. ......................................................        7 114         1 975
   In offices outside the U.S. .................................................       43 716        40 985
-----------------------------------------------------------------------------------------------------------
Total deposits .................................................................       53 074        47 074
Trading account liabilities ....................................................       44 039        39 197
Securities sold under agreements to repurchase and federal funds purchased .....       30 787        20 274
Other liabilities for borrowed money ...........................................       13 215         8 509
Accounts payable and accrued expenses ..........................................        4 203         4 187
Liability on acceptances .......................................................          212           237
Long-term debt not qualifying as risk-based capital (includes $942 at 1996 and
   $478 at 1995 of notes payable to J.P. Morgan) ...............................        5 436         2 846
Other liabilities, includes allowance for credit losses of $200 at 1996 ........          977         2 805
-----------------------------------------------------------------------------------------------------------
                                                                                      151 943       125 129
Long-term debt qualifying as risk-based capital (includes $2 780 at 1996
   and $1 400 at 1995 of notes payable to J.P. Morgan) .........................        2 979         1 599
-----------------------------------------------------------------------------------------------------------
Total liabilities ..............................................................      154 922       126 728
Commitments and contingencies

STOCKHOLDER'S EQUITY
Preferred stock, $100 par value (authorized shares: 2 500 000) .................           --            --
Common stock, $25 par value (authorized shares: 11 000 000 at 1996 and 1995;
   outstanding: 10 599 027 at 1996 and 1995) ...................................          265           265
Surplus ........................................................................        3 155         3 155
Undivided profits ..............................................................        6 334         5 286
Net unrealized gains on investment securities, net of taxes ....................          149           283
Foreign currency translation ...................................................          (12)           (4)
-----------------------------------------------------------------------------------------------------------
Total stockholder's equity .....................................................        9 891         8 985
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity .....................................      164 813       135 713
-----------------------------------------------------------------------------------------------------------
</TABLE>


Prior period balances were restated to reflect the merger of J.P. Morgan
Delaware with Morgan Guaranty Trust Company of New York effective June 1996.
Member of the Federal Reserve System and Federal Deposit Insurance Corporation.

The accompanying notes are an integral part of this consolidated financial
statement.



                                                                              39
<PAGE>   42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




         1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         J.P. Morgan, a global financial services firm, is the holding company
         for subsidiaries engaged in providing a wide range of financial
         services including advisory, underwriting, financing, trading, asset
         management, brokerage, and related capabilities. J.P. Morgan provides
         these capabilities to a broad global client base including
         corporations, governments, institutions, and individuals. The
         accounting and reporting policies and practices of J.P. Morgan and
         subsidiaries, including Morgan Guaranty Trust Company of New York and
         subsidiaries (Morgan Guaranty), conform with generally accepted
         accounting principles. The following is a description of significant
         accounting policies and practices.

         Consolidation

         The consolidated financial statements include the accounts of J.P.
         Morgan and subsidiaries in which its percentage of ownership exceeds
         50%. All material intercompany accounts and transactions have been
         eliminated in consolidation. The equity method of accounting is used in
         determining the carrying values of investments in companies in which
         the percentage of investment in voting stock is 20% or more but not
         more than 50%; these investments are included in Other assets.

         Investment Securities 

         Debt investment securities:

         Debt investment securities are held to maximize total return over the
         longer term. Debt investment securities that may be sold in response to
         or in anticipation of changes in interest rates and prepayment risk,
         liquidity considerations, and other factors are considered
         available-for-sale. Such securities are carried at fair value with
         unrealized gains and losses, including the effect of hedges, reported
         as a net amount within the stockholders' equity account, Net unrealized
         gains on investment securities, net of taxes, until realized.

                  Realized gains and losses on debt investment securities, which
         are generally computed by the specific identification method, and
         other-than-temporary impairments in value are included in Investment
         securities revenue. Debt investment securities transactions are
         recorded on their trade dates. Carrying values of individual debt
         investment securities are reduced, if necessary, through write-downs to
         reflect other-than-temporary impairments in value. In instances where
         J.P. Morgan has the positive intent and ability to hold to maturity,
         investment securities will be carried at cost, adjusted for
         amortization of premiums and accretion of discounts.

         Equity investment securities:

         Equity investment securities of companies are held for long-term
         appreciation and are included in Other assets.

                  Marketable equity investment securities are carried at fair
         value with unrealized gains and losses reported as a net amount within
         the stockholders' equity account, Net unrealized gains on investment
         securities, net of taxes, until realized. Nonmarketable equity
         investment securities are carried at cost. In the case of securities
         held in subsidiaries registered as Small Business Investment Companies
         (SBICs), equity investment securities are carried at fair value with
         changes in value recognized currently in earnings.

                  Carrying values of individual equity investment securities are
         reduced through write-downs to reflect other-than-temporary impairments
         in value. Realized gains and losses on equity investment securities,
         which are generally computed by the average cost method for a security,
         changes in the fair value of securities held in SBICs, other-than-
         temporary impairments in value, and related dividend income are
         included in Investment securities revenue.




40
<PAGE>   43
         Trading account assets and liabilities

         Trading account assets and liabilities are carried at market value and
         are recorded as of their trade dates. Short trading positions are
         classified as liabilities. Gains and losses on trading positions are
         recognized currently as Trading revenue.

         Securities financing arrangements

         Securities purchased under agreements to resell (resale agreements) and
         Securities sold under agreements to repurchase (repurchase agreements)
         are generally treated as collateralized borrowing and lending
         transactions and are carried at the amounts at which the securities
         were initially acquired or sold. Securities borrowed for cash
         collateral are included on the balance sheet at the amount of cash
         advanced in connection with the transaction. Interest income and
         Interest expense are accrued ratably over the life of each agreement.

                  J.P. Morgan takes possession of securities purchased under
         resale agreements. J.P. Morgan monitors the market value of the
         underlying securities, the majority of which are U.S. government and
         agency securities, as compared to the related receivable plus accrued
         interest, and, as necessary, requests additional collateral.

         Premiums and discounts

         Amortization of premiums and accretion of discounts are generally
         recognized as interest expense or interest revenue over the life of the
         instrument.

         Impaired loans

         J.P. Morgan defines an impaired loan as any loan on which the accrual
         of interest is discontinued because the contractual payment of
         principal or interest has become 90 days past due or management has
         serious doubts about future collectibility of principal or interest,
         even though the loans are currently performing (i.e., nonaccrual
         loans). Factors involved in determining impairment include, but are not
         limited to, expected future cash flows, financial condition of the
         borrower, and current economic conditions. When a loan is recognized as
         impaired, any accrued but unpaid interest previously recorded on such
         loan is reversed against interest revenue of the current period.
         Interest received on impaired loans is generally either applied against
         the principal or reported as revenue, according to management's
         judgment as to the collectibility of principal. Generally, a loan may
         be restored to accrual status only after all delinquent interest and
         principal are brought current and, in the case of loans where interest
         has been interrupted for a substantial period, a regular payment
         performance is established.

                  J.P. Morgan measures each loan impairment based upon the
         present value of expected future cash flows discounted at an individual
         loan's effective interest rate, except where there is an observable
         market value or, if the loan is collateral dependent, at the fair value
         of the collateral.

                  Management recommends those credits or portions of credits
         judged to be uncollectible and that should be charged off.

         Aggregate allowance for credit losses

         An aggregate allowance is maintained that is considered adequate to
         absorb losses inherent in the existing portfolios of loans and other
         undertakings to extend credit, such as unused loan commitments, or to
         make payments to others for which a client is ultimately liable, such
         as standby letters of credit and guarantees, commercial letters of
         credit and acceptances, and all other credit exposures, including
         derivatives.

                  Prior to December 31, 1996, the aggregate allowance for credit
         losses was displayed in the consolidated balance sheet as a reduction
         of the carrying value of loans. For financial statement reporting
         purposes, beginning December 31, 1996, in accordance with the American
         Institute of Certified Public Accountants Banks and Savings
         Institutions Audit Guide, while we consider it in the aggregate, the
         total allowance has been apportioned and displayed as a reduction of
         Loans, a reduction of Trading account assets relating to derivatives,
         and as Other liabilities relating to undertakings to extend credit that
         are not currently reflected on the consolidated balance sheet, such as
         standby letters of credit, guarantees, and commitments. Prior period
         amounts have not been reclassified.




                                                                              41
<PAGE>   44
                  Given the global and diversified nature of our business,
         expected shifts in the relative level of credit risk among financial
         instruments, and the numerous estimates and assumptions necessary to
         derive such allocated amounts, it is expected that portions of the
         aggregate allowance may be reclassified from time to time among Loans,
         Trading account assets, and Other liabilities. A judgment as to the
         adequacy of the aggregate allowance is made at the end of each
         quarterly reporting period. Should the aggregate allowance require
         adjustment either because of reductions due to charge-offs or because
         of changes in the size or risk characteristics of the portfolios, it is
         adjusted through a Provision for credit losses in the quarterly
         reporting period.

         Premises and equipment

         Premises and equipment are stated at cost less accumulated
         depreciation. Depreciation is generally computed using the
         straight-line method over the estimated useful lives of the related
         assets.

         Derivatives used for trading purposes

         Derivatives entered into for trading purposes or used as hedges of
         trading instruments are carried at market value. Instruments used for
         trading purposes include swaps, futures, forwards, spot, and options
         contracts in the interest rate, foreign exchange, equity, and commodity
         markets. Gains and losses associated with such derivatives are
         recognized currently in Trading revenue. The portion of the market
         value associated with derivatives that reflects credit considerations,
         ongoing servicing, and transaction hedging costs is recognized over the
         life of the agreement in Trading revenue. Unrealized gains and losses
         are reported on a gross basis in Trading account assets or Trading
         account liabilities, after taking into consideration the offsetting
         permitted under Financial Accounting Standards Board Interpretation No.
         39 (FIN No. 39), Offsetting of Amounts Related to Certain Contracts.
         The market values of options purchased and written are recorded on a
         gross basis in Trading account assets and Trading account liabilities
         respectively.

         Derivatives used for purposes other-than-trading

         Derivatives used for purposes other-than-trading are utilized to hedge
         exposures, to modify the interest rate characteristics of related
         balance sheet instruments, or to meet longer-term investment
         objectives, including maximization of net interest revenue. The
         specific criteria required for derivatives used for such purposes are
         described below. Derivatives that do not meet these criteria are
         carried at market value with changes in value recognized currently in
         earnings.

                  Derivatives used as hedges must be effective at reducing the
         risk associated with the exposure being hedged and must be designated
         as a hedge at the inception of the derivative contract. Accordingly,
         changes in the market value of the derivative must be highly correlated
         with changes in the market value of the underlying hedged item at
         inception of the hedge and over the life of the hedge contract.
         Derivatives used for hedging purposes include swaps, forwards, futures,
         and purchased options in the interest rate and foreign exchange
         markets. Interest rate swaps are also used to modify the interest rate
         characteristics of related balance sheet instruments. Swaps used to
         modify the interest rate characteristics of nontrading-related balance
         sheet instruments must be linked to the related asset or liability,
         whereby the terms of the swap generally equal the terms of the related
         asset or liability, at the inception and throughout the term of the
         derivative contract. Unrealized gains and losses on all of these
         derivative contracts are generally deferred. Derivatives used as hedges
         or to modify the interest rate characteristics of debt investment
         securities are carried at fair value with the related unrealized gains
         and losses deferred in a separate component of stockholders' equity.
         Margin requirements associated with futures contracts and option
         premiums for contracts used as hedges are recorded in Other assets or
         Other liabilities. The interest component associated with derivatives
         used as hedges or to modify the interest rate characteristics of assets
         and liabilities is recognized over the life of the contract in Net
         interest revenue. Upon contract settlement or termination, the
         cumulative change in the market value of such derivatives is recorded
         as an adjustment to the carrying value of the underlying asset or
         liability and recognized in Net interest revenue over the expected
         remaining life of the related asset or liability. In instances where
         the underlying instrument is sold, the cumulative change in the value
         of the associated derivative is recognized immediately in the component
         of earnings relating to the underlying instrument.




42
<PAGE>   45
                  Risk-adjusting swaps are used in a manner similar to debt
         investment securities to achieve a desired overall interest rate
         profile by increasing or decreasing the firm's overall exposure to
         interest rate risk. Risk-adjusting swaps include only interest rate
         swaps that replicate the cash flows of nonamortizing cash instruments
         and do not contain leverage or embedded option features. Interest
         revenue or expense associated with these swaps is accrued over the life
         of the swap agreement in Net interest revenue. Risk-adjusting swaps are
         carried at the lower of aggregate cost or market value with aggregate
         unrealized net valuation adjustments, if any, recorded in Other
         revenue. Risk-adjusting swaps are generally not terminated. In
         instances where a risk-adjusting swap is terminated, losses are
         recognized immediately and gains are deferred and amortized over the
         original remaining life of the terminated swap in Other revenue.

         Fee revenue

         Investment banking revenue includes fees earned from providing advisory
         services and arranging financing for clients. All such fees are
         recognized as revenue when the related services are performed. In
         addition, credit arrangement and syndication fees are recognized after
         certain retention, timing, and yield criteria are satisfied.

                  Investment management revenue and revenue from Fees and
         commissions are recognized as revenue when the related service is
         performed. Commitment fees are recognized as revenue in the period the
         unused commitment is available.

         Stock options and awards

         J.P. Morgan accounts for its stock-based compensation plans in
         accordance with Accounting Principles Board (APB) Opinion No. 25,
         Accounting for Stock Issued to Employees. In accordance with APB No.
         25, no compensation cost is recorded in conjunction with stock options
         granted under such stock-based compensation plans because such options
         are granted at an exercise price that is not less than the market price
         of the underlying stock on the date of grant. Compensation expense
         related to restricted stock awards, stock bonus awards, stock unit
         awards, redeemable preferred stock, and deferred stock payable in stock
         granted under the stock-based compensation plans of J.P. Morgan is
         recorded over the period in which the employees who receive such awards
         perform services.

                  Effective January 1, 1996, J.P. Morgan adopted Statement of
         Financial Accounting Standards (SFAS) No. 123, Accounting for
         Stock-Based Compensation, which permits either the recognition of
         compensation cost for the estimated fair value of employee stock-based
         compensation arrangements on the date of grant, or the disclosure in
         the notes to the consolidated financial statements of the pro forma
         effects on net income and earnings per share, determined as if the fair
         value-based method had been applied in measuring compensation cost.
         J.P. Morgan has adopted the disclosure option and continues to apply
         APB Opinion No. 25 in accounting for its stock-based compensation
         plans.

         Income taxes

         Deferred tax assets and liabilities are established for the expected
         future tax consequences of temporary differences between the carrying
         amounts and tax bases of assets and liabilities using enacted tax
         rates. A valuation allowance is established to reduce deferred tax
         assets to the amounts expected to be realized. Investment tax credits
         continue to be amortized over the estimated useful lives of the related
         assets.

         Statement of cash flows

         Cash flows from trading account assets and liabilities, trading-related
         derivative transactions, resale and repurchase agreements, and
         securities borrowed are classified as operating activities. Cash flows
         from investment securities, including securities available-for-sale,
         are classified as investing activities. Cash flows from sales of
         investment securities that had remaining lives of greater than one year
         when purchased and less than 90 days when sold, mandatory redemptions,
         and calls are classified as proceeds from maturities. Cash flows from
         derivative transactions used as hedges are classified consistent with
         the items being hedged.




                                                                              43
<PAGE>   46
         Other

         The preparation of the consolidated financial statements in conformity
         with generally accepted accounting principles requires management to
         make estimates and assumptions that affect the reported amounts of
         assets and liabilities and disclosure of contingent assets and
         liabilities at the date of the consolidated financial statements and
         the reported amounts of revenues and expenses during the reported
         period. Actual results could differ from those estimates.

         Certain prior-year amounts have been reclassified to conform with the
         1996 presentation.


         2. ACCOUNTING CHANGES AND DEVELOPMENTS

         Accounting for impairment of a loan

         Effective January 1, 1995, J.P. Morgan adopted SFAS No. 114 and
         subsequent amendment SFAS No. 118, both entitled Accounting by
         Creditors for Impairment of a Loan, which prescribe criteria for
         recognition of loan impairment as well as methods to measure impairment
         of certain loans, including loans whose terms were modified in troubled
         debt restructurings. The standards require that impaired loans be
         measured based on the present value of expected future cash flows
         discounted at the loan's effective interest rate or, as a practical
         expedient, at the loan's observable market price, or at the fair value
         of the collateral if the loan is collateral dependent. The adoption of
         these standards did not have a material impact on J.P. Morgan's
         consolidated financial statements and did not affect its charge-off
         policy.

         Accounting for transfers of assets and servicing of financial assets
         and extinguishments of liabilities

         In 1996, the Financial Accounting Standards Board issued SFAS No. 125,
         entitled Accounting for Transfers of Assets and Servicing of Financial
         Assets and Extinguishments of Liabilities, which provides new
         accounting and reporting standards for sales, securitizations, and
         servicing of receivables and other financial assets, and
         extinguishments of liabilities. The provisions of the Statement are to
         be applied to transfers of assets, servicing rights, and
         extinguishments of liabilities occurring after December 31, 1996,
         except for transfers involving repurchase agreements, securities
         borrowing/lending transactions, and financial assets provided as
         collateral. For these transactions, the Statement will be applied to
         transfers occurring after December 31, 1997. The adoption of this
         standard is expected to have no material impact on J.P. Morgan's
         consolidated financial statements for the year ending December 31,
         1997. The firm is currently evaluating the impact of the new standard
         for the year ending December 31, 1998.


         3. DISPOSITION OF CUSTODY AND CASH PROCESSING BUSINESSES

         In 1996, J.P. Morgan completed the sale of its institutional U.S. cash
         processing business. The sale did not have a material effect on
         earnings.

                  In 1995, J.P. Morgan sold its global and local custody
         businesses and its U.S. commercial paper issuing and paying agency
         business and discontinued certain cash services businesses. Gross
         proceeds of $260 million from the sales were recorded in Other revenue.
         The firm recorded $220 million of nonrecurring costs, net against
         proceeds, associated with the exit of these businesses. The costs
         included severance and other personnel-related costs of $35 million,
         unreimbursed transition costs of $35 million, and other costs of
         approximately $40 million. In addition, a real estate charge of $110
         million was recorded as a result of the rationalization of the firm's
         space requirements coincident with the disposition of these businesses
         and the corresponding reduction in personnel. The total number of
         personnel affected by these actions approximated 1,200. As of December
         31, 1996, no material changes occurred with respect to nonrecurring
         costs related to the exit of these businesses, exclusive of planned
         expenditures.

                  The transition of client accounts to the buyers of the sold
         businesses is expected to be completed over the next 12 months. The
         firm is contractually obligated to provide certain services to these
         clients for the benefit of the buyers until the transitions are
         complete.

                  Total revenues for the above exited businesses were
         approximately 2% and 6% of consolidated total revenues in 1996 and 1995
         respectively.




44
<PAGE>   47
         4. INTEREST REVENUE AND EXPENSE

         An analysis of interest revenue and expense derived from on- and
         off-balance-sheet financial instruments is presented in the table
         below. Interest revenue and expense associated with derivative
         financial instruments, such as swaps, forwards, spot, futures, options,
         and debt securities forwards, used as hedges or to modify the interest
         rate characteristics of assets and liabilities, is attributed to and
         included with the related balance sheet instrument. Net interest
         revenue associated with risk-adjusting swaps that are used to meet
         longer-term investment objectives, including the maximization of net
         interest revenue, is not attributed to a specific balance sheet
         instrument, but is included in the Other sources caption in the table
         below.

<TABLE>
<CAPTION>
         In millions                                              1996    1995     1994
         ---------------------------------------------------------------------------------
<S>                                                            <C>       <C>      <C>   
         INTEREST REVENUE
         Deposits with banks ...............................   $   110    $  168    $  197
         Debt investment securities (a) ....................     1 601     1 552     1 206
         Trading account assets ............................     3 275     3 036     2 784
         Securities purchased under agreements to resell
            and federal funds sold .........................     2 254     1 942     1 593
         Securities borrowed ...............................     1 284       876       624
         Loans .............................................     1 776     1 699     1 409
         Other sources, primarily risk-adjusting swaps .....       413       664       566
         ---------------------------------------------------------------------------------
         Total interest revenue ............................    10 713     9 937     8 379
         ---------------------------------------------------------------------------------
         INTEREST EXPENSE
         Deposits ..........................................     2 541     2 520     1 946
         Trading account liabilities .......................     1 302     1 361     1 288
         Securities sold under agreements to repurchase
            and federal funds purchased ....................     3 295     2 568     2 196
         Other borrowed money ..............................     1 248       935       679
         Long-term debt ....................................       625       550       289
         ---------------------------------------------------------------------------------
         Total interest expense ............................     9 011     7 934     6 398
         ---------------------------------------------------------------------------------
         Net interest revenue ..............................     1 702     2 003     1 981
         ---------------------------------------------------------------------------------
</TABLE>

     (a) Interest revenue from debt investment securities included taxable
         revenue of $1,484 million, $1,392 million, and $1,035 million and
         revenue exempt from U.S. income taxes of $117 million, $160 million,
         and $171 million in 1996, 1995, and 1994 respectively.

         For the 12 months ended December 31, 1996, 1995, and 1994, net interest
         revenue associated with derivatives used for purposes
         other-than-trading was approximately $125 million, $370 million, and
         $150 million respectively. At December 31, 1996 and 1995, approximately
         $225 million and $250 million respectively of net deferred losses on
         closed derivative contracts used for purposes other-than-trading were
         recorded on the consolidated balance sheet. Such amounts are primarily
         composed of net deferred losses on closed hedge contracts included in
         the amortized cost of the debt investment portfolio at December 31,
         1996 and 1995. As discussed in Note 7 to the consolidated financial
         statements, Investment securities, the net unrealized appreciation
         associated with the debt investment portfolio was $255 million and $484
         million at December 31, 1996 and 1995, respectively. The amount of net
         deferred gains or losses on closed derivative contracts will change
         from period to period, primarily due to amortization of such amounts to
         net interest revenue and the execution of our investing strategies,
         which may result in the sale of the underlying hedged instruments
         and/or termination of hedge contracts. Net deferred losses on closed
         derivative contracts at December 31, 1996, are expected to amortize
         into Net interest revenue as follows: $95 million in 1997; $75 million
         in 1998; $35 million in 1999; $10 million in 2000; $7 million in 2001;
         and approximately $3 million thereafter.




                                                                              45
<PAGE>   48
         5. TRADING REVENUE

         Trading revenue disaggregated by principal product groupings is
         presented below. For additional information refer to the Trading
         revenue discussion in the Financial review.

<TABLE>
<CAPTION>
         In millions                         1996         1995         1994
         ----------------------------------------------------------------------
<S>                                        <C>            <C>           <C>  
         Fixed Income.................     $1 540          $ 668          $ 766
         Equities.....................        330            249            115
         Foreign Exchange.............        320            253            168
         Commodities..................         34             42             82
         Proprietary Trading..........        253            164           (112)
         ----------------------------------------------------------------------
         Trading revenue..............      2 477          1 376          1 019
         ----------------------------------------------------------------------
</TABLE>




         6. CASH AND DUE FROM BANKS

         J.P. Morgan is required to maintain noninterest-earning reserve
         balances with U.S. Federal Reserve banks and various foreign central
         banks. Such balances, which are based principally on deposits
         outstanding, are included in Cash and due from banks. At December 31,
         1996 and 1995, required reserves were $259 million and $385 million
         respectively, compared with average required reserves during the year
         of $306 million in 1996 and $378 million in 1995.


         7. INVESTMENT SECURITIES

         Debt investment securities

         The debt investment securities portfolio is classified as
         available-for-sale and measured at fair value with unrealized gains and
         losses excluded from earnings and reported as a net amount within the
         stockholders' equity account, Net unrealized gains on investment
         securities, net of taxes, until realized.

                  Gross unrealized gains and losses, as well as a comparison of
         the cost and carrying value of debt investment securities
         available-for-sale and carried at fair value at December 31, 1996,
         1995, and 1994, are presented in the table on the following page. Net
         unrealized appreciation associated with debt investment securities at
         December 31, 1996, was $255 million, consisting of gross unrealized
         appreciation of $405 million and gross unrealized depreciation of $150
         million. Such amounts represent the gross unrealized appreciation or
         depreciation on each debt security, including the effects of any
         related hedge. For additional detail of gross unrealized gains and
         losses associated with open derivative contracts used to hedge debt
         investment securities, see Note 10 to the consolidated financial
         statements, Estimated fair value of financial instruments.




46
<PAGE>   49
<TABLE>
<CAPTION>
                                                                        Gross         Gross      Fair and
                                                                   unrealized    unrealized      carrying
         In millions                                       Cost         gains        losses         value
         ------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>           <C>             <C> 
         1996
         U.S. Treasury ..........................       $ 1 773       $    80       $    13       $ 1 840
         U.S. government agency, principally
            mortgage-backed .....................        16 848           109           114        16 843
         U.S. state and political subdivision ...         1 575           164            15         1 724
         U.S. corporate and bank debt ...........           304             1            --           305
         Foreign government (a) .................         1 501            39             6         1 534
         Foreign corporate and bank debt ........         2 499            11             2         2 508
         Other ..................................           110             1            --           111
         ------------------------------------------------------------------------------------------------
         Total debt investment securities .......        24 610           405           150        24 865
         ------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                        Gross         Gross      Fair and
                                                                   unrealized    unrealized      carrying
         In millions                                       Cost         gains        losses         value
         ------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>           <C>             <C> 
         1995
         U.S. Treasury ..........................       $ 1 892       $   136       $     2       $ 2 026
         U.S. government agency, principally
            mortgage-backed .....................        15 392           200            69        15 523
         U.S. state and political subdivision ...         1 875           214            16         2 073
         U.S. corporate and bank debt ...........           188             5            --           193
         Foreign government (a) .................         3 413            33            21         3 425
         Foreign corporate and bank debt ........         1 295             6             3         1 298
         Other ..................................            99             1            --           100
         ------------------------------------------------------------------------------------------------
         Total debt investment securities .......        24 154           595           111        24 638
         ------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                        Gross         Gross      Fair and
                                                                   unrealized    unrealized      carrying
         In millions                                       Cost         gains        losses         value
         ------------------------------------------------------------------------------------------------
<S>                                                     <C>        <C>           <C>             <C> 
         1994
         U.S. Treasury ..........................       $ 1 651       $    14       $    42       $ 1 623
         U.S. government agency, principally
            mortgage-backed .....................        13 531           210            88        13 653
         U.S. state and political subdivision ...         2 396           157            58         2 495
         U.S. corporate and bank debt ...........           265            17            --           282
         Foreign government (a) .................         3 758            20            65         3 713
         Foreign corporate and bank debt ........           802             7            19           790
         Other ..................................           100             1            --           101
         ------------------------------------------------------------------------------------------------
         Total debt investment securities .......        22 503           426           272        22 657
         ------------------------------------------------------------------------------------------------
</TABLE>

     (a) Primarily includes debt of countries that are members of the
         Organization for Economic Cooperation and Development.

         At December 31, 1996, there were no securities of a single issuer,
         excluding the U.S. Treasury and U.S. government agencies, whose fair
         value exceeded 10% of stockholders' equity.




                                                                              47
<PAGE>   50
                  The following table presents the components of Investment
         securities revenue realized related to the debt investment securities
         portfolio during 1996, 1995, and 1994.

<TABLE>
<CAPTION>
         In millions                                                       1996      1995      1994
         ------------------------------------------------------------------------------------------
<S>                                                                       <C>       <C>       <C>  
         Gross realized gains from sales of securities ...............    $ 231     $ 371     $ 411
         Gross realized losses from sales of securities ..............     (214)     (363)     (307)
         Net gains on maturities, calls, and mandatory redemptions ...       --        13        18
         ------------------------------------------------------------------------------------------
         Net debt investment securities gains ........................       17        21       122
         ------------------------------------------------------------------------------------------
</TABLE>


         A profile of the maturities of available-for-sale debt investment
         securities as of December 31, 1996, and the related weighted-average
         rates on such securities is presented in the following table.
         Mortgage-backed securities are included based on their weighted-average
         lives, reflecting anticipated future prepayments based on a consensus
         of dealers in the market.

<TABLE>
<CAPTION>
                                                                     After one     After five
                                                         Within       year but      years but
                                                            one         within         within      After ten
         In millions                                       year           five            ten          years          Total
         ------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>           <C>             <C>              <C> 
         U.S. Treasury ..........................       $    86        $   735        $   127        $   825        $ 1 773
         U.S. government agency,
            principally mortgage-backed .........           234          9 328          7 243             43         16 848
         U.S. state and political subdivision ...            68            410            271            826          1 575
         U.S. corporate and bank debt ...........            39            166             51             48            304
         Foreign government .....................           368            902             69            162          1 501
         Foreign corporate and bank debt ........           705          1 136            596             62          2 499
         Other ..................................            --             --             --            110            110
         ------------------------------------------------------------------------------------------------------------------
         Total debt investment securities,
            at cost .............................         1 500         12 677          8 357          2 076         24 610
         Fair value .............................         1 504         12 746          8 415          2 200         24 865
         ------------------------------------------------------------------------------------------------------------------
         Net unrealized gains ...................             4             69             58            124            255
         ------------------------------------------------------------------------------------------------------------------
         Average rates on debt
            investment securities, at cost ......          6.11%          7.02%         7.85%          8.37%          7.36%
         ------------------------------------------------------------------------------------------------------------------
</TABLE>

         Average rates represent the weighted average at December 31, 1996, and
         include the effects of various hedging transactions. Average rates do
         not give effect to unrealized gains and losses that are reflected as a
         component of stockholders' equity. U.S. state and political subdivision
         securities have been adjusted to a taxable-equivalent basis.

         Equity investment securities

         Equity investment securities are held for long-term appreciation and
         are included in Other assets. These securities, which are acquired
         primarily through private placements, management buyouts,
         privatizations, and recapitalizations and consist of both marketable
         and nonmarketable securities, are generally owned by J.P. Morgan
         Capital Corporation, a wholly owned nonbank subsidiary of J.P. Morgan.
         Quoted or estimated values of equity investment securities do not
         necessarily represent net realizable amounts, as the timing or size of
         transactions and the liquidity of the markets may not support
         realization of these values. Fair values for equity investment
         securities for which the publicly quoted market prices do not represent
         the net realizable amounts or for which there are no publicly quoted
         market prices are determined by management based on financial and other
         available information. Most of our equity investment securities are
         subject to legal, regulatory, and contractual restrictions that limit
         our ability to dispose of them freely.

                  At December 31, 1996, 1995, and 1994, marketable equity
         investment securities were carried at fair value and largely classified
         as available-for-sale. Net unrealized appreciation of $477 million,
         $440 million, and $576 million associated with available-for-sale
         equity investment securities at December 31, 1996, 1995, and 1994
         respectively primarily related to investments in
         insurance-industry-related securities at December 31, 1996, and
         investments in insurance and health-care-industry-related securities at
         December 31, 1995 and 1994. Such net unrealized appreciation is
         included within the stockholders' equity account Net unrealized gains
         on investment securities, net of taxes. Net realized gains on equity
         investment securities during 1996 of $247 million are reflected in
         Investment securities revenue. This amount represents $277 million of
         gross realized gains and $30 million of write-downs of equity




48
<PAGE>   51
         investment securities. In 1995 and 1994 net realized gains from equity
         investment securities were $485 million and $606 million after
         write-downs of $33 million and $19 million respectively. Gross
         unrealized gains and losses as well as a comparison of the cost, fair
         value, and carrying value of marketable available-for-sale equity
         investment securities at December 31, 1996, 1995, and 1994 follows.

<TABLE>
<CAPTION>
         In millions: December 31             1996           1995          1994
         ----------------------------------------------------------------------
<S>                                           <C>            <C>           <C> 
         Cost.......................          $365           $237          $183
         Gross unrealized gains.....           479            441           579
         Gross unrealized losses....            (2)            (1)           (3)
         ----------------------------------------------------------------------
         Fair and carrying value....           842            677           759
         ----------------------------------------------------------------------
</TABLE>


         Nonmarketable equity investment securities and securities held in SBICs
         are outside the scope of SFAS No. 115, and are carried at cost and fair
         value respectively. The carrying value of such investments is $499
         million at December 31, 1996, $424 million at December 31, 1995, and
         $432 million at December 31, 1994. The estimated fair value of these
         securities was $614 million, $509 million, and $528 million at December
         31, 1996, 1995, and 1994, respectively. Net unrealized appreciation was
         primarily related to investments in the communications and insurance
         industries at December 31, 1996, and an investment in the communication
         industry at December 31, 1995 and 1994.


         8. TRADING ACCOUNT ASSETS AND LIABILITIES

         Trading account assets and liabilities, including derivative
         instruments used for trading purposes, are carried at fair value. The
         following table presents the carrying value of trading account assets,
         before taking into consideration the allowance for credit losses, and
         trading account liabilities at December 31, 1996 and 1995, and the
         average balance for the years then ended.

<TABLE>
<CAPTION>
                                                                             1996                         1995
                                                                    ----------------------       -----------------------
                                                                    Carrying       Average       Carrying        Average
         In millions                                                   value       balance          value        balance
         ---------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>          <C>            <C>
         TRADING ACCOUNT ASSETS (a)
         U.S. Treasury...................................            $13 677       $10 214        $ 8 396        $ 6 900
         U.S. government agency..........................              6 163         3 527          2 549          2 410
         Foreign government..............................             24 348        20 784         20 111         20 139
         Corporate debt and equity.......................             17 376        14 589         12 406         10 008
         Other securities................................              3 905         6 315          3 147          4 834
         Interest rate and currency swaps................             11 663        10 653         12 444         13 032
         Foreign exchange contracts......................              2 507         2 701          3 286          4 920
         Interest rate futures and forwards..............                405           341            444            309
         Commodity and equity contracts..................              2 811         3 035          1 377          1 372
         Purchased option contracts......................              8 475         6 061          5 248          4 095
         ---------------------------------------------------------------------------------------------------------------
                                                                      91 330        78 220         69 408         68 019
         ---------------------------------------------------------------------------------------------------------------
         TRADING ACCOUNT LIABILITIES
         U.S. Treasury...................................              7 758         8 804          9 282          7 070
         Foreign government..............................              9 343         9 115          8 953         10 334
         Corporate debt and equity.......................              5 372         4 393          2 847          3 384
         Other securities................................                801         2 498            668          1 552
         Interest rate and currency swaps................             12 037        10 252         11 208         12 016
         Foreign exchange contracts......................              4 173         4 323          4 126          4 501
         Interest rate futures and forwards..............                705           570            549            373
         Commodity and equity contracts..................              2 400         2 982          2 595          1 633
         Written option contracts........................              8 330         6 165          5 061          4 320
         ---------------------------------------------------------------------------------------------------------------
                                                                      50 919        49 102         45 289         45 183
         ---------------------------------------------------------------------------------------------------------------
</TABLE>

     (a) Refer to Note 12 to the consolidated financial statements for a
         discussion of the aggregate allowance for credit losses.




                                                                              49
<PAGE>   52
         9. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

         Derivatives

         Derivatives may be used either for trading or other-than-trading
         purposes. Other-than-trading purposes are primarily related to our
         investing activities. Accordingly, the notional amounts presented in
         the table below have been identified as relating to either trading or
         other-than-trading purposes based on management's intent and ongoing
         usage. A summary of the credit exposure, which is represented by the
         positive market value associated with derivatives, after considering
         the benefit of approximately $36.5 billion and $27.7 billion of master
         netting agreements in effect at December 31, 1996 and 1995,
         respectively is also presented.

<TABLE>
<CAPTION>
                                                                      Notional amounts       Credit exposure
                                                                     -------------------    ------------------
         In billions: December 31                                        1996       1995       1996       1995
         -----------------------------------------------------------------------------------------------------
<S>                                                                  <C>        <C>         <C>        <C>
         Interest rate and currency swaps
            Trading ..............................................   $1 867.9   $1 233.3
            Other-than-trading (a) (b) (c) .......................      253.0      282.3
         -----------------------------------------------------------------------------------------------------
            Total interest rate and currency swaps ...............    2 120.9    1 515.6    $  11.7    $  12.4
         -----------------------------------------------------------------------------------------------------
         Foreign exchange spot, forward, and futures contracts
            Trading ..............................................      583.3      443.7
            Other-than-trading (a) (b) ...........................       36.8       18.1
         -----------------------------------------------------------------------------------------------------
            Total foreign exchange spot, forward,
               and futures contracts .............................      620.1      461.8        2.5        3.3
         -----------------------------------------------------------------------------------------------------
         Interest rate futures, forward rate agreements,
            and debt securities forwards
            Trading ..............................................      524.8      412.7
            Other-than-trading ...................................       43.4        2.7
         -----------------------------------------------------------------------------------------------------
            Total interest rate futures, forward rate
               agreements, and debt securities forwards ..........      568.2      415.4        0.4        0.5
         -----------------------------------------------------------------------------------------------------
         Commodity and equity swaps, forward,
            and futures contracts, all trading ...................       77.2       65.1        2.8        1.4
         -----------------------------------------------------------------------------------------------------
         Purchased options (d)
            Trading ..............................................      614.8      462.2
            Other-than-trading (a) ...............................        2.1        2.6
         -----------------------------------------------------------------------------------------------------
            Total purchased options ..............................      616.9      464.8        8.5        5.2
         -----------------------------------------------------------------------------------------------------
         Written options, all trading (e) (f) ....................      713.0      524.0         --         --
         -----------------------------------------------------------------------------------------------------
         Total credit exposure recorded as assets
            on the consolidated balance sheet ....................                             25.9       22.8
         -----------------------------------------------------------------------------------------------------
</TABLE>

     (a) The majority of J.P. Morgan's derivatives used for purposes
         other-than-trading are transacted with independently managed J.P.
         Morgan derivatives dealers who function as intermediaries for credit
         and administrative purposes.

     (b) At December 31, 1996 and 1995, the notional amounts of derivative
         contracts used for purposes other-than-trading conducted in the foreign
         exchange markets, primarily forward contracts, amounted to $40.6
         billion and $20.8 billion respectively. At December 31, 1996, these
         contracts were primarily denominated in the following currencies:
         German deutsche mark $5.9 billion, Italian lira $5.9 billion, Japanese
         yen $5.2 billion, French franc $4.1 billion, Swiss franc $3.4 billion,
         Spanish peseta $3.1 billion, Belgian franc $3.1 billion, British pound
         $1.9 billion, Australian dollar $1.4 billion, and European Currency
         Unit $1.1 billion. At December 31, 1995, these contracts were primarily
         denominated in the following currencies: German deutsche mark $4.6
         billion, Italian lira $2.5 billion, Japanese yen $2.3 billion, French
         franc $1.8 billion, British pound $1.7 billion, Spanish peseta $1.7
         billion, Belgian franc $1.5 billion, and Swiss franc $1.5 billion.

     (c) The notional amounts of risk-adjusting swaps were $214.3 billion and
         $259.4 billion at December 31, 1996 and 1995, respectively.

     (d) At December 31, 1996 and 1995, purchased options used for trading
         purposes included $477.5 billion and $356.7 billion respectively of
         interest rate options, $106.3 billion and $72.5 billion respectively of
         foreign exchange options, and $31.0 billion and $33.0 billion
         respectively of commodity and equity options. Only interest rate
         options are used for purposes other-than-trading. Purchased options
         executed on an exchange amounted to $165.5 billion and $137.4 billion
         and those negotiated over-the-counter amounted to $451.4 billion and
         $327.4 billion at December 31, 1996 and 1995 respectively.

     (e) At December 31, 1996 and 1995, written options included $557.7 billion
         and $414.6 billion respectively of interest rate options, $118.2
         billion and $72.8 billion respectively of foreign exchange options, and
         $37.1 billion and $36.6 billion respectively of commodity and equity
         options. Written options executed on an exchange amounted to $181.8
         billion and $162.4 billion and those negotiated over-the-counter
         amounted to $531.2 billion and $361.6 billion at December 31, 1996 and
         1995 respectively.

     (f) The total notional amount of written put options includes $8.4 billion
         and $6.7 billion of written put option contracts on debt securities at
         December 31, 1996 and 1995, respectively.

50
<PAGE>   53
         The following presents the credit exposure associated with derivatives
         at December 31, 1996 and 1995, segregated by type of counterparty.

<TABLE>
<CAPTION>
                                                    Nonbank
                                                  financial        Govern-
         In billions: December 31              institutions          ments         Banks      All other          Total
         -------------------------------------------------------------------------------------------------------------
<S>                                            <C>                 <C>             <C>        <C>                <C>  
         1996                                  
         Credit exposure....................           $8.8           $2.4          $9.4           $5.3          $25.9
         -------------------------------------------------------------------------------------------------------------

         1995
         Credit exposure....................            5.8            2.8           8.9            5.3           22.8
         -------------------------------------------------------------------------------------------------------------
</TABLE>


         Credit-related financial instruments

         Credit-related financial instruments include commitments to extend
         credit, standby letters of credit and guarantees, and indemnifications
         in connection with securities lending activities. The contractual
         amounts of these instruments represent the amounts at risk should the
         contract be fully drawn upon, the client default, and the value of any
         existing collateral become worthless. The total contractual amount of
         credit-related financial instruments does not represent the expected
         future liquidity requirements, since a significant amount of
         commitments to extend credit and standby letters of credit and
         guarantees are expected to expire or mature without being drawn. The
         credit risk associated with these instruments varies depending on the
         creditworthiness of the client and the value of any collateral held.
         Commitments to extend credit generally require the client to meet
         certain credit-related terms and conditions before drawdown. Collateral
         is required in connection with securities lending indemnifications.
         Market risk for commitments to extend credit and standby letters of
         credit and guarantees, while not significant, may exist as availability
         of and access to credit markets changes.

                  A summary of the contractual amount of credit-related
         instruments at December 31 is presented in the following table.

<TABLE>
<CAPTION>
         In billions                                               1996           1995
         -----------------------------------------------------------------------------
<S>                                                               <C>            <C>  
         Commitments to extend credit.....................        $64.7          $55.1
         Standby letters of credit and guarantees.........         13.9           11.7
         Securities lending indemnifications (a)..........          5.5            5.4
         -----------------------------------------------------------------------------
</TABLE>

     (a) At December 31, 1996 and 1995, J.P. Morgan held cash and other
         collateral in support of securities lending indemnifications.

         The following presents the contractual amount of commitments to extend
         credit and standby letters of credit and guarantees at December 31,
         1996 and 1995, segregated by type of counterparty.

<TABLE>
<CAPTION>
                                                    Nonbank
                                                  financial        Govern-
         In billions: December 31              institutions          ments         Banks        All other        Total
         -------------------------------------------------------------------------------------------------------------
<S>                                            <C>                 <C>             <C>          <C>              <C>  
         1996
         Commitments to extend credit.......          $11.1           $3.4          $3.9         $46.3           $64.7
         Standby letters of credit and
            guarantees......................            4.8            2.4           0.3           6.4(a)         13.9
         -------------------------------------------------------------------------------------------------------------
                                                                                                                
         1995                                                                                                   
         Commitments to extend credit.......            9.4            3.7           4.4          37.6(b)         55.1
         Standby letters of credit and                                                                          
            guarantees......................            3.8            2.0           0.5           5.4(a)         11.7
         -------------------------------------------------------------------------------------------------------------
</TABLE>                                                                   

     (a) The utilities and health care industries at December 31, 1996 and 1995,
         each exceeded 10% of this amount. 

     (b) At December 31, 1995, the utilities industry exceeded 10% of this
         amount.

         Included in Fees and commissions are credit-related fees of $156
         million, $162 million, and $204 million for the years ended December
         31, 1996, 1995, and 1994, respectively, which are primarily earned from
         commitments to extend credit, standby letters of credit and guarantees,
         and securities lending indemnifications.




                                                                              51
<PAGE>   54
         Other

         Consistent with industry practice, amounts receivable and payable for
         securities that have not reached the contractual settlement dates are
         recorded net on the consolidated balance sheet. Amounts receivable for
         securities sold of $20.1 billion and $27.5 billion were netted against
         amounts payable for securities purchased of $17.1 billion and $31.6
         billion to arrive at a net trade date receivable of $3.0 billion,
         recorded in Other assets, and a net trade date payable of $4.1 billion,
         recorded in Other liabilities, at December 31, 1996 and 1995,
         respectively.


         10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         In accordance with SFAS No. 107, Disclosures about Fair Value of
         Financial Instruments, J.P. Morgan estimates that the aggregate net
         fair value of all balance sheet and off-balance-sheet financial
         instruments exceeded associated net carrying values by $1.7 billion and
         $1.4 billion at December 31, 1996 and 1995, respectively before
         considering income taxes.

                  In accordance with generally accepted accounting principles,
         J.P. Morgan's financial instruments are recorded using several methods,
         including historical cost and fair or market value. Under the
         historical cost method, the carrying value generally represents the
         amount received when a liability is incurred or the amount paid to
         acquire an asset less subsequent amortization and allowances that
         reflect management's estimate of uncollectible amounts. This method
         differs from the basis of disclosure under SFAS No. 107, which states
         that the fair value of a financial instrument is the amount at which
         the instrument could be exchanged in a current transaction between
         willing parties, other than in a forced or liquidation sale. Therefore,
         differences between carrying values under the historical cost
         accounting method and fair value estimates can be significant. For
         example, such differences arise in the case of the loan portfolio,
         where the net carrying value represents management's estimate of
         ultimately recoverable principal amounts versus fair value estimates
         that represent a theoretical exchange value based on current market
         conditions that take into account both principal and interest and the
         timing of cash flows.




52
<PAGE>   55
         The following table presents the carrying value and fair value of J.P.
         Morgan's financial instruments at December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                      1996                                  1995             
                                                      -----------------------------------------------------------------------
                                                                                Appre-                                 Appre-
                                                                              ciation/                               ciation/
                                                      Carrying        Fair     (depre-      Carrying        Fair      (depre-
         In billions                                     value       value    ciation)         value       value     ciation)
         --------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>      <C>           <C>            <C>       <C>  
         FINANCIAL INSTRUMENTS USED FOR
         TRADING PURPOSES:
         FINANCIAL ASSETS:
         Trading account assets, net (a) .........       $91.0       $91.3       $ 0.3 (b)     $69.4       $69.4        $  --
         Securities purchased under
            agreements to resell and
            federal funds sold (c) ...............        32.5        32.5           --         32.2        32.2           --
         Securities borrowed (d) .................        27.9        27.9           --         19.8        19.8           --

         FINANCIAL LIABILITIES:
         Trading account liabilities (a) .........        50.9        50.9           --         45.3        45.3           --
         Securities sold under agreements
            to repurchase and federal funds
            purchased (c) ........................        61.4        61.5         (0.1)        45.1        45.3         (0.2)

         FINANCIAL INSTRUMENTS USED FOR
         PURPOSES OTHER THAN TRADING:
         FINANCIAL ASSETS: (e)
         Debt investment securities ..............        24.9        24.9           --         24.6        24.6           --
         Loans, net ..............................        27.6        28.2          0.6 (b)     22.3        23.5          1.2 (b)
         Other financial assets (f) ..............        15.8        16.0          0.2         14.2        14.2           --

         FINANCIAL LIABILITIES: (e)
         Deposits ................................        52.7        52.8         (0.1)        46.4        46.5         (0.1)
            Related derivatives ..................          --        (0.1)         0.1           --        (0.1)         0.1
         Other liabilities for borrowed
            money ................................        19.9        19.8          0.1         15.1        15.1           --
         Long-term debt (g) ......................        12.4        12.5         (0.1)         8.6         8.9         (0.3)
            Related derivatives ..................          --        (0.1)         0.1           --        (0.3)         0.3
         Company-obligated mandatorily
            redeemable preferred securities of
            subsidiary ...........................         0.8         0.7          0.1
         Other financial liabilities (h) .........        11.7        11.3          0.4 (b)     12.9        12.9           --

         OFF-BALANCE-SHEET FINANCIAL
            INSTRUMENTS:
         Risk-adjusting swaps (i) ................          --         0.1          0.1           --         0.4          0.4
         Commitments to extend credit and
            standby letters of credit and
            guarantees ...........................          --          --           --           --          --           --
         --------------------------------------------------------------------------------------------------------------------
         Excess of net fair values over net
            carrying values before
            considering income taxes .............                                  1.7                                   1.4
         --------------------------------------------------------------------------------------------------------------------
</TABLE>

     (a) Refer to Note 8 to the consolidated financial statements, Trading
         account assets and liabilities, for the carrying value and fair value
         of financial instruments, including derivatives, used for trading
         purposes.

     (b) Relates substantially to the allowance for credit losses. Refer to Note
         12 to the consolidated financial statements, Aggregate allowance for
         credit losses.

     (c) These trading-related financial instruments are generally treated as
         collateralized lending and borrowing transactions and are carried at
         the amounts at which the securities were initially acquired or sold.
         Securities sold under agreements to repurchase are also used as one
         source of financing for the debt investment securities portfolio.

     (d) These trading-related financial instruments, which are collateralized
         by cash, are carried at amounts equal to the cash advanced.

     (e) Derivatives are used to hedge or modify the interest rate
         characteristics of debt investment securities, loans, deposits, other
         liabilities for borrowed money, long-term debt, and other financial
         assets and liabilities. Net unrealized gains and losses associated with
         such derivatives contracts amounted to $90 million and $195 million at
         December 31, 1996 and 1995, respectively. Gross unrealized gains and
         gross unrealized losses associated with open derivative contracts used
         for these purposes at December 31, 1996 and 1995, are presented below.
         Such amounts primarily relate to interest rate and currency swaps used
         to hedge or modify the interest rate characteristics of long-term debt;
         deposits; debt investment securities, principally mortgage-backed
         securities; and other financial instruments.                



                                                                              53
<PAGE>   56
        

<TABLE>
<CAPTION>
                                                      Gross                Gross    Net unrealized
         In millions: December 31          unrealized gains    unrealized losses    gains/(losses)
         -----------------------------------------------------------------------------------------
<S>                                        <C>                 <C>                  <C> 
         1996                                                  
         Long-term debt..................              $239                 $153              $ 86
         Debt investment securities......                49                  126               (77)
         Deposits........................                75                   25                50
         Other financial instruments.....                76                   45                31
         -----------------------------------------------------------------------------------------
         Total...........................               439                  349                90
         -----------------------------------------------------------------------------------------
         1995                                                  
         Long-term debt..................               275                   19               256
         Debt investment securities......                 1                  111              (110)
         Deposits........................                57                    1                56
         Other financial instruments.....                38                   45                (7)
         -----------------------------------------------------------------------------------------
         Total...........................               371                  176               195
         -----------------------------------------------------------------------------------------
</TABLE>

     (f) Includes cash and due from banks, interest-earning deposits with banks,
         customers' acceptance liability, accrued interest and accounts
         receivable, and other financial assets.

     (g) Estimating the fair value for J.P. Morgan's convertible mortgage loan
         and British pound financing obligation is not practicable due to the
         complex terms and conditions associated with the transactions. For
         additional information regarding these financing obligations, see Note
         14 to the consolidated financial statements, Long-term debt.

     (h) Includes commercial paper, liability on acceptances, accounts payable
         and accrued expenses, and other financial liabilities.

     (i) Represents the net unrealized gain associated with risk-adjusting swaps
         and their related hedges that are entered into to meet longer-term
         investment objectives. The net amount is composed of gross unrealized
         gains and gross unrealized losses of $2.8 billion and $2.7 billion
         respectively at December 31, 1996, and $4.4 billion and $4.0 billion
         respectively at December 31, 1995. The unrealized gains and losses
         related to the derivative contracts used to hedge these risk-adjusting
         swaps, included above, were not material at December 31, 1996 and 1995.
         There were no material terminations of risk-adjusting swaps during 1996
         or 1995.

         The following table summarizes the fair values of all on- and
         off-balance-sheet financial instruments according to the valuation
         methods used to determine fair value estimates.

<TABLE>
<CAPTION>
                                                                                                          Off-balance-
                                                                                                                 sheet
                                                      Financial assets             Financial liabilities   instruments
                                                   -------------------------------------------------------------------
                                                   Carrying                     Carrying                  
         In billions: December 31                     value     Fair value         value     Fair value     Fair value
         -------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>             <C>          <C>          <C>      
         1996                                                                                               
         Carried at fair or market value....         $116.9         $117.2        $ 50.9         $ 50.9           $ --
         Carried at cost:                                                                                   
            Carrying value approximates                                                                     
               fair value due to                                                                            
               short-term nature............           76.0           76.0          72.4           72.4             --
            Fair value based on available                                                                   
               quoted market prices.........            3.0            3.0           4.1            3.8             --
            Fair value derived using                                                                        
               estimation techniques........           23.8           24.6          82.4           82.2            0.1
         -------------------------------------------------------------------------------------------------------------
                                                      219.7          220.8         209.8          209.3            0.1
         -------------------------------------------------------------------------------------------------------------
         1995                                                                                               
         Carried at fair or market value....           94.7           94.7          45.3           45.3             --
         Carried at cost:                                                                                   
            Carrying value approximates                                                                     
               fair value due to                                                                            
               short-term nature............           65.1           65.1          58.1           58.3             --
            Fair value based on available                                                                   
               quoted market prices.........            2.8            2.8           5.4            5.4             --
            Fair value derived using                                                                        
               estimation techniques........           19.9           21.1          64.6           64.6            0.4
         -------------------------------------------------------------------------------------------------------------
                                                      182.5          183.7         173.4          173.6            0.4
         -------------------------------------------------------------------------------------------------------------
</TABLE>




54
<PAGE>   57
         Carried at fair or market value

         Trading account assets and liabilities, including derivatives used for
         trading purposes, are carried at market value. For financial statement
         reporting purposes, a portion of the aggregate allowance for credit
         losses related to derivatives is classified as a reduction of the
         carrying value of trading account assets. Debt and marketable equity
         investment securities are carried at fair value.

         Carried at cost: Carrying value approximates fair value due to
         short-term nature

         For short-term balance sheet instruments without publicly quoted market
         prices, the carrying value approximates fair value. These balance sheet
         instruments include cash and due from banks, certain securities
         purchased under agreements to resell and federal funds sold, securities
         borrowed, certain loans, customers' acceptance liability, accrued
         interest and accounts receivable, certain other financial assets,
         certain securities sold under agreements to repurchase and federal
         funds purchased, liability on acceptances, accounts payable and accrued
         expenses, and certain other financial liabilities. Instruments with a
         maturity or repricing profile of one year or less are generally
         classified as short term.

         Carried at cost: Fair value based on available quoted market prices

         The fair values of certain loans and other financial assets and certain
         other financial liabilities were determined based on quoted market
         prices for the instruments or similar issues in their most active
         market.

         Carried at cost: Fair value derived using estimation techniques

         The fair values of most financial instruments without quoted market
         prices are derived using discount rates that management believes are
         appropriate. Interest rates derived from prevailing market yield
         curves, which closely reflect J.P. Morgan's interest-earning deposit
         and borrowing rates, are used to discount interest-earning deposits,
         other interest-earning assets, interest-bearing deposits, other
         borrowings, long-term repurchase agreements, and risk-adjusting swaps.
         In order to estimate fair values for commercial paper, J.P. Morgan's
         current commercial paper rates are used; for most long-term debt, J.P.
         Morgan's current cost of funds for debt with similar terms and
         remaining maturities is used. Loans are discounted at current market
         rates that are applicable to loans of similar type, maturity, and
         credit standing. The fair value of impaired loans is derived using
         expected cash flows on a discounted basis (or by taking the fair value
         of any collateral on the loan or by using available market prices). For
         financial statement reporting purposes, a portion of the aggregate
         allowance for credit losses is classified as a reduction of the
         carrying value of loans whose fair value is derived using estimation
         techniques. Fair values for equity investment securities for which
         there are no publicly quoted market prices are determined by management
         based on financial and other available information.

                  The fair value related to commitments to extend credit and
         standby letters of credit and guarantees is derived by comparing the
         contractual future stream of fees with such fee streams adjusted to
         reflect current market rates that would be applicable to instruments of
         similar type, maturity, and credit standing. The fair value of
         securities lending indemnifications is determined similarly based on
         fee streams, which are at market rates since most agreements mature in
         less than 30 days. For financial statement reporting purposes, a
         portion of the aggregate allowance for credit losses related to
         undertakings to extend credit that are not currently reflected on the
         balance sheet is included in the carrying value of other liabilities.




                                                                              55
<PAGE>   58
         11. LOANS

         Loans, before taking into consideration the allowance for credit
         losses, at December 31 are summarized in the following table.

<TABLE>
<CAPTION>
         In millions                                                         1996           1995
         ---------------------------------------------------------------------------------------
<S>                                                                       <C>            <C> 
         LOANS IN OFFICES IN THE U.S.
         Commercial and industrial.................................       $ 1 878        $ 1 990
         Financial institution:
            Banks..................................................           641            729
            Other financial institutions...........................           902            527
         Collateralized by real estate.............................           324            365
         Other, including U.S. state and political subdivision.....         1 488          1 666
         ---------------------------------------------------------------------------------------
                                                                            5 233          5 277
         ---------------------------------------------------------------------------------------
         LOANS IN OFFICES OUTSIDE THE U.S.
         Commercial and industrial.................................        12 026         10 045
         Financial institution:
            Banks..................................................         2 853          1 447
            Other financial institutions...........................         4 522          3 013
         Collateralized by real estate.............................           364            281
         Foreign governments and official institutions ............           811          1 042
         Other.....................................................         2 311          2 348
         ---------------------------------------------------------------------------------------
                                                                           22 887         18 176
         ---------------------------------------------------------------------------------------
                                                                           28 120         23 453
         ---------------------------------------------------------------------------------------
</TABLE>


         The distribution of total loans at December 31 on the basis of the
         location of the borrower is presented in the following table.

<TABLE>
<CAPTION>
         In millions                                         1996           1995    
         -----------------------------------------------------------------------
<S>                                                       <C>            <C> 
         LOANS TO BORROWERS IN THE U.S.                   
         In offices in the U.S.......................     $ 4 354        $ 3 769
         In offices outside the U.S..................       8 275          6 702
         -----------------------------------------------------------------------
                                                           12 629         10 471
         -----------------------------------------------------------------------

         LOANS TO BORROWERS OUTSIDE THE U.S.              
         In offices in the U.S.......................         879          1 508
         In offices outside the U.S..................      14 612         11 474
         -----------------------------------------------------------------------
                                                           15 491         12 982
         -----------------------------------------------------------------------
                                                           28 120         23 453
         -----------------------------------------------------------------------
</TABLE>


         Total impaired loans, net of charge-offs, at December 31 are presented
         in the following table. At December 31, 1996, more than half of the
         impaired loan balance is measured based upon the present value of
         expected future cash flows discounted at an individual loan's effective
         interest rate, and the remainder is primarily based on the fair value
         of the collateral. Consistent with prior periods, all of J.P. Morgan's
         impaired loans at December 31, 1996, were on nonaccrual status.

<TABLE>
<CAPTION>
         In millions                           1996           1995          1994
         -----------------------------------------------------------------------
<S>                                            <C>            <C>           <C> 
         Commercial and industrial.......      $ 89           $ 67          $136
         Other...........................        29             48            81
         -----------------------------------------------------------------------
                                                118            115           217
         Restructuring countries.........         2              2             2
         -----------------------------------------------------------------------
                                                120            117           219
         -----------------------------------------------------------------------
</TABLE>




56
<PAGE>   59
         As of December 31, 1996, no SFAS No. 114 reserve was required for the
         $120 million recorded investment in impaired loans. Charge-offs and
         interest applied to principal have reduced the recorded investment
         values to amounts that are less than the SFAS No. 114 calculated
         values. For the 12 months ended December 31, 1996, the average recorded
         investment in impaired loans was $141 million.

         An analysis of the effect of impaired loans, net of charge-offs, on
         interest revenue is presented in the following table.

<TABLE>
<CAPTION>
         In millions                                                             1996    1995   1994
         -------------------------------------------------------------------------------------------
<S>                                                                              <C>      <C>    <C>
         Interest revenue that would have been recorded if accruing (a) .....    $ 14     $17    $18
         Less interest revenue recorded: (b)
            Related to the current period ...................................       3       1      5
            Related to prior periods ........................................       1      38     39
         -------------------------------------------------------------------------------------------
         Positive (negative) impact of impaired loans on interest revenue ...     (10)     22     26
         -------------------------------------------------------------------------------------------
</TABLE>

     (a) Represents $12 million, $13 million, and $13 million from borrowers in
         the U.S. and $2 million, $4 million, and $5 million from borrowers
         outside the U.S. in 1996, 1995, and 1994 respectively.

     (b) Represents $3 million, $30 million, and $4 million from borrowers in
         the U.S. and $1 million, $9 million, and $40 million from borrowers
         outside the U.S. in 1996, 1995, and 1994 respectively.


         12. AGGREGATE ALLOWANCE FOR CREDIT LOSSES

         An analysis of the aggregate allowance for credit losses is presented
         in the following table.

<TABLE>
<CAPTION>
         In millions                                 1996        1995      1994
         ----------------------------------------------------------------------
<S>                                                <C>         <C>       <C>   
         BALANCE, JANUARY 1 ...................    $1 130      $1 131    $1 157
         ----------------------------------------------------------------------
         Recoveries ...........................        25          54        45
         Charge-offs:                                          
            Commercial and industrial .........       (30)        (39)      (37)
            Restructuring countries ...........        --          --       (18)
            Other .............................        (9)        (16)      (17)
         ----------------------------------------------------------------------
         Net charge-offs ......................       (14)         (1)      (27)
         Translation adjustment ...............        --          --         1
         ----------------------------------------------------------------------
         BALANCE, DECEMBER 31 .................     1 116 (a)   1 130     1 131
         ----------------------------------------------------------------------
</TABLE>

     (a) At December 31, 1996, the aggregate allowance was apportioned and
         displayed as follows: $566 million as a reduction of loans, $350
         million as a reduction of trading account assets relating to
         derivatives, and $200 million included in other liabilities related to
         undertakings to extend credit that are not currently reflected on the
         consolidated balance sheet.


         13. PREMISES AND EQUIPMENT

         The components of premises and equipment at December 31 are presented
         in the following table.

<TABLE>
<CAPTION>
         In millions                                          1996          1995
         -----------------------------------------------------------------------
<S>                                                         <C>           <C>   
         Land......................................         $  112        $  112
         Buildings.................................          1 047           958
         Equipment and furniture...................          1 107         1 435
         Leasehold improvements....................            342           347
         Property under financing obligation:
            Land and building......................            500           455
         Construction-in-progress..................             29            32
         -----------------------------------------------------------------------
                                                             3 137         3 339
         Less: accumulated depreciation............          1 272         1 412
         -----------------------------------------------------------------------
                                                             1 865         1 927
         -----------------------------------------------------------------------
</TABLE>


         Depreciation expense was $212 million in 1996, $247 million in 1995,
         and $231 million in 1994. No interest was capitalized in connection
         with various construction projects in 1996 or 1995.




                                                                              57
<PAGE>   60
         14. LONG-TERM DEBT

         The net proceeds of J.P. Morgan's long-term debt may be used for
         general corporate purposes, including investment in equity and debt
         securities and advances to subsidiaries. J.P. Morgan has the option to
         redeem certain debt prior to maturity at specified prices.

                  Long-term debt qualifying as risk-based capital generally must
         be unsecured and subordinated with an original weighted-average
         maturity of at least five years.

         LONG-TERM DEBT QUALIFYING AS RISK-BASED CAPITAL

         Long-term debt qualifying as risk-based capital and representing all of
         J.P. Morgan's subordinated issues at December 31 is presented in the
         following table.

<TABLE>
<CAPTION>
                                                     J.P. Morgan (parent)         Morgan Guaranty            Total debt
                                                   ------------------------       ----------------           outstanding
                                                    Fixed          Floating       Fixed   Floating       ------------------
         In millions                                 rate              rate        rate       rate         1996        1995
         ------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>            <C>     <C>            <C>         <C>   
         CONTRACTUAL MATURITY DATE                                    
         1996.................................     $   --              $ --        $ --       $ --       $   --      $  100
         1998.................................        611 (a)(b)         --          --         --          611         582 (a)(b)
         2000.................................         --               200          --         --          200         200
         2002-2006............................      1 602               740         199         --        2 541       2 548
         Thereafter...........................        899                10          --         --          909         649
         ------------------------------------------------------------------------------------------------------------------
                                                                                                          4 261       4 079
         Less: amortization for risk-based
            capital purposes (c)..............                                                             (569)       (489)
         ------------------------------------------------------------------------------------------------------------------
         Total long-term debt qualifying as
            risk-based capital................                                                            3 692       3 590
         ------------------------------------------------------------------------------------------------------------------
</TABLE>

     (a) Amounts include $2 million of outstanding convertible debentures at
         December 31, 1996 and 1995, respectively. At December 31, 1996, these
         debentures were convertible into 76,650 shares of J.P. Morgan common
         stock at $20 per share.

     (b) Amounts include $360 million and $331 million of outstanding
         zero-coupon notes at December 31, 1996 and 1995, respectively. The
         principal amount of these notes is $400 million. The yield to maturity
         on the notes, which do not bear interest, is 8.66%. The carrying value
         increases as the discount on the notes is accreted to interest expense.

     (c) The balance of debt qualifying as risk-based capital is reduced 20% per
         year during each of the last five years prior to maturity.




58
<PAGE>   61
         LONG-TERM DEBT NOT QUALIFYING AS RISK-BASED CAPITAL

         Long-term debt not qualifying as risk-based capital and representing
         all of J.P. Morgan's senior issues at December 31 is presented in the
         following table.

<TABLE>
<CAPTION>
                                                        J.P. Morgan (parent)        Morgan Guaranty          Total debt
                                                      ------------------------      ----------------         outstanding
                                                       Fixed          Floating      Fixed   Floating      ------------------
         In millions                                    rate              rate       rate       rate        1996        1995
         -------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>           <C>     <C>           <C>         <C>   
         CONTRACTUAL MATURITY DATE                                        
         1996.....................................    $   --              $ --       $ --     $   --      $   --      $1 062
         1997.....................................       854               650        125          6       1 635       1 500
         1998.....................................       208               194        414      1 543       2 359         399
         1999.....................................       138                --        530        200         868         332
         2000.....................................       458                --         43         10         511         537
         2001.....................................       192                --        738         95       1 025          65
         2002-2006................................       391               160        374         65         990         227
         Thereafter...............................     1 103 (a)(b)         --         16         25       1 144         832 (a)(b)
         British pound financing obligation (c)...                                               310         310         294
         -------------------------------------------------------------------------------------------------------------------
                                                                                                           8 842       5 248
         Add: amortization for risk-based                                 
            capital purposes (d)..................                                                           569         489
         -------------------------------------------------------------------------------------------------------------------
         Total long-term debt not qualifying                              
            as risk-based capital.................                                                         9 411       5 737
         -------------------------------------------------------------------------------------------------------------------
</TABLE>


     (a) Amounts include a convertible mortgage loan with a carrying value of
         $406 million and $407 million at December 31, 1996 and 1995,
         respectively. The interest rate on the loan increases 1/2% every four
         years from 7%, as set in 1988, to 9% in 2004. After 2008 the rate will
         be fixed based upon the interest rate for 10-year U.S. Treasury
         securities at that time. Beginning in 2008 the loan may be converted,
         at the option of the lender, into a 49% interest in the J.P. Morgan
         building at 60 Wall Street. If the loan is converted, J.P. Morgan will
         have the option to lease the property for seven 10-year terms. J.P.
         Morgan has the right to prepay the debt if the lender does not exercise
         the conversion option. The loan is collateralized by the 60 Wall Street
         building owned by Morgan Guaranty.

     (b) Includes notes maturing in 2008 - 2009 for which the interest rates
         will be reset during 1998 for the following 10-year term at a rate
         based on the interest rate for 10-year U.S. Treasury securities at that
         time. The carrying amount of these notes was $425 million at December
         31, 1996 and 1995, respectively.

     (c) Represents the sale of a 52.5% interest in J.P. Morgan's office
         building complex in London. The transaction is treated as a financing
         obligation, which is being amortized over a 25-year period,
         corresponding with J.P. Morgan's initial lease term for the entire
         complex. J.P. Morgan has renewal options to lease this space for an
         additional 50 years. The lease contains escalation clauses under which
         rental payments will be redetermined every five years, beginning after
         year 15. Interest on the financing obligation is imputed annually at an
         effective rate that varies depending on then-current rental rates in
         the London real estate market. 

         The aggregate amounts of minimum cash payments (at the December 31,
         1996 exchange rate) to be applied to the financing obligation for each
         of the five years subsequent to December 31, 1996, and thereafter are
         presented in the following table.

<TABLE>
<CAPTION>
         In millions
         --------------------------------------------------------------------
<S>                                                                      <C> 
         1997.....................................................       $ 26
         1998.....................................................         26
         1999.....................................................         26
         2000.....................................................         26
         2001.....................................................         28
         Thereafter...............................................        283
         --------------------------------------------------------------------
         Total cash payments......................................        415
         Less: interest...........................................        105
         --------------------------------------------------------------------
         Balance outstanding at December 31, 1996.................        310
         --------------------------------------------------------------------
</TABLE>

     (d) The balance of debt qualifying as risk-based capital is reduced 20% per
         year during each of the last five years prior to maturity.




                                                                              59
<PAGE>   62
         Included in the long-term debt tables above are non-U.S. dollar
         denominated fixed rate instruments totaling $2,790 million and $1,319
         million at December 31, 1996 and 1995, respectively. Non-U.S. dollar
         denominated floating rate instruments totaled $350 million and $124
         million at December 31, 1996 and 1995, respectively.

                  Also included in the long-term debt tables above are
         medium-term notes totaling $745 million at December 31, 1996. Based
         solely on contractual terms, the weighted-average interest rate of
         these issues was 6.09% at December 31, 1996. Maturities of these issues
         ranged from 1997 to 2026. There were no medium-term notes outstanding
         at December 31, 1995.

                  Based on the yield to maturity for zero-coupon notes and
         contractual terms for all other issues, the ranges of interest rates
         associated with long-term debt at December 31 are summarized in the
         following table.

<TABLE>
<CAPTION>
                                                                   1996           1995
         -----------------------------------------------------------------------------
<S>                                                          <C>            <C>
         U.S. dollar fixed rate issues...............        4.50-10.00%     4.46-8.66%
         U.S. dollar floating rate issues (a)........        5.18-14.00      4.92-6.86
         Non-U.S. dollar fixed rate issues...........        2.52-14.50     4.63-14.50
         Non-U.S. dollar floating rate issues (a)....         3.39-8.00      4.13-9.69
         -----------------------------------------------------------------------------
</TABLE>

     (a) Floating rates are determined by formulas and may be subject to certain
         minimum or maximum rates.

         The weighted-average interest rate for total long-term debt was 6.67%
         and 6.94% at December 31, 1996 and 1995, respectively.

                  In order to modify exposure to interest rate and currency
         exchange rate movements, J.P. Morgan utilizes derivative instruments,
         primarily interest rate and currency swaps, in conjunction with some of
         its debt issues. The effect of these derivative instruments is included
         in the calculation of the interest expense on the associated debt. The
         weighted-average interest rate for total long-term debt, including the
         effects of the related derivative instruments, was 5.75% and 6.01% at
         December 31, 1996 and 1995, respectively.


         15. INCOME TAXES

         J.P. Morgan and eligible subsidiaries file a consolidated U.S. federal
         income tax return. The current and deferred portions of income tax
         expense included in the consolidated statement of income are presented
         in the following table.

<TABLE>
<CAPTION>
         In millions                         1996                          1995                         1994               
         ----------------------------------------------------   --------------------------   ---------------------------
         INCOME TAX EXPENSE
            (BENEFIT)             Current   Deferred    Total   Current   Deferred   Total   Current   Deferred    Total
                                  --------------------------------------------------------------------------------------
<S>                                 <C>       <C>         <C>     <C>       <C>        <C>     <C>       <C>         <C> 
         U.S...................      $285      $(123)    $162      $ 43       $ (3)   $ 40      $161       $ 91     $252
         Foreign...............       586        (74)     512       505         (4)    501       243         16      259
         State and local.......       120        (36)      84       114        (45)     69       115        (16)      99
         ---------------------------------------------------------------------------------------------------------------
                                      991       (233)     758       662        (52)    610       519         91      610
         ---------------------------------------------------------------------------------------------------------------
</TABLE>




60
<PAGE>   63
         The income tax expense related to net gains on debt and equity
         investment securities, included in Income taxes, was $98 million in
         1996, $187 million in 1995, and $274 million in 1994.

                  Deferred tax assets and liabilities at December 31, 1996,
         1995, and 1994, resulted from the items listed in the following table.

<TABLE>
<CAPTION>
         In millions                                                   1996           1995           1994
         ------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>   
         DEFERRED TAX ASSETS
         Compensation and benefits...............................    $  887         $  646         $  454
         Aggregate allowance for credit losses...................       443            444            444
         Foreign operations......................................        68             82             88
         Write-down of equity investment securities..............        44             54             52
         Other...................................................       168            199            129
         ------------------------------------------------------------------------------------------------
         Total deferred tax assets before valuation allowance....     1 610          1 425          1 167
         Less: valuation allowance (a)...........................       120            140            140
         ------------------------------------------------------------------------------------------------
         Total deferred tax assets...............................     1 490          1 285          1 027
         ------------------------------------------------------------------------------------------------

         DEFERRED TAX LIABILITIES
         Gains on debt and equity investment securities..........       549            564            342
         Lease financing transactions............................       142            135            120
         Unremitted earnings.....................................       101             86             67
         Depreciation............................................        36             43             44
         Interest rate and currency swaps........................        14             68             99
         Other...................................................       147            241            219
         ------------------------------------------------------------------------------------------------
         Total deferred tax liabilities..........................       989          1 137            891
         ------------------------------------------------------------------------------------------------
</TABLE>

     (a) The valuation allowance is primarily related to the ability to
         recognize tax benefits associated with foreign operations.

         J.P. Morgan recorded a deferred income tax liability of $268 million,
         $358 million, and $274 million at December 31, 1996, 1995, and 1994,
         respectively related to the net unrealized gains on investment
         securities classified as available-for-sale.

         A reconciliation of the difference between the expected U.S. statutory
         income tax rate and J.P. Morgan's effective income tax rate is shown in
         the following table.

<TABLE>
<CAPTION>
         Percentage of pretax income                                              1996           1995           1994
         -----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>            <C> 
         U.S. statutory tax rate........................................          35.0%          35.0%          35.0%
         Increase (decrease) due to:
            State and local taxes, net of U.S. income tax effects.......           2.3            2.4            3.5
            Tax-exempt income...........................................          (2.7)          (6.7)          (3.7)
            Other.......................................................          (2.1)           1.3           (1.4)
         -----------------------------------------------------------------------------------------------------------
         Effective tax rate.............................................          32.5           32.0           33.4
         -----------------------------------------------------------------------------------------------------------
</TABLE>

         Pretax income

         The following table presents Income before income taxes reported by
         location of office. This presentation differs from the basis of
         disclosure of U.S., foreign, and state and local tax expense above and
         from the basis of disclosure of domestic-related and
         international-related income in Note 25 to the consolidated financial
         statements, International operations.

<TABLE>
<CAPTION>
         In millions                        1996           1995           1994
         ---------------------------------------------------------------------
<S>                                       <C>            <C>            <C>   
         Offices in the U.S.............  $  155         $  455         $  908
         Offices outside the U.S........   2 177          1 451            917
         ---------------------------------------------------------------------
                                           2 332          1 906          1 825
         ---------------------------------------------------------------------
</TABLE>




                                                                              61
<PAGE>   64
         16. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
         SUBSIDIARY

         In November 1996, the JPM Capital Trust I (Trust), a wholly owned
         subsidiary of J.P. Morgan, issued $750 million of 7.54% Cumulative
         Capital Securities (Trust Preferred Securities) with a stated value
         and liquidation preference of $1,000 per share. The Trust Preferred
         Securities qualify as tier 1 capital under Federal Reserve guidelines,
         and have no voting rights.  The obligations of J.P. Morgan under the
         Trust Agreement, as defined, constitute a full and unconditional
         guarantee by J.P. Morgan of the Trust's obligations under the Trust
         Preferred Securities issued.  The proceeds from the sale of the Trust
         Preferred Securities and the sale of the Trust's common stock to J.P.
         Morgan were utilized by the Trust to purchase $773.2 million of 7.54%
         Junior Subordinated Debentures (Intercompany Debentures) of J.P.
         Morgan. The Intercompany Debentures are unsecured and rank subordinate
         and junior in right of payment to all other indebtedness, liabilities,
         and obligations of J.P. Morgan. The Intercompany Debentures represent
         the sole assets of the Trust. Interest on the Trust Preferred
         Securities is cumulative, payable semiannually, but only if, and to
         the extent that, the semiannual interest payments are made on the
         Intercompany Debentures by J.P. Morgan. Upon approval from the Federal
         Reserve, J.P. Morgan has the right to optionally redeem the
         Intercompany Debentures, prior to the maturity date of January 15,
         2027, on or after January 15, 2007, at 103.77% of the stated
         liquidation preference amount; such price declining 0.377% per year
         until January 15, 2017, at which time the price on and thereafter
         shall equal 100%. Proceeds from any redemption or maturity of the
         Intercompany Debentures would cause a mandatory redemption of Trust
         Preferred Securities having an aggregate liquidation amount equal to   
         the principal amount of Intercompany Debentures redeemed.

                  In accordance with Securities and Exchange Commission Staff
         Accounting Bulletin No. 53, J.P. Morgan is not required to disclose
         separate financial statements because the Trust is wholly owned, has no
         independent operations, and is issuing securities that contain a full
         and unconditional guarantee of its parent, J.P. Morgan.

                  In December 1996, the Board of Directors approved the purchase
         of up to $750 million of J.P. Morgan common stock in the open market or
         through privately negotiated transactions with the proceeds raised from
         the issuance of the Trust Preferred Securities. The repurchase is
         expected to be completed in 1997.




62
<PAGE>   65
         17. PREFERRED STOCK

         Total authorized shares of preferred stock are 10,400,000 and
         10,000,000 at December 31, 1996 and 1995, respectively. J.P. Morgan may
         redeem the outstanding preferred stock, in whole or in part, at its
         option, for the stated value plus accrued and unpaid dividends except
         for the Fixed Cumulative Preferred Stock, Series H shares, which may
         not be redeemed before March 31, 2006. All preferred stock has a
         dividend preference as well as a liquidation preference and is
         generally nonvoting. Preferred stock outstanding at December 31 is
         presented in the following table.

<TABLE>
<CAPTION>
                                                                  Authorized, issued,
                                                                 and outstanding shares                Dividend rate (a)  
                                                               ---------------------------          ------------------------
                                                                    1996              1995               1996           1995
         -------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>                <C>            <C> 
         Adjustable Rate Cumulative Preferred Stock,
            Series A (stated value: $100 per share)........    2 444 300         2 444 300               5.00%          5.00%
         Variable Cumulative Preferred Stock, Series
            B, C, D, E, and F (authorized, issued, and
            outstanding: 50 000 shares each series;
            stated value: $1 000 per share)................      250 000           250 000          3.88-4.08      4.28-4.56
         Fixed Cumulative Preferred Stock,
            Series H (stated value: $500 per share)........      400 000                --               6.63             --
         -------------------------------------------------------------------------------------------------------------------
</TABLE>

     (a) Series A: The quarterly dividend rate is determined by a formula based
         on the interest rates of certain actively traded U.S. Treasury
         obligations. The quarterly rate in no event will be less than 5.00% or
         greater than 11.50% per annum. The Series A preferred stock qualifies
         as tier 1 capital. Series B, C, D, E, and F: Dividend rates for each
         series are determined periodically either by auction or remarketing.
         The dividend rates may not exceed certain maximums that are 110% to
         200% of various market interest rates, depending on the prevailing
         credit rating of the instrument at the dividend determination dates and
         the duration of the then-current dividend periods. The dividend periods
         may vary from one day to 30 years, depending on the dividend
         determination method used. During 1996 and 1995, J.P. Morgan reset the
         dividend rates approximately every 49 days. The dividend rates stated
         above represent the range of those in effect at year-end. These series
         of preferred stock qualify as tier 2 capital. Series H: The quarterly
         dividend rate is paid at the fixed rate of 6.625% per annum. The Series
         H preferred stock qualifies as tier 1 capital.


         18. PENSION BENEFITS

         Pension plans are in effect for substantially all regular employees of
         J.P. Morgan. J.P. Morgan's pension plans are generally noncontributory
         defined benefit plans. The plans' pension benefits are generally based
         on age and years of credited service and a percentage of qualifying
         compensation during the final years of employment.

                  J.P. Morgan's policy generally has been to contribute
         currently the accrued costs of its funded pension plans. The principal
         U.S. plan continues to meet legal funding requirements. Contributions
         to that plan were $20 million in 1996, $26 million in 1995, and $63
         million in 1994. The accrued costs of certain other pension plans are
         not contributed currently, since contributions to these unfunded plans
         are not tax deductible.




                                                                              63
<PAGE>   66
                  For J.P. Morgan's domestic and foreign funded plans, the value
         of plan assets exceeded accumulated benefits at September 30, 1996 and
         1995 (the dates of the actuarial valuations). The following table
         presents information related to these plans, including the amounts
         recorded on the consolidated balance sheet.

<TABLE>
<CAPTION>
         In millions                                                                        1996           1995
         ------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>            <C>   
         Plan assets (a)...............................................................   $1 309         $1 175
         Less: accumulated benefits earned prior to valuation date (b)                 
            Vested.....................................................................      787            763
            Nonvested..................................................................      132            112
         ------------------------------------------------------------------------------------------------------
            Accumulated benefit obligation (b).........................................      919            875
         ------------------------------------------------------------------------------------------------------
         Funded status of accumulated benefit obligation...............................      390            300
         Less: additional benefits based on estimated future salary levels (b).........      171            209
         ------------------------------------------------------------------------------------------------------
         Funded status of projected benefit obligation (c).............................      219             91
         Amounts available to increase (reduce) future pension expense:                
            Unamortized balance of the initial transition amount (d)...................      (34)           (42)
            Cumulative net actuarial gain, including deferred investment results (e)...     (114)           (27)
            Costs of retroactive benefits granted by plan amendments...................       32             38
         ------------------------------------------------------------------------------------------------------
            Net amounts available to decrease expense in future periods................     (116)           (31)
         ------------------------------------------------------------------------------------------------------
         Net prepaid pension cost recorded on the consolidated balance sheet...........      103             60
         ------------------------------------------------------------------------------------------------------
</TABLE>

     (a) Plan assets, which are at fair value, are managed by a trustee and are
         generally invested in fixed income securities, listed stocks, and
         commingled pension trust funds.

     (b) Expressed as the actuarial present value.

     (c) The projected benefit obligation, which equals the sum of the
         accumulated benefit obligation and additional benefits based on
         estimated future salary levels, was $1,090 million and $1,084 million
         at September 30, 1996 and 1995, respectively.

     (d) To be recognized ratably as a reduction of pension expense through
         1999.

     (e) Actuarial gains result from experience that differs from that assumed
         or from a change in an actuarial assumption.

         Obligations related to unfunded pension plans are recorded as a
         liability on the consolidated balance sheet. At December 31, 1996 and
         1995, such obligations were $116 million and $112 million respectively.

                  The following table presents the components of 1996, 1995, and
         1994 pension expense for all defined benefit pension plans. The pension
         expense related to defined contribution pension plans continues to be
         immaterial.

<TABLE>
<CAPTION>
         In millions                                                             1996     1995     1994
         ----------------------------------------------------------------------------------------------
<S>                                                                             <C>       <C>      <C> 
         Cost of benefits earned during the period .........................    $  60     $ 60     $ 67
         Interest cost on the projected benefit obligation .................       88       87       81
         Assumed return on all pension plan assets (a) .....................     (109)     (98)     (89)
         Amortization, primarily of the initial transition amount ..........       (7)      (6)      (3)
         ----------------------------------------------------------------------------------------------
         Pension expense reflected in Employee compensation and benefits ...       32       43       56
         ----------------------------------------------------------------------------------------------
</TABLE>

     (a) For the 12 month periods ended September 30, 1996, 1995, and 1994, the
         actual returns on plan assets were $163 million, $141 million, and $33
         million respectively. The differences between the actual and assumed
         amounts have been deferred.

         The following table presents weighted-average actuarial assumptions
         used to calculate the projected benefit obligation and pension expense.
         Assumptions at September 30 are used to calculate the projected benefit
         obligation as of that date and determine the pension expense for the
         following fiscal year.

<TABLE>
<CAPTION>
                                                                    1996       1995       1994
         -------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>        <C> 
         Assumptions at September 30:
            Assumed rate of return .........................         9.3%       9.3%       9.5%
            Future annual compensation increases ...........         4.9        5.1        6.0
            Discount rate ..................................         7.6        7.4        8.3
         -------------------------------------------------------------------------------------
         Pension expense for the year ended December 31:
            Assumed rate of return .........................         9.3        9.5        9.5
            Future annual compensation increases ...........         5.1        6.0        5.0
            Discount rate ..................................         7.4        8.3        7.0
         -------------------------------------------------------------------------------------
</TABLE>




64
<PAGE>   67
         19. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

         U.S. employees retiring with J.P. Morgan who were hired before February
         1, 1989, and who have completed 10 years of continuous service with
         J.P. Morgan may be eligible for pensioner health care and pensioner
         life insurance coverage, although J.P. Morgan has no contractual
         obligation to provide this coverage. Eligible employees retiring after
         July 1, 1992, will absorb a greater proportion of the cost of health
         care than those who retired on or before July 1, 1992. U.S. employees
         hired on or after February 1, 1989, are not eligible for pensioner
         health care coverage but may be eligible for limited pensioner life
         insurance coverage when they retire. Substantially all of the
         postretirement benefit costs relate to U.S. employees. Eligibility
         requirements for each plan vary from country to country.

                  Effective November 21, 1994, J.P. Morgan began to fund its
         postretirement benefit obligations through the purchase of
         corporate-owned life insurance (COLI) on the lives of eligible
         employees and retirees. Assets attributable to the COLI policy are held
         in a separate account at the insurance company, and the cash value of
         the policy is invested by the insurance company in equity securities
         and/or bonds or other debt instruments. The COLI policy is owned by
         J.P. Morgan; however, the COLI proceeds (i.e., death benefits,
         withdrawals, and other distributions) are segregated and restricted to
         reimbursing J.P. Morgan for its net postretirement benefit claim
         payments and related administrative expenses.

                  The following table reconciles the actuarial present value of
         J.P. Morgan's accumulated postretirement benefit obligation (APBO)
         relating to health care and life insurance at September 30, the date of
         the actuarial valuation, to the amount recorded on the consolidated
         balance sheet at December 31.

<TABLE>
<CAPTION>
         In millions                                                                      1996      1995
         -----------------------------------------------------------------------------------------------
<S>                                                                                      <C>       <C>  
         Actuarial present value of APBO:
            Retirees ................................................................    $ 104     $  97
            Fully eligible active participants ......................................       19        22
            Other active participants ...............................................       69        83
         -----------------------------------------------------------------------------------------------
         Total APBO at September 30 .................................................      192       202
         Cumulative net actuarial gain, including deferred investment results (a) ...       91        73
         Fair value of COLI policy at December 31 ...................................     (140)      (91)
         -----------------------------------------------------------------------------------------------
         Net accrued postretirement benefit liability recorded on the
            consolidated balance sheet ..............................................      143       184
         -----------------------------------------------------------------------------------------------
</TABLE>

     (a) Actuarial gains and losses result from experience that differs from
         that assumed or from a change in an actuarial assumption.

         The following table presents the components of 1996, 1995, and 1994
         postretirement benefit expense.

<TABLE>
<CAPTION>
         In millions                                       1996     1995    1994
         -----------------------------------------------------------------------
<S>                                                        <C>      <C>     <C> 
         Cost of benefits earned during the period ....    $  5     $  6     $ 9
         Interest cost on APBO ........................      15       17      18
         Assumed return on COLI policy (a) ............      (7)      (3)     --
         Amortization of unrecognized net gains .......      (4)      (2)     --
         -----------------------------------------------------------------------
         Postretirement benefit expense reflected in
            Employee compensation and benefits ........       9       18      27
         -----------------------------------------------------------------------
</TABLE>

     (a) For the 12 month periods ended September 30, 1996 and 1995, the actual
         return was $10 million and $9 million respectively. The differences
         between the actual and assumed amounts have been deferred.




                                                                              65
<PAGE>   68
         The following table presents actuarial assumptions used to calculate
         the APBO and postretirement benefit expense. Assumptions at September
         30 are used to calculate the APBO as of that date and determine
         postretirement benefit expense for the following fiscal year.

<TABLE>
<CAPTION>
                                                                                  1996       1995       1994
         ---------------------------------------------------------------------------------------------------
<S>                                                                               <C>        <C>        <C> 
         Assumptions at September 30:
            Assumed rate of return .........................................       9.0%       9.0%       9.0%
            Future annual compensation increases, affecting the APBO for
               pensioner life insurance only ...............................       4.8        4.8        5.5
            Health care cost trend rate:
               First year ..................................................      11.5       12.0       15.0
               Ultimate rate after gradual decreases until the year 2009 ...       5.5        5.5        5.5
            Discount rate ..................................................       7.8        7.5        8.5
         ---------------------------------------------------------------------------------------------------
</TABLE>


         If the assumed health care cost trend rate were increased one
         percentage point in each future year, annual postretirement benefit
         expense would have increased by $2.0 million in 1996, $2.0 million in
         1995, and $3.0 million in 1994. In addition, the APBO as of September
         30 would have increased by $13.0 million, $16.0 million, and $20.0
         million for 1996, 1995, and 1994 respectively.


         20. STOCK OPTIONS AND AWARDS

         J.P. Morgan's stock option and award plans provide for the issuance of
         stock-related awards to key employees, such as stock options, stock
         appreciation rights, restricted stock awards, stock bonus awards, stock
         unit awards, deferred stock payable in stock, and redeemable preferred
         stock.

                  To satisfy awards granted under the stock option and award
         plans, common stock may be made available from J.P. Morgan's authorized
         but unissued shares. Shares may also be purchased on the open market at
         various times during the year. Shares available for future grant under
         the Stock Incentive plans totaled 21,204,623 at December 31, 1996,
         certain of which may be made available from treasury shares. Shares
         authorized for future grant under the Stock Bonus plan are 2% of
         outstanding shares. All shares authorized under the Stock Bonus plan
         are required to be settled in treasury shares. The Company applies APB
         Opinion No. 25 and related Interpretations in accounting for its stock
         option and award plans. Compensation cost recognized in the
         consolidated income statement for J.P. Morgan's stock award plans for
         1996, 1995, and 1994 was $272 million, $227 million, and $157 million
         respectively.

                  Had compensation cost for J.P. Morgan's stock-based
         compensation plans been determined based on the fair value at the grant
         dates for awards under those plans consistent with the method of SFAS
         No. 123, net income and earnings per share for 1996 and 1995 would
         approximate the pro forma amounts indicated below.

<TABLE>
<CAPTION>
         In millions, except per share data                      1996       1995
         -----------------------------------------------------------------------
<S>                                        <C>                 <C>        <C>   
         Net income (a)                    As reported.....    $1 574     $1 296
                                           Pro forma.......     1 522      1 231
         -----------------------------------------------------------------------
         Primary earnings per share        As reported.....    $ 7.63      $6.42
                                           Pro forma.......      7.37       6.09
         -----------------------------------------------------------------------
         Fully diluted earnings per share  As reported.....      7.56       6.36
                                           Pro forma.......      7.31       6.03
         -----------------------------------------------------------------------
</TABLE>

     (a) For pro forma purposes, the fair value of stock option awards is
         amortized over the relative vesting periods; the fair value of other
         stock awards is generally expensed entirely in the year of performance
         to which it relates. As of December 31, 1996 and 1995, the unamortized
         expense of nonvested options for pro forma purposes was $28 million and
         $23 million respectively.




66
<PAGE>   69
         Stock options

         Stock options under the Stock Incentive plans are issued at exercise
         prices not less than the fair market value on the date of grant, and in
         accordance with APB Opinion No. 25 and related Interpretations, no
         compensation cost has been recognized for fixed stock option plans.
         Stock options are generally exercisable commencing one to three years
         following the date of grant and in no event later than 10 years from
         the date of grant. Options generally vest ratably over the vesting
         period.

                  Since employee stock options have characteristics
         significantly different from those of traded options and because
         changes in the subjective assumptions can materially affect the fair
         value estimate, J.P. Morgan used a modified Black-Scholes
         option-pricing model to estimate the fair value of each option grant.
         The modified Black-Scholes model takes into account the estimated lives
         of the options and an expected dividend yield based on historical
         dividend rate increases.

                  The following weighted-average assumptions were used for
         grants in 1996 and 1995 respectively: dividend yield of 4.24% and
         4.83%; five year monthly historical volatility of 18.5% and 21.3%;
         risk-free interest rate of 5.98% and 7.61%; and expected life of 7
         years.

         A summary of Morgan's stock option activity and related information
         follows.

<TABLE>
<CAPTION>
                                                            1996                       1995                       1994          
                                                  ------------------------   ------------------------   ------------------------
                                                                 Weighted-                  Weighted-                  Weighted-
                                                                   average                    average                    average
                                                                  exercise                   exercise                   exercise
                                                       Shares        price        Shares        price        Shares        price
         -----------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>         <C>            <C>         <C>            <C>   
         Outstanding at beginning of year .....    24 325 921       $59.75    20 725 020       $56.28    17 532 954       $51.95
         Granted ..............................     5 208 808        78.44     7 166 952        64.61     4 541 600        71.00
         Exercised ............................    (4 189 674)       54.33    (3 128 485)       47.17      (946 955)       42.87
         Forfeited ............................      (271 958)       68.18      (437 566)       65.07      (402 579)       65.41
         Expired ..............................          (982)       41.94            --           --            --           --
         -----------------------------------------------------------------------------------------------------------------------
         Outstanding at year-end, .............    25 072 115        64.45    24 325 921        59.75    20 725 020        56.28
         -----------------------------------------------------------------------------------------------------------------------
         Exercisable at year-end ..............    15 991 664       $59.13    15 179 860       $55.89    14 229 295       $51.06
         -----------------------------------------------------------------------------------------------------------------------
         Weighted-average fair value of
            options granted during the year ...   $     13.47       $78.44   $     13.41       $64.61   $     16.18       $71.00
         -----------------------------------------------------------------------------------------------------------------------
</TABLE>


         The following table summarizes information about stock options
         outstanding at December 31, 1996.

<TABLE>
<CAPTION>
                                                         Options outstanding                 Options exercisable
                                               ---------------------------------------    --------------------------
                                                               Weighted-
                                                                 average     Weighted-                     Weighted-
                                                               remaining       average                       average
                                                    Number   contractual      exercise         Number       exercise
         Range of exercise prices              outstanding  life (years)         price    exercisable          price
         -----------------------------------------------------------------------------------------------------------
<S>                                            <C>                 <C>         <C>        <C>                <C>    
         $31-$46............................     4 101 242          3.05        $41.43      4 101 242         $41.43
         $60-$76............................    19 265 873          7.32         67.01     11 890 422          65.23
         $78-$105...........................     1 705 000          8.55         90.82             --             --
         -----------------------------------------------------------------------------------------------------------
</TABLE>                                                               


         Prior to 1997, stock options were generally granted in January.
         Beginning in 1997, stock options will generally be granted in midyear.




                                                                              67
<PAGE>   70
         Restricted stock awards

         Restricted stock awards under the Stock Incentive and Stock Bonus plans
         are awarded in the form of share credits, each of which is equivalent
         to one share of J.P. Morgan common stock. Restricted stock awards
         generally become fully vested on the fifth anniversary of the date of
         the award. Payment of the award generally may be made to the
         participant as soon as practicable after the award has become vested,
         but may be deferred at the discretion of a committee of the Board of
         Directors administering the plans. At December 31, 1996, 1995, and
         1994, total share credits representing previously granted restricted
         stock awards, including share credits attributable to dividend
         equivalents, were 3,395,355 credits, 2,968,840 credits, and 2,146,629
         credits respectively. For the 1996 and 1995 award years, 485,507 and
         612,530 share credits respectively were granted at weighted-average
         grant date fair values of $95.34 and $73.37 per share respectively.

         Stock bonus awards

         Stock bonus awards under the Stock Incentive and Stock Bonus plans are
         substantially similar to restricted stock awards, except that stock
         bonus awards generally become vested on the third anniversary of the
         date of the award. Payment of stock bonus awards may be made to the
         participant as soon as practicable after the award has become vested,
         but may be deferred at the discretion of a committee of the Board of
         Directors administering the plans. At December 31, 1996, 1995, and
         1994, total share credits representing previously granted stock bonus
         awards, including share credits attributable to dividend equivalents,
         were 4,030,763 credits, 2,603,378 credits, and 1,573,006 credits
         respectively. For the 1996 and 1995 award years, 2,126,067 and
         1,588,477 share credits respectively were granted at weighted average
         grant date fair values of $103.14 and $75.53 per share respectively.

         Stock unit awards

         Stock unit awards under the Stock Bonus plan are substantially similar
         to restricted stock and stock bonus awards, except that the value of a
         stock unit award will never exceed (but may be less than) the dollar
         value of the initial award, except for the value of dividend
         equivalents accrued on such awards. Stock unit awards generally become
         fully vested on the third anniversary of the date of the award. At
         December 31, 1996 and 1995, total share credits representing previously
         granted stock unit awards, including share credits attributable to
         dividend equivalents, were 176,481 credits and 52,533 credits
         respectively. At December 31, 1994, no stock unit awards had been
         granted. For the 1996 and 1995 award years, 145,594 and 123,364 share
         credits respectively were granted at weighted-average grant date fair
         values of $103.44 and $75.63 per share respectively.

         Deferred stock payable in stock

         Morgan's Incentive Compensation plans permit eligible employees to
         elect to defer all or a portion of their current annual incentive
         compensation awards into several types of accounts, including a Morgan
         common stock account. Deferral amounts are not subject to forfeiture.
         Amounts deferred into the Morgan common stock account are converted
         into share credits and earn dividend equivalents during the deferral
         period. In general, upon termination of employment or retirement, a
         participant's balance in the Morgan common stock account is distributed
         in the form of Morgan common stock. At December 31, 1996, total share
         credits payable in stock (including share credits attributable to
         dividend equivalents) were 2,100,985 credits. For the 1996 and 1995
         award years, 306,284 and 186,155 share credits respectively were
         granted at weighted-average grant date fair values of $97.63 and $80.25
         per share respectively.




68
<PAGE>   71
         Redeemable preferred stock

         J.P. Morgan may award redeemable preferred stock to certain employees.
         The redeemable preferred stock is redeemable at any time by the
         stockholder. J.P. Morgan may also call the outstanding redeemable
         preferred stock, in whole, upon 30 days' notice after 60 days from
         issuance. At December 31, 1996, 1995, and 1994, approximately 2.5
         million, 1.7 million, and 1.0 million shares respectively of the
         redeemable preferred stock had been authorized, and there were no
         shares issued or outstanding. In 1996 and 1995, shares of redeemable
         preferred stock were awarded to employees, and all shares were redeemed
         by those employees.

         Stock awards other than options are generally granted in the January
         following the award year. In January 1997, 2,818,693 share credits
         representing stock awards other than options were granted.


         21. EARNINGS PER COMMON SHARE

         In the calculation of primary and fully diluted earnings per common
         share, net income is adjusted by adding back to net income the interest
         expense on convertible debentures and the expense related to dividend
         equivalents on certain deferred incentive compensation awards, net of
         the related income tax effects, and subtracting from net income the
         preferred stock dividends to arrive at net income applicable to common
         stock. Primary and fully diluted earnings per common share are computed
         by dividing net income applicable to common stock by the
         weighted-average number of common and common equivalent shares
         outstanding during the year.

                  For primary and fully diluted earnings per share, the
         weighted-average number of common and common equivalent shares
         outstanding was the sum of the average number of shares of common stock
         outstanding, the average number of shares issuable upon conversion of
         convertible debentures, and the average number of shares issuable under
         employee benefit plans that have a dilutive effect, as computed under
         the treasury stock method. Under this method, the number of incremental
         shares is determined by assuming the issuance of the outstanding stock
         options and certain deferred incentive compensation awards, reduced by
         the number of shares assumed to be repurchased from the issuance
         proceeds, using the market price of the company's common stock. For
         primary earnings per share, this market price is the average market
         price for the period, while for fully diluted earnings per share, it is
         the period-end market price, if it is higher than the average price.

<TABLE>
<CAPTION>
         Dollars in millions                                         1996           1995           1994
         ----------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>            <C>      
         Net income applicable to common stock.............  $      1 541   $      1 275   $      1 198
         Weighted-average number of common and common 
            equivalent shares outstanding:
            Primary earnings per share.....................   202 010 237    198 654 973    199 056 561
            Fully diluted earnings per share...............   203 754 564    200 613 199    199 056 809
         ----------------------------------------------------------------------------------------------
</TABLE>




                                                                              69
<PAGE>   72
     22. CAPITAL REQUIREMENTS

     J.P. Morgan and its subsidiaries, as well as certain foreign branches of
     its bank subsidiary, Morgan Guaranty, are subject to various regulatory
     capital requirements administered by U.S. and foreign regulators. The Board
     of Governors of the Federal Reserve System (Federal Reserve Board), J.P.
     Morgan's primary regulator, establishes the minimum capital requirements
     for the consolidated bank holding company as well as for certain of its
     subsidiaries, including Morgan Guaranty. Failure to meet minimum capital
     requirements can initiate certain mandatory, and possibly additional
     discretionary, actions by regulators that, if undertaken, could have a
     direct material effect on J.P. Morgan's financial statements. The capital
     of J.P. Morgan and its principal subsidiaries, Morgan Guaranty and J.P.
     Morgan Securities Inc. (JPMSI), exceeded the minimum requirements set by
     each regulator at December 31, 1996.

           Under risk-based capital adequacy guidelines set by the Federal
     Reserve Board, banks and bank holding companies must meet specific capital
     guidelines that involve quantitative measures of assets, liabilities, and
     certain off-balance-sheet items as calculated under regulatory accounting
     practices.

           Set forth in the table below are the risk-based capital and leverage
     ratios and amounts for J.P. Morgan and Morgan Guaranty. Under the capital
     guidelines established by the Federal Reserve Board, the published capital
     ratios of J.P. Morgan are calculated excluding the equity, assets, and
     off-balance-sheet exposures of JPMSI. JPMSI is subject to the SEC Uniform
     Net Capital Rule, which requires the maintenance of minimum net capital. In
     accordance with Federal Reserve Board guidelines, the risk-based capital
     and leverage amounts and ratios exclude the effect of SFAS No. 115,
     Accounting for Certain Investments in Debt and Equity Securities.

<TABLE>
<CAPTION>
                                               Amounts                      Ratios (c)
                                         ---------------------          ----------------
     In millions                          1996          1995            1996        1995
     -----------------------------------------------------------------------------------
<S>                                      <C>           <C>              <C>         <C>
      Tier 1 capital (a)
         J.P. Morgan .............       $10 873       $ 9 033           8.8%        8.8%
         Morgan Guaranty (d) .....         9 665         8 510           8.2         8.6
     -----------------------------------------------------------------------------------
      Total risk-based capital (b)

         J.P. Morgan .............        15 145        13 398          12.2        13.0
         Morgan Guaranty (d) .....        13 551        11 143          11.5        11.2
     -----------------------------------------------------------------------------------
      Leverage

         J.P. Morgan .............                                       5.9         6.1
         Morgan Guaranty (d) .....                                       5.3         5.7
     -----------------------------------------------------------------------------------

</TABLE>

 (a) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
     minimum tier 1 capital of $5.0 billion and $4.7 billion respectively as of
     December 31, 1996. At December 31, 1995, J.P. Morgan and Morgan Guaranty
     required minimum tier 1 capital of $4.1 billion and $4.0 billion
     respectively.

 (b) For capital adequacy purposes, J.P. Morgan and Morgan Guaranty required
     minimum total risk-based capital of $9.9 billion and $9.4 billion
     respectively as of December 31, 1996. At December 31, 1995, J.P. Morgan and
     Morgan Guaranty required minimum total capital of $8.3 billion and $7.9
     billion respectively.

 (c) Pursuant to Federal Reserve Board guidelines, the minimum tier 1 capital,
     total risk-based capital, and leverage ratios are 4%, 8%, and 3%
     respectively for bank holding companies and banks.

 (d) The December 31, 1995 amounts and ratios have been restated to reflect the
     merger of J.P. Morgan Delaware with Morgan Guaranty Trust Company of New
     York effective June 1996.

     Furthermore, for certain regulatory supervision purposes, bank regulators
     use five capital category definitions applicable to banks ranging from
     "well capitalized" to "critically undercapitalized." A bank is considered
     "well capitalized" if it has minimum tier 1 capital, total capital, and
     leverage ratios of 6%, 10%, and 5% respectively. At December 31, 1996 and
     1995, Morgan Guaranty's ratios exceeded the minimum standards for a "well
     capitalized" bank, under standards provided by the regulatory framework for
     prompt corrective action and the Federal Reserve Board. Management is aware
     of no conditions or events that have occurred since December 31, 1996, that
     would change Morgan Guaranty's "well capitalized" status.


70
<PAGE>   73
           Effective October 1996, the Federal Reserve Board issued a rule
     implementing provisions of Regulation Y, which determines the capital
     levels at which a bank holding company shall be considered "well
     capitalized." Pursuant to these guidelines, the Federal Reserve Board
     considers a bank holding company "well capitalized" if it has a minimum
     tier 1 capital, total capital, and leverage ratios of 6%, 10%, and 4%
     respectively. At December 31, 1996, J.P. Morgan's ratios exceeded the
     minimum standards for a "well capitalized" bank holding company. Management
     is aware of no conditions or events that have occurred since December 31,
     1996, that would change J.P. Morgan's "well capitalized" status.

     23. COMMITMENTS AND CONTINGENT LIABILITIES

     Excluding mortgaged properties, assets carried at approximately $67.0
     billion and approximately $53.1 billion in the consolidated balance sheet
     at December 31, 1996 and 1995, respectively were pledged as collateral for
     borrowings, to qualify for fiduciary powers, to secure public monies as
     required by law, and for other purposes.

           In compliance with rules and regulations established by various
     domestic and foreign regulators, cash of $112 million and $96 million and
     securities with a market value of $2,158 million and $1,786 million were
     segregated in special bank accounts for the benefit of securities and
     futures brokerage customers at December 31, 1996 and 1995, respectively.

           Operating expenses include net rentals of $96 million in 1996, $115
     million in 1995, and $94 million in 1994. Minimum rental commitments on
     noncancelable leases for premises and equipment are $746 million in the
     aggregate, and for each of the five years subsequent to December 31, 1996,
     are $93 million (1997), $86 million (1998), $57 million (1999), $54 million
     (2000), and $50 million (2001). Certain leases contain renewal options and
     escalation clauses.

           In the ordinary course of business, J.P. Morgan guarantees the
     performance of certain obligations of certain subsidiaries and affiliates.
     It is not anticipated that these agreements will have a material effect on
     the results of operations of J.P. Morgan.

           Various legal actions and proceedings are pending against or involve
     J.P. Morgan and its subsidiaries. Management, after reviewing with counsel
     all actions and proceedings pending against or involving J.P. Morgan and
     its subsidiaries, considers that the aggregate liability or loss, if any,
     resulting from them will not be material.


71
<PAGE>   74
     24. CONCENTRATIONS OF FINANCIAL INSTRUMENTS

     J.P. Morgan's clients and other counterparties to the company's on- and
     off-balance-sheet financial instruments operate in diverse industries of
     the world economy, most significantly in the United States and Europe, and
     include nonbank financial institutions, governments, and banks.

           Summarized in the following tables are the amounts of credit exposure
     associated with the company's on- and off-balance-sheet financial
     instruments allocated to the industries and geographic areas of the
     ultimate obligors at December 31, 1996 and 1995. The amounts below do not
     consider $97.0 billion and $95.5 billion of cash and marketable security
     collateral at December 31, 1996 and 1995, respectively related mainly to
     loans, resale agreements, securities lending indemnifications, and amounts
     receivable for securities sold not yet settled, that are available to J.P.
     Morgan to limit these credit exposures.

<TABLE>
<CAPTION>
                                                     Nonbank
                                                   financial       Govern-
     In billions                                institutions (a)     ments       Banks     All other        Total
     ------------------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>         <C>        <C>             <C>
      1996
      On-balance-sheet:
      North America (b) .....................       $ 30.6          $ 39.5      $ 23.8      $ 18.6         $112.5
      Europe (c) ............................         22.2            25.0        18.7         9.4           75.3
      Asia Pacific ..........................          4.0             8.2         6.6         3.7           22.5
      Latin America (d) .....................          0.1             4.0         1.5         5.2           10.8
     ------------------------------------------------------------------------------------------------------------
      Total on-balance-sheet credit exposure          56.9            76.7        50.6        36.9         221.1 (e)
     ------------------------------------------------------------------------------------------------------------
      Off-balance-sheet:                                                                                             
      North America (b) .....................         20.3             5.7         5.1        42.0           73.1    
      Europe (c) ............................          9.8             1.6        10.0        10.0           31.4    
      Asia Pacific ..........................          1.1             2.7         0.9         2.9            7.6    
      Latin America (d) .....................          0.2              --         0.3         0.6            1.1    
     ------------------------------------------------------------------------------------------------------------
      Total off-balance-sheet credit exposure         31.4            10.0        16.3        55.5          113.2    
     ------------------------------------------------------------------------------------------------------------
      Total credit exposure .................         88.3            86.7        66.9        92.4(f)       334.3    
     ------------------------------------------------------------------------------------------------------------
      Cash and marketable security                                                                                   
         collateral .........................         51.8             1.6        33.1        10.5           97.0    
     ------------------------------------------------------------------------------------------------------------
      1995                                                                                                           
      On-balance-sheet:                                                                                              
      North America (b) .....................         32.2            33.6        20.8        17.3          103.9    
      Europe (c) ............................         13.5            20.3        13.4         9.5           56.7    
      Asia Pacific ..........................          1.7             7.1         3.4         2.4           14.6    
      Latin America (d) .....................          0.1             4.6         1.6         2.6            8.9    
     ------------------------------------------------------------------------------------------------------------
      Total on-balance-sheet credit exposure          47.5            65.6        39.2        31.8          184.1(e) 
     ------------------------------------------------------------------------------------------------------------
      Off-balance-sheet:                                                                                             
      North America (b) .....................         25.7             6.6         3.7        34.2           70.2    
      Europe (c) ............................          8.9             5.8         6.0         8.4           29.1    
      Asia Pacific ..........................          0.4             1.0         2.4         2.3            6.1    
      Latin America (d) .....................          0.7             0.7         0.3         0.2            1.9    
     ------------------------------------------------------------------------------------------------------------
      Total off-balance-sheet credit exposure         35.7            14.1        12.4        45.1          107.3    
     ------------------------------------------------------------------------------------------------------------
      Total credit exposure .................         83.2            79.7        51.6        76.9          291.4    
     ------------------------------------------------------------------------------------------------------------
      Cash and marketable security                                                                                   
         collateral .........................         57.2             1.7        27.0         9.6           95.5    
     ------------------------------------------------------------------------------------------------------------
</TABLE>

 (a) Nonbank financial institutions include securities firms, insurance
     companies, and investment companies.

 (b) Includes the United States, Canada, and the Carribean.

 (c) Includes Middle East and Africa.

 (d) Includes Mexico, Central America, and South America.

 (e) On-balance-sheet items without credit exposure totaled $0.9 billion and
     $0.8 billion in 1996 and 1995 respectively.

 (f) The utilities industry exceeded 10% of this amount at December 31, 1996.


72
<PAGE>   75
     25. INTERNATIONAL OPERATIONS

     For financial reporting purposes, the operations of J.P. Morgan are divided
     into domestic and international components. Management believes that the
     methodology used to allocate J.P. Morgan's results between domestic and
     international sources, while inexact, is an appropriate one.

           Assets are distributed on the basis of the location of the borrower
     or obligor, with the exception of interest-earning deposits with banks,
     which are distributed based on the location of the institution receiving
     the deposit, and trading account assets, premises and equipment, accrued
     interest and accounts receivable, and other assets, which are distributed
     based on the location of the office recording the asset.

           Because the operations of J.P. Morgan are highly integrated,
     identification of revenues and expenses by geographic region involves
     estimates and assumptions. Client-focused revenues are assigned to the
     region managing the client relationship for the particular product. For
     finance and advisory products, this is the location of the client's head
     office; for most other products, it is based on the location where activity
     is transacted. Market-making revenues that cannot be specifically
     attributed to individual clients (for example, gains/losses arising from
     positions taken to facilitate client transactions) are generally allocated
     based on the proportion of regional revenues. Revenues from proprietary
     investing and trading activities are based upon the location of the
     risk-taker. Expenses are allocated based on the estimated cost associated
     with servicing the client base in the region. Earnings on stockholders'
     equity are generally allocated based on the proportion of regional revenue,
     and adjustments are made for differences between domestic and international
     income tax rates.

           On the basis described above, assets at December 31 and results for
     the years ended December 31, 1996, 1995, and 1994 were distributed among
     domestic and international operations as presented in the following table.

<TABLE>
<CAPTION>
                                                                                     Income
                                                                                     before      Income
                                             Total           Total         Total     income         tax        Net
      In millions                           assets        revenues (a)  expenses      taxes     expense     income
      ------------------------------------------------------------------------------------------------------------
      <S>                                  <C>              <C>          <C>        <C>        <C>        <C>
      1996
      Europe (b) ...................       $ 95 854         $2 060       $1 367     $    693   $    277   $    416
      Asia Pacific .................         11 365            845          458          387        155        232
      Latin America (c) ............          5 839            528          227          301        120        181
      ------------------------------------------------------------------------------------------------------------
      Total international operations        113 058          3 433        2 052        1 381        552        829
      Domestic operations (d) (e) ..        108 968          3 422        2 471          951        206        745
      ------------------------------------------------------------------------------------------------------------
      Total ........................        222 026          6 855        4 523        2 332        758      1 574
      ------------------------------------------------------------------------------------------------------------
      1995
      Europe (b) ...................         73 040          1 684        1 236          448        179        269
      Asia Pacific .................          7 753            786          430          356        143        213
      Latin America (c) ............          4 537            441          189          252        101        151
      ------------------------------------------------------------------------------------------------------------
      Total international operations         85 330          2 911        1 855        1 056        423        633
      Domestic operations (d) (e) ..         99 549          2 993        2 143          850        187        663
      ------------------------------------------------------------------------------------------------------------
      Total ........................        184 879          5 904        3 998        1 906        610      1 296
      ------------------------------------------------------------------------------------------------------------
      1994
      Europe (b) ...................         63 939          1 481        1 135          346        138        208
      Asia Pacific .................          5 840            578          363          215         86        129
      Latin America (c) ............          2 851            389          158          231         92        139
      ------------------------------------------------------------------------------------------------------------
      Total international operations         72 630          2 448        1 656          792        316        476
      Domestic operations (d) (e) ..         82 287          3 069        2 036        1 033        294        739
      ------------------------------------------------------------------------------------------------------------
      Total ........................        154 917          5 517        3 692        1 825        610      1 215
      ------------------------------------------------------------------------------------------------------------
</TABLE>

 (a) Includes net interest revenue and noninterest revenues.

 (b) Includes Middle East and Africa.

 (c) Includes Mexico, Central America, and South America.

 (d) Includes the United States, Canada, and the Caribbean. Total assets include
     $99.5 billion, $90.5 billion, and $78.2 billion at December 31, 1996, 1995,
     and 1994, respectively related to United States operations. Total revenue
     and expenses relate substantially to United States operations for all
     years.

 (e) Expenses for domestic operations include a technology-related charge of $71
     million in 1996, a severance-related charge of $55 million in 1995, and
     other unallocated corporate expenses.


                                                                              73
<PAGE>   76
     26. CONDENSED FINANCIAL STATEMENTS OF J.P. MORGAN (PARENT)

     Presented below are the condensed statement of income, balance sheet, and
     statement of cash flows for J.P. Morgan & Co. Incorporated, the parent
     company.

     STATEMENT OF INCOME
     J.P. Morgan (parent)

<TABLE>
<CAPTION>
      In millions                                                        1996         1995         1994
      --------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>
      REVENUES
      Equity in undistributed earnings of subsidiaries ..........      $1 093       $  588       $  (82)
      Dividends from subsidiaries:
         Bank ...................................................         150          285          725
         Other ..................................................         360          420          593
      --------------------------------------------------------------------------------------------------
      Total equity in earnings of subsidiaries ..................       1 603        1 293        1 236
      Interest from subsidiaries ................................         637          616          423
      Other interest revenue ....................................          37           46           27
      Investment banking revenue allocations from subsidiaries ..         103           71           59
      Service fees from subsidiaries ............................         186          134           87
      Investment securities revenue .............................          (7)         (28)         (29)
      Other revenue .............................................          (9)           3           17
      --------------------------------------------------------------------------------------------------
      Total revenues ............................................       2 550        2 135        1 820
      --------------------------------------------------------------------------------------------------
      EXPENSES
      Interest (includes $9 in 1996, $24 in 1995, and $16 in 1994
         to subsidiaries) .......................................         714          665          446
      Employee compensation and benefits ........................         203          159          103
      Other expenses ............................................         103           75           56
      --------------------------------------------------------------------------------------------------
      Total expenses ............................................       1 020          899          605
      --------------------------------------------------------------------------------------------------
      Income before income taxes ................................       1 530        1 236        1 215
      Income tax benefit ........................................         (44)         (60)          --
      --------------------------------------------------------------------------------------------------
      Net income ................................................       1 574        1 296        1 215
      --------------------------------------------------------------------------------------------------
</TABLE>


74
<PAGE>   77
     BALANCE SHEET
     J.P. Morgan (parent)

<TABLE>
<CAPTION>
                                                                                                 December 31
                                                                                            ---------------------
      In millions                                                                             1996          1995
     ------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>           <C>
      ASSETS
      Interest-earning deposits with subsidiary bank ................................       $   202       $   377
      Debt investment securities available-for-sale carried at fair value ...........         1 098           688
      Investments in subsidiaries:

         Bank .......................................................................         9 891         8 985
         U.S. broker-dealer .........................................................           494           407
         Other nonbanks .............................................................           919           947
      Advances to subsidiaries:
         Bank .......................................................................         3 545         1 878
         U.S. broker-dealer .........................................................         1 333         2 148
         Other nonbanks, primarily securities-related ...............................         6 047         5 154
      Accrued interest and accounts receivable, primarily from subsidiary bank ......           296           265
      Other assets (includes $1 577 in 1996 and $908 in 1995 related to
         corporate-owned life insurance contracts, $669 in 1996 and $544 in 1995
         related to deferred tax assets, and $50 in 1995 from dividends
         receivable from subsidiary bank) ...........................................         2 343         1 660
     ------------------------------------------------------------------------------------------------------------
      Total assets ..................................................................        26 168        22 509
     ------------------------------------------------------------------------------------------------------------
      LIABILITIES AND STOCKHOLDERS' EQUITY
      Securities sold under agreements to repurchase (includes $87 in 1996 and
         $102 in 1995 with subsidiary bank) .........................................           505           102
      Commercial paper ..............................................................         3 438         2 729
      Other liabilities for borrowed money ..........................................            --         1 140
      Accounts payable and accrued expenses .........................................         1 434         1 255
      Long-term debt not qualifying as risk-based capital ...........................         4 931         3 369
      Other liabilities .............................................................           161            71
     ------------------------------------------------------------------------------------------------------------
                                                                                             10 469         8 666
      Long-term debt qualifying as risk-based capital ...............................         3 494         3 392
      Intercompany debentures .......................................................           773 (a)        --
     ------------------------------------------------------------------------------------------------------------
      Total liabilities .............................................................        14 736        12 058
     ------------------------------------------------------------------------------------------------------------
      Total stockholders' equity ....................................................        11 432        10 451
     ------------------------------------------------------------------------------------------------------------
      Total liabilities and stockholders' equity ....................................        26 168        22 509
     ------------------------------------------------------------------------------------------------------------
</TABLE>

 (a) Consists solely of $773.2 million of 7.54% Junior Subordinated Debentures
     issued to JPM Capital Trust I. Refer to Note 16 to the consolidated
     financial statements, Company-Obligated Mandatorily Redeemable Preferred
     Securities of Subsidiary.


                                                                              75
<PAGE>   78
     STATEMENT OF CASH FLOWS
     J.P. Morgan (parent)

<TABLE>
<CAPTION>
     In millions                                                                 1996           1995           1994
     ----------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>            <C>
     NET INCOME .............................................................  $ 1 574        $ 1 296        $ 1 215  
     Adjustments to reconcile to cash provided by operating activities:                                               
        Equity in undistributed (earnings) losses of subsidiaries ...........   (1 093)          (588)            82  
        Increase (decrease) due to changes in other                                                                   
           balance sheet amounts ............................................      116           (223)           359  
        Net investment securities losses included in cash flows                                                       
           from investing activities ........................................        7             28             29  
     ----------------------------------------------------------------------------------------------------------------
     CASH PROVIDED BY OPERATING ACTIVITIES ..................................      604            513          1 685  
     ----------------------------------------------------------------------------------------------------------------
     (Increase) decrease in interest-earning deposits                                                                 
        with subsidiary bank ................................................      227          1 263         (1 452) 
     Debt investment securities:                                                                                      
        Proceeds from sales .................................................    1 173          5 720            535  
        Purchases ...........................................................   (1 605)        (5 230)        (1 064) 
     Increase in advances to subsidiaries ...................................   (1 712)        (2 479)          (695) 
     Capital to subsidiaries ................................................      (23)          (250)          (270) 
     Payments for insurance contracts .......................................     (717)          (367)          (367) 
     Other changes, net .....................................................       (8)           (14)            36  
     ----------------------------------------------------------------------------------------------------------------
     CASH USED IN INVESTING ACTIVITIES ......................................   (2 665)        (1 357)        (3 277) 
     ----------------------------------------------------------------------------------------------------------------
     Increase (decrease) in securities sold under agreements                                                          
        to repurchase .......................................................      403           (490)           281  
     Increase (decrease) in commercial paper ................................      706           (698)           991  
     Increase (decrease) in other liabilities for borrowed money ............   (1 140)         1 140              -  
     Long-term debt:                                                                                                  
        Proceeds ............................................................    1 792          2 230          1 575  
        Payments ............................................................        -           (833)          (464) 
     Intercompany debentures:                                                                                         
        Proceeds ............................................................      773              -              -  
     Capital stock:                                                                                                   
        Issued or distributed ...............................................      424            143             61  
        Purchased ...........................................................     (604)          (293)          (445) 
     Dividends paid .........................................................     (643)          (583)          (541) 
     Cash receipts from subsidiary bank for common stock issuable ...........      307            171            108  
     Other changes, net .....................................................       41             57             26  
     ----------------------------------------------------------------------------------------------------------------
     CASH PROVIDED BY FINANCING ACTIVITIES ..................................    2 059            844          1 592  
     ----------------------------------------------------------------------------------------------------------------
     DECREASE IN CASH AND DUE FROM BANKS ....................................       (2)             -              -  
     Cash and due from banks, beginning of year .............................        2              2              2  
     ----------------------------------------------------------------------------------------------------------------
     Cash and due from banks, end of year ...................................        -              2              2  
     ----------------------------------------------------------------------------------------------------------------
     Cash disbursements for interest and taxes ..............................  $   692        $   617        $   445  
     ----------------------------------------------------------------------------------------------------------------
</TABLE>


76
<PAGE>   79
     27. CERTAIN RESTRICTIONS: SUBSIDIARIES

     Under the Federal Reserve Act and New York State law, there are legal
     restrictions limiting the amount of dividends that Morgan Guaranty, a state
     member bank, can declare. The most restrictive test requires approval of
     the Federal Reserve Board if dividends declared exceed the net profits for
     that year combined with the net profits for the preceding two years. The
     calculation of the amount available for payment of dividends is based on
     net profits determined in accordance with bank regulatory accounting
     principles, reduced by the amount of dividends declared. At December 31,
     1996, the cumulative retained net profits for the years 1996 and 1995
     available for distribution as dividends in 1997 without approval of the
     Federal Reserve Board amounted to approximately $1,859 million.

           The Federal Reserve Board may prohibit the payment of dividends if it
     determines that circumstances relating to the financial condition of a bank
     are such that the payment of dividends would be an unsafe and unsound
     practice.

           U.S. federal law also places certain restrictions on certain types of
     transactions engaged in by insured banks and their subsidiaries with
     certain affiliates, including, in the case of Morgan Guaranty, J.P. Morgan
     and its nonbanking subsidiaries. "Covered transactions" are limited to 20%
     of capital and surplus, as defined, and "covered transactions" with any one
     such affiliate are limited to 10% of capital and surplus. "Covered
     transactions" are defined to include, among other things, loans and
     extensions of credit to such an affiliate, purchases of assets from such an
     affiliate, and any guarantees, acceptances, and letters of credit issued on
     behalf of such an affiliate. Such loans, extensions of credit, guarantees,
     acceptances, and letters of credit must be collateralized. In addition, a
     wide variety of transactions engaged in by insured banks and their
     subsidiaries with such affiliates are required to be made on terms and
     under circumstances that are at least as favorable to the bank or
     subsidiary concerned as those prevailing at the time for comparable
     transactions with nonaffiliated companies.

           Certain other subsidiaries are subject to various restrictions,
     mainly regulatory requirements, that may limit cash dividends and advances
     to J.P. Morgan and that establish minimum capital requirements.


                                                                              77
<PAGE>   80
ADDITIONAL SELECTED DATA
J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
Dollars in millions, except per share data                 1996           1995            1994           1993              1992
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>          <C>               <C>               <C>
SELECTED FINANCIAL DATA
Total interest revenue ............................     $ 10 713       $  9 937        $  8 379       $  7 442          $  7 281
Total noninterest revenues ........................        5 153          3 901           3 536          4 499             2 950
Total revenues ....................................       15 866         13 838          11 915         11 941            10 231
Net interest revenue ..............................        1 702          2 003           1 981          1 772             1 708
Provision for credit losses .......................           --             --              --             --                55
Total operating expenses ..........................        4 523          3 998           3 692          3 580             2 854
Net income ........................................        1 574          1 296           1 215          1 586(a)          1 582(b)
At year-end:
  Total assets ....................................      222 026        184 879         154 917        133 888           103 197
  Long-term debt and other capital securities (c)..       13 853          9 327           6 802          5 276             5 443
  Stockholders' equity ............................       11 432         10 451           9 568          9 859             7 308
  Common stockholders' equity .....................       10 738          9 957           9 074          9 365             6 814
  Tier 1 risk-based capital (k) ...................       10 873          9 033           8 265          7 773             6 625
  Total risk-based capital (k) ....................       15 145         13 398          12 221         10 850             9 672
Per common share:
  Net income (d) ..................................    $    7.63      $    6.42      $     6.02      $    7.80(a)      $    7.95(b)
  Book value ......................................        54.43(e)       50.71(f)        46.73(g)       47.25(h)          35.56
  Dividends declared ..............................         3.31           3.06            2.79           2.48              2.23 1/2

EARNINGS RATIOS
Net income as % of:
  Average total assets ............................         0.73%(e)       0.73%(f)        0.70%(g)       1.08%(h) (i)      1.32%(j)
  Average stockholders' equity ....................        14.3(e)        13.2(f)         12.5(g)        19.8(h) (i)       22.5 (j)
  Average common stockholders' equity .............        14.9(e)        13.6(f)         12.9(g)        20.9(h) (i)       23.9(j)

DIVIDEND PAYOUT RATIO
Dividends declared per common share as % of
  net income per common share .....................        43.4%          47.7%           46.3%          31.8%(i)          28.1%(j)

CAPITAL RATIOS
Average stockholders' equity as % of average
  total assets ....................................         5.1%(e)        5.5%(f)         5.7%(g)        5.5%(h)           5.8%
Common stockholders' equity as % of:
  Average total assets ............................         5.0(e)         5.6(f)          5.3(g)         6.4(h)            5.7
  Total year-end assets ...........................         4.8(e)         5.4(f)          5.9(g)         7.0(h)            6.6
Total stockholders' equity as % of:

  Average total assets ............................         5.3(e)         5.9(f)          5.5(g)         6.7(h)            6.1
  Total year-end assets ...........................         5.2(e)         5.7(f)          6.2(g)         7.4(h)            7.1
Tier 1 risk-based capital ratio (k) ...............         8.8            8.8             9.6            9.3               8.9
Total risk-based capital ratio (k) ................        12.2           13.0            14.2           13.0              13.0
Leverage ratio (k) ................................         5.9            6.1             6.5            7.3               7.1

OTHER SELECTED DATA
Registered holders of record of common stock at
  year-end ........................................       29 607         29 391          29 596            28 919            28 061
Common shares outstanding at year-end
  (in thousands) ..................................      184 923        187 116         187 701           193 087           191 610
Employees at year-end:
  In the U.S. .....................................        8 579          8 855           9 607             8 983             8 567
  Outside the U.S. ................................        6 948          6 758           7 448             6 210             5 801
----------------------------------------------------------------------------------------------------------------------------------
Total employees ...................................       15 527         15 613          17 055            15 193            14 368
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


78
<PAGE>   81
(a)  Net income in 1993 includes a $137 million ($0.68 per share) charge related
     to the cumulative effect of a change in accounting for postretirement
     benefits adopted January 1, 1993.

(b)  Net income in 1992 includes $452 million ($2.29 per share) related to the
     cumulative effect of a change in accounting for income taxes adopted
     retroactive to January 1, 1992. As a result of applying the new method of
     accounting for income taxes, income before the cumulative effect of the
     change for 1992 was reduced by $252 million, or $1.26 per share ($1.27 per
     share assuming full dilution); net income was increased by $200 million, or
     $1.03 per share ($1.02 per share assuming full dilution).

(c)  Includes $3,692 million, $3,590 million, $3,197 million, $2,459 million,
     and $2,300 million of long-term debt qualifying as risk-based capital in
     1996, 1995, 1994, 1993, and 1992 respectively and $750 million of
     Company-obligated mandatorily redeemable preferred securities of subsidiary
     in 1996.

(d)  Earnings per share amounts for 1994 and 1993 represent both primary and
     fully diluted earnings per share; earnings per share amounts for 1996,
     1995, and 1992 represent primary earnings per share. For 1996 fully diluted
     earnings per share were $7.56. For 1995 fully diluted earnings per share
     were $6.36. For 1992 fully diluted earnings per share before and after the
     cumulative effect of the change in accounting were $5.63 and $7.92
     respectively.

(e)  Excluding the effect of SFAS No. 115, the book value per common share would
     have been $52.08 for the 12 months ended December 31, 1996; net income
     would have been 0.73% of average total assets, 14.89% of average
     stockholders' equity, and 15.6% of average common stockholders' equity;
     average stockholders' equity would have been 4.9% of average total assets;
     common stockholders' equity would have been 4.79% of average total assets
     and 4.64% of total year-end assets; and total stockholders' equity would
     have been 5.12% of average total assets and 4.96% of total year-end assets.

(f)  Excluding the effect of SFAS No. 115, the book value per common share would
     have been $47.83 for the 12 months ended December 31, 1995; net income
     would have been 0.73% of average total assets, 13.78% of average
     stockholders' equity, and 14.3% of average common stockholders' equity;
     average stockholders' equity would have been 5.3% of average total assets;
     common stockholders' equity would have been 5.29% of average total assets
     and 5.11% of total year-end assets; and total stockholders' equity would
     have been 5.57% of average total assets and 5.37% of total year-end assets.

(g)  Excluding the effect of SFAS No. 115, the book value per common share would
     have been $44.39 for the 12 months ended December 31, 1994; net income
     would have been 0.71% of average total assets, 13.6% of average
     stockholders' equity, and 14.2% of average common stockholders' equity;
     average stockholders' equity would have been 5.2% of average total assets;
     common stockholders' equity would have been 5.0% of average total assets
     and 5.6% of total year-end assets; and total stockholders' equity would
     have been 5.3% of average total assets and 5.9% of total year-end assets.

(h)  Excluding the effect of adopting SFAS No. 115 at December 31, 1993, the
     book value per common share would have been $41.37; net income would have
     been 1.09% of average total assets, 19.8% of average stockholders' equity,
     and 20.9% of average common stockholders' equity; average stockholders'
     equity would have been 5.5% of average total assets; common stockholders'
     equity would have been 5.6% of average total assets and 6.2% of total
     year-end assets; and total stockholders' equity would have been 6.0% of
     average total assets and 6.6% of total year-end assets.

(i)  Excluding the cumulative effect of the accounting change for postretirement
     benefits, 1993 net income would have been 1.18% of average total assets,
     21.1% of average stockholders' equity, and 22.3% of average common
     stockholders' equity; dividends declared per common share would have been
     29.3% of income per common share before the accounting change.

(j)  Excluding the cumulative effect of the accounting change for income taxes,
     1992 net income would have been 0.94% of average total assets, 17.2% of
     average stockholders' equity, and 18.3% of average common stockholders'
     equity; dividends declared per common share would have been 39.5% of income
     per common share before the accounting change.

(k)  In accordance with Federal Reserve Board guidelines, the effect of SFAS No.
     115 and the equity, assets, and off-balance-sheet exposures of J.P. Morgan
     Securities Inc. are excluded.

                                                                              79
<PAGE>   82
CONSOLIDATED AVERAGE BALANCES AND TAXABLE-EQUIVALENT NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
In millions                                                  1996                         1995
----------------------------------------------------------------------------    ------------------------
Interest and average rates on                  Average               Average    Average              Average
a taxable-equivalent basis                     balance   Interest       rate    balance   Interest      rate
------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>         <C>         <C>       <C>       <C>
ASSETS
Interest-earning deposits with banks,
   mainly in offices outside the U.S. .......   $ 2 022   $   110       5.44%    $ 1 796      $168     9.35%
Debt investment securities in offices
   in the U.S.:(a)
   U.S. Treasury ............................     1 581       106       6.70       1 983       130     6.56
   U.S. state and political subdivision .....     1 591       183      11.50       1 964       236    12.02
   Other ....................................    17 399     1 109       6.37      13 619       962     7.06
Debt investment securities in offices outside
   the U.S.(a) ..............................     4 452       271       6.09       4 433       309     6.97
Trading account assets:
   In offices in the U.S. ...................    16 591       994       5.99      12 802       836     6.53
   In offices outside the U.S. ..............    29 656     2 285       7.71      25 560     2 205     8.63
Securities purchased under agreements to
   resell and federal funds sold, mainly in
   offices in the U.S. ......................    43 064     2 254       5.23      31 769     1 942     6.11
Securities borrowed in offices in the U.S. ..    25 310     1 284       5.07      15 222       876     5.75
Loans:
   In offices in the U.S. ...................     6 227       418       6.71       6 586       479     7.27
   In offices outside the U.S. ..............    21 794     1 371       6.29      17 561     1 236     7.04
Other interest-earning assets:(b)
   In offices in the U.S. ...................       940       139          *       1 185       252        *
   In offices outside the U.S. ..............     1 027       274          *       1 635       412        *
-----------------------------------------------------------------------------------------------------------
Total interest-earning assets ...............   171 654    10 798       6.29     136 115    10 043     7.38
Allowance for credit losses .................    (1 119)                          (1 130)
Cash and due from banks .....................       935                            1 796
Other noninterest-earning assets ............    43 573                           41 729
-----------------------------------------------------------------------------------------------------------
Total assets ................................   215 043                          178 510
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
In millions                                                   1994
-------------------------------------------------------------------------------
Interest and average rates on                    Average                Average
a taxable-equivalent basis                       balance    Interest       rate
--------------------------------------------------------------------------------
<S>                                              <C>       <C>         <C>
ASSETS
Interest-earning deposits with banks,
   mainly in offices outside the U.S. .......   $ 2 252       $  197        8.75%
Debt investment securities in offices
   in the U.S.:(a)
   U.S. Treasury ............................     1 282           79        6.16
   U.S. state and political subdivision .....     2 215          267       12.05
   Other ....................................    10 569          547        5.18
Debt investment securities in offices outside
   the U.S.(a) ..............................     6 010          409        6.81
Trading account assets:
   In offices in the U.S. ...................    14 632          952        6.51
   In offices outside the U.S. ..............    24 033        1 838        7.65
Securities purchased under agreements to
   resell and federal funds sold, mainly in
   offices in the U.S. ......................    32 247        1 593        4.94
Securities borrowed in offices in the U.S. ..    15 615          624        4.00
Loans:
   In offices in the U.S. ...................     7 754          438        5.65
   In offices outside the U.S. ..............    16 201          991        6.12
Other interest-earning assets:(b)
   In offices in the U.S. ...................       913          269           *
   In offices outside the U.S. ..............       646          295           *
--------------------------------------------------------------------------------
Total interest-earning assets ...............   134 369        8 499        6.33
Allowance for credit losses .................    (1 143)
Cash and due from banks .....................     1 790
Other noninterest-earning assets ............    37 565
--------------------------------------------------------------------------------
Total assets ................................   172 581
--------------------------------------------------------------------------------
</TABLE>

The percentage of average interest-earning assets attributable to offices
outside the U.S. was 47% in 1996, 50% in 1995, and 48% in 1994. Average balances
are derived from daily balances except in the case of some subsidiaries, for
which they are derived from month-end balances. Interest and average rates
applying to the following asset categories have been adjusted to a
taxable-equivalent basis: Debt investment securities in offices in the U.S.,
Trading account assets in offices in the U.S., and Loans in offices in the U.S.
The applicable tax rate used to adjust tax-exempt interest to a
taxable-equivalent basis was approximately 41% in 1996, 1995, and 1994.

Impaired loans are included in the determination of average total loans.

(a)  Average debt investment securities are computed based on historical
     amortized cost, excluding the effects of SFAS No. 115 adjustments.

(b)  Interest revenue includes the effect of certain off-balance-sheet
     transactions.

*    Not meaningful

80
<PAGE>   83

<TABLE>
<CAPTION>
In millions                                                        1996                                       1995
------------------------------------------------------------------------------------------      ------------------------------------
Interest and average rates on                             Average                 Average        Average                    Average
a taxable-equivalent basis                                balance   Interest         rate        balance    Interest           rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>          <C>           <C>          <C>        <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
   In offices in the U.S.........................        $  3 962    $   204        5.15%        $ 2 048     $    98          4.79%
   In offices outside the U.S....................          45 148      2 337        5.18          41 762       2 422          5.80
Trading account liabilities:
   In offices in the U.S.........................           8 295        522        6.29           6 596         438          6.64
   In offices outside the U.S....................          11 056        780        7.05          12 222         923          7.55
Securities sold under agreements to
   repurchase and federal funds purchased,
   mainly in offices in the U.S..................          63 424      3 295        5.20          43 658       2 568          5.88
Commercial paper, mainly in offices in
   the U.S.......................................           4 133        225        5.44           2 809         169          6.02
Other interest-bearing liabilities:
   In offices in the U.S.........................          14 274        815        5.71          10 414         639          6.14
   In offices outside the U.S....................           2 258        204        9.03           1 869         127          6.80
Long-term debt, mainly in offices in the U.S.....          10 643        625        5.87           8 761         550          6.28
Company-obligated mandatorily redeemable
   preferred securities of subsidiary............              57          4        7.54              --          --            --
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities...............         163 250      9 011        5.52         130 139       7 934          6.10
Noninterest-bearing deposits:
   In offices in the U.S.........................           2 298                                  3 336
   In offices outside the U.S....................             737                                  1 354
Other noninterest-bearing liabilities............          37 767                                 33 822
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities................................         204 052                                168 651
Stockholders' equity.............................          10 991                                  9 859
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity.......         215 043                                178 510
Net yield on interest-earning assets:............                                   1.04                                     1.55
   Attributable to offices in the U.S.(a)                                           0.76                                     1.29
   Attributable to offices outside the U.S.(a)                                      1.36                                     1.85
Taxable-equivalent net interest earnings:                             1 787                                      2 109
   Attributable to offices in the U.S.(a)                               699                                        883
   Attributable to offices outside the U.S.(a)                        1 088                                      1 226
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
In millions                                                         1994
-------------------------------------------------------------------------------------
Interest and average rates on                          Average                Average
a taxable-equivalent basis                             balance    Interest       rate
-------------------------------------------------------------------------------------
<S>                                                  <C>           <C>        <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
   In offices in the U.S.....................         $  2 175      $  101       4.64%
   In offices outside the U.S................           37 768       1 845       4.89
Trading account liabilities:
   In offices in the U.S.....................            8 028         510       6.35
   In offices outside the U.S................           11 109         778       7.00
Securities sold under agreements to
   repurchase and federal funds purchased,
   mainly in offices in the U.S..............           48 372       2 196       4.54
Commercial paper, mainly in offices in
   the U.S...................................            4 174         182       4.36
Other interest-bearing liabilities:
   In offices in the U.S.....................            8 085         365       4.51
   In offices outside the U.S................            2 315         132       5.70
Long-term debt, mainly in offices in the U.S.            5 901         289       4.90
Company-obligated mandatorily redeemable
   preferred securities of subsidiary........               --          --         --
-------------------------------------------------------------------------------------
Total interest-bearing liabilities...........          127 927       6 398       5.00
Noninterest-bearing deposits:
   In offices in the U.S.....................            3 818
   In offices outside the U.S................            1 395
Other noninterest-bearing liabilities........           29 684
-------------------------------------------------------------------------------------
Total liabilities............................          162 824
Stockholders' equity.........................            9 757
-------------------------------------------------------------------------------------
Total liabilities and stockholders' equity             172 581
Net yield on interest-earning assets:........                                    1.56
   Attributable to offices in the U.S.(a)                                        1.41
   Attributable to offices outside the U.S.(a)                                   1.73
Taxable-equivalent net interest earnings:                            2 101
   Attributable to offices in the U.S.(a)                              994
   Attributable to offices outside the U.S.(a)                       1 107
-------------------------------------------------------------------------------------
</TABLE>
     The percentage of average interest-bearing liabilities attributable to
     offices outside the U.S. was 47% in 1996, 53% in 1995, and 51% in 1994.

(a)  Funding costs are allocated based on the location of the office recording
     the asset. No allocation is made for capital.

                                                                              81
<PAGE>   84
ANALYSIS OF YEAR-TO-YEAR CHANGES IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS
J.P. Morgan & Co. Incorporated



<TABLE>
<CAPTION>
                                                                      1996/95                                  1995/94
                                                          ---------------------------------      ---------------------------------
                                                           Increase (decrease)                    Increase (decrease)
                                                             due to change in:                      due to change in:
                                                          --------------------                   --------------------
                                                          Average      Average     Increase      Average      Average     Increase
In millions                                               balance         rate    (decrease)     balance         rate    (decrease)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>        <C>            <C>          <C>        <C>
INTEREST-EARNING ASSETS
Interest-earning deposits with banks, mainly in offices
   outside the U.S. ...................................    $   19        $ (77)       $ (58)       $ (42)       $  13        $ (29)
Debt investment securities in offices in the U.S.:
   U.S. Treasury ......................................       (27)           3          (24)          46            5           51
   U.S. state and political subdivision ...............       (43)         (10)         (53)         (30)          (1)         (31)
   Other ..............................................       248         (101)         147          184          231          415
Debt investment securities in offices outside the U.S.          1          (39)         (38)        (109)           9         (100)
Trading account assets:
   In offices in the U.S. .............................       231          (73)         158         (119)           3         (116)
   In offices outside the U.S. ........................       330         (250)          80          122          245          367
Securities purchased under agreements to resell and
   federal funds sold, mainly in offices in the U.S. ..       620         (308)         312          (24)         373          349
Securities borrowed in offices in the U.S. ............       522         (114)         408          (16)         268          252
Loans:
   In offices in the U.S. .............................       (25)         (36)         (61)         (72)         113           41
   In offices outside the U.S. ........................       277         (142)         135           88          157          245
Other interest-earning assets:
   In offices in the U.S. .............................       (46)         (67)        (113)          69          (86)         (17)
   In offices outside the U.S. ........................      (161)          23         (138)         295         (178)         117
----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .........................     1 946       (1 191)         755          392        1 152        1 544
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
   In offices in the U.S. .............................        99            7          106           (6)           3           (3)
   In offices outside the U.S. ........................       187         (272)         (85)         209          368          577
Trading account liabilities:
   In offices in the U.S. .............................       108          (24)          84          (94)          22          (72)
   In offices outside the U.S. ........................       (84)         (59)        (143)          81           64          145
Securities sold under agreements to repurchase and
   federal funds purchased, mainly in offices in
   the U.S. ...........................................     1 052         (325)         727         (229)         601          372
Commercial paper, mainly in offices in the U.S. .......        73          (17)          56          (70)          57          (13)
Other interest-bearing liabilities:
   In offices in the U.S. .............................       224          (48)         176          121          153          274
   In offices outside the U.S. ........................        29           48           77          (28)          23           (5)
Long-term debt, mainly in offices in the U.S. .........       108          (33)          75          175           86          261
Company-obligated mandatorily redeemable preferred
   securities of subsidiary ...........................         4           --            4           --           --           --
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ....................     1 800         (723)       1 077          159        1 377        1 536
----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN TAXABLE-EQUIVALENT NET INTEREST EARNINGS ....       146         (468)        (322)         233         (225)           8
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Changes in the average balance/rate are allocated based on the percentage
relationship of the change in average balance or average rate to the total
increase (decrease). Included in the above analysis is approximately $1 million,
$38 million, and $39 million of interest revenue recorded in 1996, 1995, and
1994 respectively that related to prior years.

TAXABLE-EQUIVALENT NET INTEREST EARNINGS AND THE CONSOLIDATED STATEMENT OF
INCOME

J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
In millions                                                                  1996       1995      1994
------------------------------------------------------------------------------------------------------
<S>                                                                       <C>        <C>        <C>
Taxable interest revenue.............................................     $10 551    $ 9 728    $8 154
Tax-exempt interest revenue, adjusted to a taxable-equivalent basis..         247        315       345
------------------------------------------------------------------------------------------------------
Total interest revenue, adjusted to a taxable-equivalent basis.......      10 798     10 043     8 499
Less: interest expense...............................................       9 011      7 934     6 398
------------------------------------------------------------------------------------------------------
Taxable-equivalent net interest earnings.............................       1 787      2 109     2 101
Less: adjustment of tax-exempt interest revenue......................          85        106       120
------------------------------------------------------------------------------------------------------
Net interest revenue, as in the consolidated statement of income.....       1 702      2 003     1 981
------------------------------------------------------------------------------------------------------
</TABLE>


82
<PAGE>   85
ASSET-QUALITY ANALYSIS


LOANS

J.P. Morgan's portfolio of loans is diversified by borrower, industry, and
geographic area. On the basis of the location of the borrower or, in the case of
guaranteed loans, the location of the guarantor, at December 31, 1996 and 1995,
45% of loans were in the United States. No more than 9% and 12% of loans were in
any single foreign country at year-end 1996 and 1995 respectively. At December
31, 1996 and 1995, 14% and 12% respectively of loans were collateralized by
marketable securities or cash. At December 31, 1996, after exclusion of these
collateralized amounts, the only category of borrower or guarantor that
accounted for 10% or more of total loans was banks, which accounted for 13%,
while at December 31, 1995, no category accounted for 10% or more of total
loans.

         The following table shows loan diversity based upon maturity and
interest rate structure, by category and location of the booking office.

<TABLE>
<CAPTION>
                                                                         Maturing
                                         ----------------------------------------------------------------------
                                                      After one    After five
                                          Within       year but     years but          After
In millions: December 31, 1996          one year    within five    within ten      ten years              Total
---------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>            <C>             <C>                  <C>
LOANS IN OFFICES IN THE U.S.
Commercial and industrial..........      $   484        $   560        $  623           $211            $ 1 878
Financial institution:
   Banks...........................          441            200            --             --                641
   Other financial institutions....          404            380            72             46                902
Collateralized by real estate......           26             91            61            146                324
Other, including U.S. state and
   political subdivision...........        1 059            153           210             66              1 488
---------------------------------------------------------------------------------------------------------------
                                           2 414          1 384           966            469              5 233
---------------------------------------------------------------------------------------------------------------
LOANS IN OFFICES OUTSIDE THE U.S.
Commercial and industrial..........        4 192          6 413         1 388             33             12 026
Financial institution:
   Banks...........................        1 755          1 009            89             --              2 853
   Other financial institutions....        2 775          1 427           256             64              4 522
Collateralized by real estate......          207            121             9             27                364
Foreign governments and official
   institutions....................          337            349           118              7                811
Other..............................        1 326            712           272              1              2 311
---------------------------------------------------------------------------------------------------------------
                                          10 592         10 031         2 132            132             22 887
---------------------------------------------------------------------------------------------------------------
                                          13 006         11 415         3 098            601             28 120
---------------------------------------------------------------------------------------------------------------
LOANS AT FIXED RATES OF INTEREST
Offices in the U.S.................          691            865           582            198              2 336
Offices outside the U.S............        2 291            770           144             30              3 235
---------------------------------------------------------------------------------------------------------------
                                           2 982          1 635           726            228              5 571
---------------------------------------------------------------------------------------------------------------
LOANS AT FLOATING RATES OF INTEREST
Offices in the U.S.................        1 723            519           384            271              2 897
Offices outside the U.S............        8 301          9 261         1 988            102             19 652
---------------------------------------------------------------------------------------------------------------
                                          10 024          9 780         2 372            373             22 549
---------------------------------------------------------------------------------------------------------------
                                          13 006         11 415         3 098            601             28 120
---------------------------------------------------------------------------------------------------------------
</TABLE>




                                                                              83

<PAGE>   86
Additional detail on loans by category and location at December 31 is presented
in the following table.

<TABLE>
<CAPTION>
In millions                                 1996           1995          1994           1993           1992
-----------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>            <C>           <C>
LOANS IN OFFICES IN THE U.S.
Commercial and industrial..........      $ 1 878        $ 1 990       $ 3 047        $ 3 507        $ 3 643
Financial institution:
   Banks...........................          641            729           458            730            258
   Other financial institutions....          902            527           738          1 457          1 089
Collateralized by real estate......          324            365           365            411            457
Other, including U.S. state and
   political subdivision...........        1 488          1 666         1 483          1 928          2 802
-----------------------------------------------------------------------------------------------------------
                                           5 233          5 277         6 091          8 033          8 249
-----------------------------------------------------------------------------------------------------------
LOANS IN OFFICES OUTSIDE THE U.S.
Commercial and industrial..........       12 026         10 045         8 451          7 809          8 777
Financial institution:
   Banks...........................        2 853          1 447         1 940          1 076            956
   Other financial institutions....        4 522          3 013         2 460          3 917          4 107
Collateralized by real estate......          364            281           329            313            691
Foreign governments and official
   institutions....................          811          1 042           846          1 149          1 840
Other..............................        2 311          2 348         1 963          2 083          1 818
-----------------------------------------------------------------------------------------------------------
                                          22 887         18 176        15 989         16 347         18 189
-----------------------------------------------------------------------------------------------------------
                                          28 120         23 453        22 080         24 380         26 438
-----------------------------------------------------------------------------------------------------------
</TABLE>


Impaired loans

Impaired loans, net of charge-offs, at December 31, distributed according to the
location of the borrower, are presented in the following table. At December 31,
1996, more than half of the impaired loan balance is measured based upon the
present value of expected future cash flows discounted at an individual loan's
effective interest rate, and the remainder is primarily based on the fair value
of the collateral.

<TABLE>
<CAPTION>
In millions                         1996      1995     1994     1993    1992
----------------------------------------------------------------------------
<S>                                 <C>       <C>      <C>     <C>      <C>
BORROWERS IN THE U.S.
Commercial and industrial.......    $ 83      $ 59     $106     $129    $168
Other...........................      17        31       60       68     114
----------------------------------------------------------------------------
                                     100        90      166      197     282
----------------------------------------------------------------------------
BORROWERS OUTSIDE THE U.S.
Commercial and industrial.......       6         8       30       53      33
Other...........................      12        17       21       24      38
----------------------------------------------------------------------------
                                      18        25       51       77      71
Restructuring countries.........       2         2        2        8     183
----------------------------------------------------------------------------
                                      20        27       53       85     254
----------------------------------------------------------------------------
                                     120       117      219      282     536
----------------------------------------------------------------------------
</TABLE>


84
<PAGE>   87
An analysis of changes in impaired loans is presented in the following table.

<TABLE>
<CAPTION>
In millions                              1996     1995     1994    1993    1992
-------------------------------------------------------------------------------
<S>                                      <C>      <C>      <C>     <C>     <C>
IMPAIRED LOANS, JANUARY 1..........      $117     $219     $282    $536    $642
Additions to impaired loans........        98       89       96     113     201
Less: Repayments of principal net
   of additional advances..........        56      113       53      86      86
   Loans returning to accrual status       --       --       42      26      78
   Charge-offs:
      Commercial and industrial....         8       13       20      24      62
      Restructuring countries......        --       --        1       1       6
      Other........................         7        7        8      30      33
   Interest and other credits......        11       12       11      19      20
   Sales and swaps of loans........        13       46       24     181      22
-------------------------------------------------------------------------------
IMPAIRED LOANS, DECEMBER 31........       120      117      219     282     536
-------------------------------------------------------------------------------
</TABLE>


Loans that are 90 days or more past due may still accrue interest if they are in
the process of collection and are either well collateralized or guaranteed. The
composition of such loans at December 31 is presented in the following table.

<TABLE>
<CAPTION>
In millions                              1996      1995     1994       1993      1992
-------------------------------------------------------------------------------------
<S>                                      <C>       <C>      <C>        <C>       <C>
Borrowers in the U.S...............       $ 1       $ 2       $1         $2       $ 1
Borrowers outside the U.S..........        --        --        1(a)       3(a)     --
-------------------------------------------------------------------------------------
                                            1         2        2          5         1
-------------------------------------------------------------------------------------
</TABLE>

(a)  Guaranteed by the French and Swiss governments.

Aggregate allowance and provision for credit losses

A provision for credit losses is recorded in each accounting period as
necessary, based on senior management's judgment as to the amount needed to
maintain the aggregate allowance for credit losses at an adequate level to
absorb losses inherent in the existing portfolios of loans and other
undertakings to extend credit, such as irrevocable unused loan commitments, or
to make payments to others for which a client is ultimately liable, such as
standby letters of credit and guarantees, commercial letters of credit and
acceptances, and all other credit exposures, including derivatives. Size and
risk characteristics of the portfolios are considered in determining the
appropriate level for the aggregate allowance, and therefore the amount of the
provision. Because J.P. Morgan deals with a relatively small number of
borrowers, management believes that it is generally able to identify borrowers
with financial problems reasonably early and to monitor carefully its credits to
such borrowers. The Asset Quality Review Committee recommends those credits or
portions of credits that are judged to be uncollectible and should therefore be
charged off. It also recommends the size of the aggregate allowance considered
adequate after taking such charge-offs into account.

Specific allocations

In reaching its judgment as to an adequate aggregate allowance, the Asset
Quality Review Committee estimates the amounts necessary to provide for possible
losses relating to specific credits. Although these credits are presently judged
to be collectible, there is a greater-than-normal risk that some portion of them
will become uncollectible if the factors that have adversely affected those
borrowers continue.


                                                                              85

<PAGE>   88
Allocation to general risk

The allocation to general risk considers the probability that there are inherent
losses in the existing portfolios that cannot yet be identified. The allocation
to general risk also includes the portion of the aggregate allowance that can be
considered to be related to outstandings to restructuring countries. The portion
of the aggregate allowance related to restructuring countries is based on
overall concerns about the willingness and ability of certain countries to make
timely payments on their outstanding debt and does not result in allocations of
the allowance being made against specific counterparties.

         The following table summarizes the activity in the consolidated
aggregate allowance for credit losses for the last five years.

<TABLE>
<CAPTION>
In millions                                 1996           1995          1994           1993           1992
-----------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>           <C>            <C>            <C>
BALANCE, JANUARY 1.................       $1 130         $1 131        $1 157         $1 258         $1 419
-----------------------------------------------------------------------------------------------------------
Recoveries:
   Borrowers in the U.S., primarily
      commercial and industrial....           20             37            14              7              7
   Borrowers outside the U.S.......            5             17            31             53             26
-----------------------------------------------------------------------------------------------------------
                                              25             54            45             60             33
-----------------------------------------------------------------------------------------------------------
CHARGE-OFFS:
   Borrowers in the U.S., primarily
      commercial and industrial....          (36)           (45)          (51)           (78)          (117)
   Borrowers outside the U.S.:
      Restructuring countries......           --             -            (18)           (37)           (48)
      Other, primarily commercial
         and industrial............           (3)           (10)           (3)           (45)           (82)
-----------------------------------------------------------------------------------------------------------
                                             (39)           (55)          (72)          (160)          (247)
-----------------------------------------------------------------------------------------------------------
Net charge-offs....................          (14)            (1)          (27)          (100)          (214)
Provision for credit losses........           --             --            --             --             55
Translation adjustment.............           --             --             1             (1)            (2)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31...............         1 116 (a)     1 130         1 131          1 157          1 258
-----------------------------------------------------------------------------------------------------------
Specific allocations, primarily
   commercial and industrial (b)...          249            283           186            283            326
Allocation to general risk (c).....          867            847           945            874            932
-----------------------------------------------------------------------------------------------------------
Net charge-offs as % of average
   loans (d).......................         0.05%           0.01%        0.11%          0.38%          0.74%
-----------------------------------------------------------------------------------------------------------
</TABLE>

(a)  At December 31, 1996, the aggregate allowance has been apportioned and
     displayed as follows: $566 million as a reduction of loans, $350 million as
     a reduction of trading account assets relating to derivatives, and $200
     million included in other liabilities related to undertakings to extend
     credit that are not currently reflected on the consolidated balance sheet.

(b)  At December 31, 1996, 1995, 1994, 1993, and 1992, the specific allocation
     of the aggregate allowance for credit losses was as follows: borrowers in
     the U.S., $169 million, $224 million, $116 million, $164 million, and $198
     million respectively; borrowers outside the U.S., $80 million, $59 million,
     $70 million, $119 million, and $128 million respectively.

(c)  Includes the portion of the aggregate allowance that could be considered to
     be related to outstandings to restructuring countries, which totaled
     approximately $129 million, $310 million, $239 million, $310 million, and
     $426 million at December 31, 1996, 1995, 1994, 1993, and 1992,
     respectively.

(d)  Excluding restructuring-country net charge-offs and loans, the ratios for
     1996, 1995, 1994, 1993, and 1992 would have been 0.05%, 0.05%, 0.13%,
     0.37%, and 0.68% respectively.

Foreign-country-related assets

The composition of foreign-country-related assets is presented in the following
table. Assets are distributed on the basis of the location of the borrower or
obligor, with the exception of interest-earning deposits with banks, which are
distributed based on the location of the office receiving the deposit, and
trading account assets, premises and equipment, accrued interest and accounts
receivable, and other assets, which are distributed based on the location of the
office recording the asset.


86
<PAGE>   89
<TABLE>
<CAPTION>
In millions: December 31                                          1996           1995           1994
----------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>            <C>
Interest-earning deposits with banks:
   At overseas branches or subsidiaries of U.S. banks.....    $    305        $    70        $    94
   Other..................................................       1 539          1 906          1 258
Loans.....................................................      15 491         12 982         11 270
Less: allowance for credit losses.........................         356            716            647
----------------------------------------------------------------------------------------------------
Net loans.................................................      15 135         12 266         10 623
Investment securities.....................................       4 087          4 557          4 442
Trading account assets, net...............................      66 704         50 588         40 070
Customers' acceptance liability...........................         212            193            342
Other assets..............................................      34 546         24 756         19 864
----------------------------------------------------------------------------------------------------
Total foreign-country-related assets......................     122 528         94 336         76 693
----------------------------------------------------------------------------------------------------
</TABLE>

For financial statement reporting purposes, beginning December 31, 1996, in
accordance with the American Institute of Certified Public Accountants Banks and
Savings Institutions Audit Guide, while we consider it in the aggregate, the
total allowance has been apportioned and displayed as a reduction of Loans, a
reduction of Trading account assets relating to derivatives, and as Other
liabilities relating to undertakings to extend credit that are not currently
reflected on the consolidated balance sheet. Prior period amounts have not been
reclassified.

Foreign-country-related aggregate allowance for credit losses

In response to regulatory requirements, the following table presents the
foreign-country-related portion of the aggregate allowance for credit losses. In
cases where a specific allocation of the aggregate allowance was made for a
borrower, the foreign-country-related component is determined on the basis of
the borrower's location. The foreign-country-related portion of the aggregate
allowance also includes the amount of the allowance that could be considered to
relate to outstandings to restructuring countries. The remaining portion of the
aggregate allowance allocated to general risk is apportioned to U.S.-related and
foreign-country-related components in the same proportion as average total
loans.

<TABLE>
<CAPTION>
In millions                                 1996     1995     1994     1993      1992
-------------------------------------------------------------------------------------
<S>                                        <C>       <C>      <C>     <C>       <C>
BALANCE, JANUARY 1.................        $ 716     $647     $708     $748     $ 807
-------------------------------------------------------------------------------------
Recoveries.........................            5       17       31       53        26
Charge-offs:
   Commercial and industrial.......           (1)      (6)      (2)     (34)      (69)
   Restructuring countries.........           --       --      (18)     (37)      (48)
   Other...........................           (2)      (4)      (1)     (11)      (13)
-------------------------------------------------------------------------------------
Net charge-offs....................            2        7       10      (29)     (104)
Provision for credit losses........           --       --       (1)       9        17
Net transfer from (to) U.S.-related
   allowance.......................         (187)      62      (71)     (19)       30
Translation adjustment.............           --       --        1       (1)       (2)
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31...............          531      716      647      708       748
-------------------------------------------------------------------------------------
</TABLE>

Foreign-country-related outstandings

Foreign-country-related outstandings represent outstandings to foreign borrowers
that are denominated in U.S. dollars or currencies other than the borrower's
local currency or, in the case of a guarantee, other than the guarantor's local
currency. Countries in which J.P. Morgan's outstandings exceeded 1% of total
assets at December 31, 1996, 1995, and 1994, are listed in the following table.
Outstandings, which are shown by category of borrower, include loans,
interest-earning deposits with banks, investment securities, customers'
acceptance liability, securities purchased under agreements to resell, trading
account securities, accrued interest, and other monetary assets. Outstandings
generally are distributed according to the location and category of the
borrower. In the case of guaranteed outstandings or when tangible, liquid
collateral is held and realizable outside the obligor's country, distribution is
generally made according to the location and category of the guarantor or the
location where the collateral is held and realizable.

                                                                              87
<PAGE>   90
<TABLE>
<CAPTION>
                                        Public sector                      Private sector
                            ---------------------------------------     -------------------
                                    Governments,
                            government agencies,
                             central banks, and                                                            Commit-          Con-
                                   official and    Government-owned                    Other,                ments      tingent
                                  international    ----------------                   mainly             to extend          out-
In millions: December 31          institutions      Banks     Other      Banks    businesses    Total       credit     standings(a)
--------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>                   <C>         <C>       <C>       <C>          <C>       <C>           <C>
1996
United Kingdom............                $522     $    3      $ 22     $1 221        $3 002   $4 770       $5 992        $1 504
France....................                 352      1 077       467      1 289           465    3 650        1 888           473
Switzerland...............                  --          4        86      1 847           327    2 264          501           470
--------------------------------------------------------------------------------------------------------------------------------
1995 (b)
United Kingdom............                 403          8        12      1 007         5 674    7 104        6 293           960
France....................                 208      1 343       533      1 329           342    3 755        1 289           350
--------------------------------------------------------------------------------------------------------------------------------
1994 (b)
United Kingdom............                  40        263         4        669         3 018    3 994        4 263         2 876
Switzerland...............                   1         17        49        961           613    1 641          397           749
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     The amounts reported for each country exclude those outstandings that are
     denominated in the local currency of that country except in cases of net
     unfunded or unhedged positions in the local currency.

(a)  Contingent outstandings include standby letters of credit, guarantees, and
     securities lending indemnifications.

(b)  Mexican cross-border outstandings at December 31, 1995 and 1994, were
     $1,196 million and $1,086 million respectively, less than 0.75% of total
     assets; commitments to extend credit and contingent outstandings were $6
     million and $1 million at December 31, 1995, and $30 million and $11
     million at December 31, 1994. Not included in Mexican cross-border
     outstandings are United Mexican States (UMS) bonds, substantially all of
     which have been sold forward (and delivered in 1996), which are
     collateralized by U.S. Treasury securities. If the book value of these
     bonds, which is discussed below, had been included, total Mexican
     cross-border outstandings would have exceeded 1% of total assets at
     December 31, 1995 and 1994.

<TABLE>
<CAPTION>
                                               1995                 1994
                                         -------------      ----------------
                                          Book    Face        Book      Face
In millions: December 31                 value   value       value     value
----------------------------------------------------------------------------
<S>                                      <C>     <C>        <C>       <C>
UMS bonds collateralized by U.S.
   Treasury securities:
   Due in 2008.......................     $855    $879      $1 112    $1 149
   Due in 2019.......................      561     786         985     1 303
----------------------------------------------------------------------------
</TABLE>

The UMS bonds were collateralized as to principal by zero-coupon U.S. Treasury
securities with a face value equal to the face value of the underlying bonds.
The collateral was pledged to the holders of the bonds and held by the Federal
Reserve Bank of New York. The fair value of the U.S. Treasury securities was
$635 million and $585 million at December 31, 1995 and 1994, respectively. The
estimated market value of the UMS bonds at December 31, 1995 and 1994, was
$1,298 million and $1,945 million respectively.

At December 31, 1996 and 1995, the amount of impaired loans relating to the
countries listed in the table was immaterial. At December 31, 1994, there were
no impaired loans relating to the countries listed in the above table.
Additionally, loans contractually past due 90 days or more as to principal or
interest payments but with interest still being accrued were immaterial for each
of the countries in the table at December 31, 1996, 1995, and 1994.

         Foreign countries in which J.P. Morgan's total foreign-country-related
outstandings were between 0.75% and 1% of total assets are presented below.

<TABLE>
<CAPTION>
                                        Total cross-border
In millions: December 31                   outstandings
----------------------------------------------------------
<S>                                     <C>
1995
Switzerland....................               $1 761
----------------------------------------------------------
</TABLE>

At December 31, 1996 and 1994, there were no foreign-country-related
outstandings between 0.75% and 1% of total assets.


88
<PAGE>   91
DERIVATIVES USED FOR PURPOSES OTHER-THAN-TRADING


The objective of J.P. Morgan's investing activities is to create longer-term
value through the management of interest rate risk related to J.P. Morgan's
nontrading assets, liabilities, and off-balance-sheet activities. J.P. Morgan
utilizes a variety of financial instruments, including derivatives, in an
integrated manner to achieve these objectives. Additional information on
derivatives used for purposes other-than-trading, primarily interest rate swaps,
is provided below. For more information about investing activities, see the
Proprietary Investing and Trading section of the Business sector analysis, and
Note 9 to the consolidated financial statements, Off-balance-sheet financial
instruments.

         The table below summarizes maturities and weighted-average interest
rates to be received and paid on U.S. dollar and non-U.S. dollar interest rate
swaps used for purposes other-than-trading at December 31, 1996. The majority of
nontrading interest rate swaps, as presented below, are risk-adjusting swaps.
Also included in the table are swaps designated as hedges or used to modify the
interest rate characteristics of assets and liabilities. Variable rates
presented are generally based on the London Interbank Offered Rate (LIBOR) in
effect on the swaps at December 31, 1996, and reset at predetermined dates. The
table was prepared under the assumption that these variable interest rates will
remain constant. The variable interest rates to be received or paid will change
to the extent that rates fluctuate. Such changes may be substantial.

         Not included in the table below are other derivatives used for purposes
other-than-trading, such as currency swaps, basis swaps, foreign exchange
contracts, interest rate futures, forward rate agreements, debt securities
forwards, and purchased options, totaling $88.7 billion at December 31, 1996.
The contractual maturities of these derivative contracts are primarily less than
one year.

By expected maturities

<TABLE>
<CAPTION>
                                                                                            After
In billions                       1997        1998        1999        2000       2001        2001       Total
-------------------------------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>        <C>         <C>        <C>         <C>
INTEREST RATE SWAPS:
U.S. DOLLAR
Receive fixed swaps
Notional amount..........        $18.5       $13.6       $ 4.1       $ 2.9      $ 1.8      $ 11.7      $ 52.6
Weighted average:
   Receive rate..........          6.2%        6.1%        7.1%        6.5%       6.7%        6.5%        6.3%
   Pay rate..............          5.6         5.5         5.3         5.5        5.5         5.5         5.5

Pay fixed swaps
Notional amount..........        $21.6       $14.7       $ 3.5       $ 8.3      $ 5.1       $ 9.9      $ 63.1
Weighted average:
   Receive rate..........          5.2%        5.5%        5.6%        5.6%       5.5%        5.6%        5.4%
   Pay rate..............          5.9         5.7         6.8         6.2        6.6         7.0         6.2

INTEREST RATE SWAPS:
NON-U.S. DOLLAR
Receive fixed swaps
Notional amount..........        $26.0       $15.8       $ 9.4       $ 8.2      $ 3.5       $ 6.0      $ 68.9
Weighted average:
   Receive rate..........          6.2%        4.8%        6.1%        6.2%       6.8%        7.0%        6.0%
   Pay rate..............          3.6         2.8         3.3         3.5        3.8         3.6         3.4

Pay fixed swaps
Notional amount..........        $25.5       $12.4       $ 9.1       $ 6.9      $ 2.8       $ 5.3      $ 62.0
Weighted average:
   Receive rate..........          3.5%        3.5%        3.4%        4.0%       3.8%        3.5%        3.6%
   Pay rate..............          6.1         5.4         6.0         6.4        7.2         7.2         6.1
-------------------------------------------------------------------------------------------------------------
Total notional amount....        $91.6       $56.5       $26.1       $26.3      $13.2       $32.9      $246.6
-------------------------------------------------------------------------------------------------------------
</TABLE>

Not included in the table above are $3.9 billion and $2.5 billion of notional
amounts related to currency swaps and basis swaps respectively.



                                                                              89
<PAGE>   92
CAPITAL AND FUNDING ANALYSIS

RISK-ADJUSTED ASSETS

J.P. Morgan's consolidated risk-adjusted assets and the net adjustments to
exclude the assets and off-balance-sheet exposures of J.P. Morgan Securities
Inc. (JPMSI) at December 31 are set forth in the following table.

<TABLE>
<CAPTION>
                                                   1996                        1995                         1994
                                         ----------------------       ----------------------      ---------------------
                                          Balance                      Balance                     Balance
                                           sheet/         Risk-         sheet/         Risk-         sheet/       Risk-
                                         notional      adjusted       notional      adjusted       notional    adjusted
 In billions                               amount       balance         amount       balance         amount     balance
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>            <C>          <C>          <C>
ASSETS
Cash and due from banks and interest-
   earning deposits with banks........    $    2.8      $  0.7        $   3.5        $  0.9       $    3.5       $ 0.7
Debt investment securities............        24.9         4.0           24.6           3.6           22.7         2.9
Trading account assets, net...........        91.0        22.4           69.4          18.3           57.0        11.3
Resale agreements and federal
   funds sold.........................        32.5         5.7           32.2           3.1           21.4         4.4
Securities borrowed...................        27.9         7.4           19.8           4.0           12.1         2.4
Loans, net............................        27.6        23.6           22.3          20.7           21.0        18.9
Customers' acceptance liability.......         0.2         0.2            0.2           0.2            0.6         0.6
Premises and equipment, net...........         1.9         1.9            1.9           1.9            2.0         2.0
Other assets..........................        13.2         9.8           11.0           7.3           14.6        12.0
----------------------------------------------------------------------------------------------------------------------
Total assets..........................       222.0        75.7          184.9          60.0          154.9        55.2
Net effect of excluding JPMSI assets
   (primarily trading account assets,
   resale agreements, and securities
   borrowed)..........................       (43.8)       (7.2)         (37.3)         (5.7)         (25.8)       (7.8)
----------------------------------------------------------------------------------------------------------------------
Assets, excluding JPMSI...............       178.2        68.5          147.6          54.3          129.1        47.4
----------------------------------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET EXPOSURES
Commitments to extend credit..........        64.7        22.5           55.1          21.3           44.6        16.7
Standby letters of credit and guarantees      13.9         7.9           11.7           8.6            9.9         7.8
Securities lending indemnifications...         5.5         1.4            5.4           0.7           19.5         1.8
Other credit facilities...............         0.6         0.6            1.3           0.9            0.6         0.2
Foreign exchange contracts,
   including foreign exchange options.       844.6         4.4          607.1           3.1          494.9         3.5
Currency swaps........................       205.9         4.3          144.2           3.8          112.7         3.5
Interest rate swaps...................     1 915.0         7.3        1 371.4           6.1          862.2         3.6
Interest rate and other contracts.....     1 750.8         8.2        1 324.0           4.5        1 002.7         1.8
----------------------------------------------------------------------------------------------------------------------
Total off-balance-sheet exposures.....     4 801.0        56.6        3 520.2          49.0        2 547.1        38.9
Net effect of excluding JPMSI
   off-balance-sheet exposures........       (29.1)       (1.2)         (27.7)         (0.2)         (58.0)         --
----------------------------------------------------------------------------------------------------------------------
Off-balance-sheet exposures,
   excluding JPMSI....................     4 771.9        55.4 (a)     3 492.5         48.8 (a)    2 489.1        38.9 (a)
----------------------------------------------------------------------------------------------------------------------
Gross risk-adjusted assets, excluding
   JPMSI..............................                   123.9                        103.1                       86.3
Less: allowance for credit losses not
   qualifying as risk-based capital...                      --                           --                       (0.1)
----------------------------------------------------------------------------------------------------------------------
Risk-adjusted assets,
   excluding JPMSI....................                   123.9                        103.1                       86.2
----------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  Includes $9.9 billion, $6.8 billion, and $4.6 billion at December 31, 1996,
     1995, and 1994, respectively related to potential future credit exposure as
     defined in the risk-based capital framework.


90
<PAGE>   93
DEPOSITS

Average deposits in offices outside the U.S. are presented in the following
table.

<TABLE>
<CAPTION>
                                                     1996                    1995                   1994
                                             -------------------     ------------------     -------------------
                                             Average     Average     Average    Average     Average     Average
In millions                                  balance   rate paid     balance  rate paid     balance   rate paid
---------------------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>           <C>      <C>          <C>        <C>
INTEREST-BEARING DEPOSITS
From banks in foreign countries.......       $13 753       4.96%     $11 703      6.44%     $12 139        5.05%
From foreign governments and
   official institutions..............        11 020       4.97       10 374      5.55        8 932        4.24
Other time............................        16 830       5.96       15 750      6.10       13 114        5.75
On demand.............................         3 545       2.96        3 935      3.30        3 583        2.76
---------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits in
   offices outside the U.S............        45 148       5.18       41 762      5.80       37 768        4.89
---------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEPOSITS
From banks in foreign countries.......            29                      56                    183
From foreign governments and
   official institutions..............             5                       6                     43
Other demand..........................           703                   1 292                  1 169
---------------------------------------------------------------------------------------------------------------
Total noninterest-bearing deposits in
   offices outside the U.S............           737                   1 354                  1 395
---------------------------------------------------------------------------------------------------------------
</TABLE>

Foreign-country-related deposits in offices in the U.S. totaled $0.8 billion at
December 31, 1996, $1.2 billion at December 31, 1995, and $0.9 billion at
December 31, 1994.

         A profile of the maturities of time certificates of deposit and other
time deposits in denominations of $100,000 or more at December 31, 1996, is
presented in the following table.

<TABLE>
<CAPTION>
                                                                    After six
                                          Within    After three    months but          After
                                           three     months but        within            one
In millions                               months     within six      one year           year          Total
-----------------------------------------------------------------------------------------------------------
<S>                                      <C>        <C>            <C>                <C>           <C>
Offices in the U.S.:
   Time certificates of deposit....      $ 1 714         $   52        $3 190         $  203        $ 5 159
   Other time deposits.............          235             51            --             25            311
-----------------------------------------------------------------------------------------------------------
                                           1 949            103         3 190            228          5 470
-----------------------------------------------------------------------------------------------------------
Offices outside the U.S.:
   Time certificates of deposit....        3 756            219           232              9          4 216
   Other time deposits.............       27 981          1 171           351          1 023         30 526
-----------------------------------------------------------------------------------------------------------
                                          31 737          1 390           583          1 032         34 742
-----------------------------------------------------------------------------------------------------------
</TABLE>



                                                                              91
<PAGE>   94

PURCHASED FUNDS AND OTHER BORROWINGS

Purchased funds and other borrowings are detailed in the following table.

<TABLE>
<CAPTION>
In millions                                                              1996           1995           1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>            <C>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Balance at year-end............................................       $56 117        $40 803        $30 179
Average balance................................................        59 812         40 245         45 470
Maximum month-end balance......................................        69 548         51 162         51 387
Average interest rate:
   During year.................................................          5.19%          5.87%          4.55%
   At year-end.................................................          5.98           5.77           5.43
-----------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED (DAY-TO-DAY)
Balance at year-end............................................       $ 5 312        $ 4 296        $ 5 589
Average balance................................................         3 612          3 414          2 902
Maximum month-end balance......................................         5 312          6 199          5 589
Average interest rate:
   During year.................................................          5.30%          5.96%          4.35%
   At year-end.................................................          6.19           5.48           5.25
-----------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER
Balance at year-end............................................       $ 4 132        $ 2 801        $ 3 507
Average balance................................................         4 133          2 809          4 174
Maximum month-end balance......................................         5 102          3 250          4 882
Average interest rate:
   During year.................................................          5.44%          6.02%          4.36%
   At year-end.................................................          5.50           5.67           5.89
-----------------------------------------------------------------------------------------------------------
OTHER LIABILITIES FOR BORROWED MONEY
Federal funds purchased (term):
   Balance at year-end.........................................       $   386        $   442        $   465
   Average balance.............................................           554            461            372
   Maximum month-end balance...................................           800            640            516
   Average interest rate:
      During year..............................................          5.57%          6.27%          4.30%
      At year-end..............................................          5.51           5.95           3.82
Other:
   Balance at year-end.........................................       $19 562        $14 687        $10 435
   Average balance.............................................        15 810         11 822         10 028
   Maximum month-end balance...................................        20 142         13 762         10 823
   Average interest rate:
      During year..............................................          6.20%          6.23%          4.80%
      At year-end..............................................          5.63           5.96           5.82
-----------------------------------------------------------------------------------------------------------
</TABLE>

Average interest rates during each year are computed by dividing total interest
expense by the average amount borrowed. Average interest rates at year-end are
average rates for a single day and as such may reflect one-day market
distortions that may not be indicative of generally prevailing rates. Original
maturities of securities sold under agreements to repurchase generally are not
more than six months. Original maturities of commercial paper are generally not
more than nine months. Other liabilities for borrowed money generally have
original maturities of one year or less.

92
<PAGE>   95
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
J.P. Morgan & Co. Incorporated

<TABLE>
<CAPTION>
In millions, except per share data                                     1996
-----------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>           <C>           <C>
Three months ended                                    Dec. 31      Sept. 30     June 30       Mar. 31
-----------------------------------------------------------------------------------------------------
Interest revenue...............................        $2 925        $2 675      $2 559        $2 554
Interest expense...............................         2 441         2 250       2 162         2 158
-----------------------------------------------------------------------------------------------------
Net interest revenue...........................           484           425         397           396
Total noninterest revenues.....................         1 321         1 124       1 364         1 344
Total operating expenses.......................         1 197         1 137       1 104         1 085
-----------------------------------------------------------------------------------------------------
Income before income taxes ....................           608           412         657           655
Income taxes...................................           189           136         217           216
-----------------------------------------------------------------------------------------------------
NET INCOME ....................................           419           276         440           439
-----------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (a).................................        $2.04         $ 1.32      $ 2.14        $ 2.13
Dividends declared.............................         0.88           0.81        0.81          0.81
-----------------------------------------------------------------------------------------------------
Price range per common share on the
   composite tape:
   High........................................        $ 100 1/8     $  92 1/2      $89 1/4    $   85 3/4
   Low.........................................           82 1/4        80 1/4       75 1/2        73 1/2
Closing price per common share at quarter-end..           97 5/8        88 7/8       84 5/8        83
-----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
In millions, except per share data                                           1995
-----------------------------------------------------------------------------------------------------
Three months ended                                    Dec. 31    Sept. 30       June 30       Mar. 31
-----------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>            <C>           <C>
Interest revenue...............................        $2 609      $2 453        $2 405        $2 470
Interest expense...............................         2 121       1 946         1 897         1 970
-----------------------------------------------------------------------------------------------------
Net interest revenue...........................           488         507           508           500
Total noninterest revenues.....................         1 030       1 042           941           888
Total operating expenses.......................           990       1 022           984         1 002
-----------------------------------------------------------------------------------------------------
Income before income taxes ....................           528         527           465           386
Income taxes...................................           162         167           150           131
-----------------------------------------------------------------------------------------------------
NET INCOME ....................................           366         360           315           255
-----------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income (a).................................        $ 1.80      $ 1.78        $ 1.56        $ 1.27
Dividends declared.............................          0.81        0.75          0.75          0.75
-----------------------------------------------------------------------------------------------------
Price range per common share on the
   composite tape:
   High........................................        $  82 1/2   $   78 7/8    $   74 1/2    $   65 5/8
   Low.........................................           74 5/8       68 7/8        60 1/2        56 1/8
Closing price per common share at quarter-end..           80 1/4       77 3/8        70 1/8        61
-----------------------------------------------------------------------------------------------------
</TABLE>



     The principal market on which the company's common stock is traded is the
     New York Stock Exchange.

(a)  Earnings per share amounts represent both primary and fully diluted
     earnings per share, except for the three months ended December 31, 1996.
     Fully diluted earnings per share were $2.03 for the three months ended
     December 31, 1996.

The 1996 fourth quarter results are discussed in J.P. Morgan's earnings release
dated January 13, 1997.




                                                                              93
<PAGE>   96
FORM 10-K ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996

J.P. MORGAN & CO. INCORPORATED
(Incorporated in the State of Delaware)
60 Wall Street, New York, NY 10260-0060
(212) 483-2323

Filed with:
Securities and Exchange Commission, Washington, D.C. 20549

Commission file number: 1-5885
I.R.S. Employer Identification Number: 13-2625764

The following securities are registered on the New York Stock Exchange pursuant
to Section 12(b) of the Act:

    Common Stock, $2.50 Par Value
    Adjustable Rate Cumulative Preferred Stock, Series A
        No Par Value, Stated Value $100
    Depositary shares representing a one-tenth interest in 6 5/8% Cumulative
        Preferred Stock, Series H, No Par Value, Stated Value $500
    4 3/4% Convertible Debentures Due 1998

No securities are registered pursuant to Section 12(g) of the Act.

The aggregate market value of the voting stock held by nonaffiliates of J.P.
Morgan totaled $19,344,804,150 at February 28, 1997.

The number of shares outstanding of J.P. Morgan's Common Stock, $2.50 Par Value,
at February 28, 1997, totaled 184,236,230 shares.

J.P. Morgan (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 and
(2) has been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein nor in any amendment to this Form 10-K, but is contained in
J.P. Morgan's 1997 Proxy Statement incorporated by reference in Part III of this
Form 10-K.

J.P. Morgan's definitive Proxy Statement dated March 24, 1997, is incorporated
by reference in response to Part III, Items 10, 11, 12, and 13 of Form 10-K.


94
<PAGE>   97
FORM 10-K CROSS-REFERENCE INDEX

Part I

1. BUSINESS

   Description of business, 2-10, 97-100
   Number of employees, 78
   Financial information about foreign and domestic operations, 73, 86-88
   Distribution of assets, liabilities, and stockholders' equity; interest rates
   and interest differential, 80-82
   Investment portfolio, 46-49
   Loan portfolio, 41, 56-57, 83-88
   Summary of loan loss experience, 85-87
   Deposits, 80-82, 91
   Return on equity and assets, 78-79
   Short-term borrowings, 92

2. PROPERTIES, 100

3. LEGAL PROCEEDINGS(a)

4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS(a)


PART II

5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, 77-79,
   93

6. SELECTED FINANCIAL DATA, 78-79

7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
   OPERATIONS, 2-32

8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   Report of independent accountants, 34
   J.P. Morgan & Co. Incorporated
     Consolidated statement of income, 35
     Consolidated balance sheet, 36
     Consolidated statement of changes in stockholders' equity, 37
     Consolidated statement of cash flows, 38
   Morgan Guaranty Trust Company of New York - Consolidated statement of
   condition, 39
   Notes to consolidated financial statements, 40-77
   Selected consolidated quarterly financial data,(b) 93

9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
   DISCLOSURE(a)


PART III

10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(c)

11. EXECUTIVE COMPENSATION(c)

12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(c)

13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(c)


PART IV

14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    1. Financial statements have been included in Item 8.

    2. Financial statement schedules Schedule III - Condensed financial
       information of J.P. Morgan & Co. Incorporated (parent), 74-76


EXHIBITS

 3a. Restated certificate of incorporation, as amended (incorporated by
     reference to Exhibit 3a to J.P. Morgan's post-effective amendment No. 1 to
     Form S-3, Registration No. 33-55851)

 3b. By-laws of J.P. Morgan as amended through April 10, 1996 (incorporated by
     reference to Exhibit 3b to J.P. Morgan's report on Form 8-K, dated April
     11, 1996)

 4.  Instruments defining the rights of security holders, including
     indentures(d)

10a. 1992 stock incentive plan, as amended (incorporated by reference to Exhibit
     10a to J.P. Morgan's annual report on Form 10-K for the year ended December
     31, 1994, File No. 1-5885)

10b. Director stock plan, as amended (incorporated by reference to Exhibit 10b
     to J.P. Morgan's annual report on Form 10-K for the year ended December 31,
     1994, File No. 1-5885)

10c. Deferred compensation plan for directors' fees, as amended (incorporated by
     reference to Exhibit 10c to J.P. Morgan's annual report on Form 10-K for
     the year ended December 31, 1992, File No. 1-5885)

10d. 1989 stock incentive plan, as amended (incorporated by reference to Exhibit
     10d to J.P. Morgan's annual report on Form 10-K for the year ended December
     31, 1994, File No. 1-5885)

10e. 1987 stock incentive plan, as amended (incorporated by reference to Exhibit
     10e to J.P. Morgan's annual report on Form 10-K for the year ended December
     31, 1994, File No. 1-5885)

10f. Stock option plan, as amended (incorporated by reference to Exhibit 10f to
     J.P. Morgan's annual report on Form 10-K for the year ended December 31,
     1994, File No. 1-5885)

10g. Incentive compensation plan, as amended (incorporated by reference to
     Exhibit 10g to J.P. Morgan's annual report on Form 10-K for the year ended
     December 31, 1994, File No. 1-5885)

10h. Stock option award (incorporated by reference to Exhibit 10h to J.P.
     Morgan's quarterly report on Form 10-Q for the quarter ended March 31,
     1995, File No. 1-5885)

10i. 1995 stock incentive plan, as amended

10j. 1995 executive officer performance plan (incorporated by reference to
     Exhibit 10j to J.P. Morgan's annual report on Form 10-K for the year ended
     December 31, 1995, File No. 1-5885)

12.  Statements re computation of ratios

13.  Annual report to stockholders(e)

21.  Subsidiaries of J.P. Morgan

23.  Consent of independent accountants

24.  Powers of attorney

27.  Financial data schedule


REPORTS ON FORM 8-K

Report on Form 8-K dated October 10, 1996, was filed with the Securities and
Exchange Commission during the quarter ended December 31, 1996, which reported
the issuance by J.P. Morgan of a press release reporting its earnings for the
three- and nine-month periods ended September 30, 1996. In addition, Form 8-K
dated December 11, 1996, was filed announcing a dividend increase, a stock
repurchase program, and that John A. Krol had been elected a director of both
J.P. Morgan and Morgan Guaranty effective January 1, 1997.

This report on Form 10-K has not been approved or disapproved by the Securities
and Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this report. Portions of the annual report to stockholders are not
required for the Form 10-K report and are not filed as part of J.P. Morgan's
Form 10-K.

(a) Nothing to report.

(b) Fourth quarter 1996 results are incorporated by reference to the report on
    Form 8-K dated January 13, 1997, filed with the Securities and Exchange
    Commission.

(c) Incorporated by reference to the definitive Proxy Statement dated March 24,
    1997.

(d) J.P. Morgan hereby agrees to furnish to the Commission, upon request, a copy
    of any unfiled agreements defining the rights of holders of long-term debt
    of J.P. Morgan and of all subsidiaries of J.P. Morgan for which
    consolidated or unconsolidated financial statements are required to be
    filed.

(e) Only those sections of the annual report to stockholders referenced in the
    cross-reference index above are incorporated in the report on Form 10-K.

Other schedules and exhibits are omitted because the required information either
is not applicable or is shown in the consolidated financial statements or the
notes thereto.


                                                                              95
<PAGE>   98
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on March
24, 1997, on its behalf by the undersigned, thereunto duly authorized.

J.P. Morgan & Co. Incorporated
Registrant


RACHEL F. ROBBINS
-------------------------------
Rachel F. Robbins
Secretary


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 24, 1997, by the following persons on behalf of
the registrant in the capacities indicated.


JOHN A. MAYER JR.
-------------------------------
John A. Mayer Jr.
Chief Financial Officer
(Principal financial officer)

DAVID H. SIDWELL
-------------------------------
David H. Sidwell
Managing Director and Controller
(Principal accounting officer)

Douglas A. Warner III*
Chairman of the Board and Director
Riley P. Bechtel* Director
Martin Feldstein* Director
Hanna H. Gray* Director
James R. Houghton* Director
James L. Ketelsen* Director
John A. Krol* Director

Roberto G. Mendoza*
Vice Chairman of the Board and Director
Michael E. Patterson*
Vice Chairman of the Board and Director
Lee R. Raymond* Director
Richard D. Simmons* Director
Kurt F. Viermetz*
Vice Chairman of the Board and Director
Dennis Weatherstone* Director
Douglas C. Yearley* Director

*By: JAMES C.P. BERRY
 -------------------------------------------------------
 James C.P. Berry
 Attorney-in-fact


96
<PAGE>   99
DESCRIPTION OF BUSINESS


J.P. Morgan & Co. Incorporated, whose origins date to a merchant banking firm
founded in London in 1838, is the holding company for subsidiaries engaged
globally in providing a wide range of financial services to institutions,
corporations, governments, and individuals. A list of principal subsidiaries and
associated companies appears on page 104.

BUSINESS ENVIRONMENT

J.P. Morgan conducts its business in a global environment that is inherently
unpredictable. Numerous variables may have a material effect on the firm's
results or operations. These variables include, but are not limited to: economic
and market conditions, including the liquidity of secondary markets, the
volatility of market prices, rates and indices, the timing and volume of market
activity, the availability of capital, and inflation; political events,
including legislative, regulatory, and other developments, such as the
anticipated formation of the European Monetary Union; competitive forces,
including the ability to attract and retain highly skilled individuals, and the
ability to cost-effectively develop and support technology and information
systems critical to its businesses; and investor sentiment. As a result,
revenues and net income in any particular period may not be indicative of
full-year results; may vary from year to year; and may impact the firm's ability
to achieve its strategic objectives.

BUSINESS SECTORS

We describe the activities of J.P. Morgan using five business sectors, as
discussed below. Three of these sectors - Finance and Advisory, Market Making,
and Asset Management and Servicing - focus on services we provide for clients,
including positions taken to facilitate client transactions. Two sectors
comprise proprietary activities that we conduct exclusively for our own account:
Equity Investments and Proprietary Investing and Trading. While presenting our
results in sector format helps simplify the complexity of Morgan's business, it
is also important to understand the shared benefits of our strategy: our focus
on building long-term client relationships; the synergy we create by acting as
one firm with singular dedication to clients, rather than as a collection of
separate businesses; the global diversification of activities across a range of
products and locations; and the integration of global capabilities to capitalize
on opportunities. Effective with the 1996 Annual report, we have made some
changes to the business sector analysis in order to more closely align our
sector results with the manner in which we provide services to our clients and
to distinguish our proprietary activities. As a result, certain activities have
been reclassified as follows: the proprietary trading unit results have been
included in Proprietary Investing and Trading as compared to Market Making in
the 1995 Annual report; cash and derivative secondary trading results related to
the equities business have been included in the Market Making sector as compared
to the Finance and Advisory sector in the 1995 Annual report; and earnings on
stockholders' equity have been restated to reflect current internal management
models based on external benchmarks. Prior year results have been restated to
conform with the 1996 presentation. Our activities, updated for these changes,
are summarized below.

Finance and Advisory

Finance and Advisory encompasses the sophisticated advisory, capital raising,
and financing work that we do for our broad base of clients around the world.
These clients include financial institutions, corporations, governments, and
municipalities. The expertise we offer them is based on in-depth knowledge of
their needs and the industries and financial markets in which they operate. Our
global network of senior client relationship managers markets the full spectrum
of our capabilities and provides the link between a corporate client's need and
J.P. Morgan's financing, advisory, asset management, and risk management
products and services.

      In partnership with clients, our advisory professionals explore the risks
and rewards of such strategic alternatives as mergers and acquisitions,
divestitures, privatizations, and recapitalizations. We also advise clients on
their capital structures, looking for ways to unlock value and capture
opportunities.


                                                                              97
<PAGE>   100
      Our debt and equities underwriting and credit businesses provide clients
with the capabilities to raise the necessary capital and execute strategies.
High-quality research is an integral part of this business. Our credit
capabilities include meeting clients' financing needs by underwriting, arranging
and syndicating loans and other credit facilities.

Market Making

Market Making provides clients with around-the-clock access to global markets.
J.P. Morgan makes markets in fixed income, equity, foreign exchange, and
commodity instruments in both developed and emerging markets; we serve as a
counterparty to help clients manage risks; and we provide research to help
clients assess opportunities and track performance. We take positions to
facilitate client transactions, to enable us to function effectively, and to
benefit from our role as a market maker. Our clients include corporations,
central banks, governments and their agencies, financial institutions, pension
funds, mutual funds, and leveraged funds.

      Our fixed income activities encompass acting as a primary dealer in U.S.
and foreign government securities; making markets in money market instruments,
U.S. government agency securities, corporate debt securities, and options; and
helping clients manage their exposure to fluctuating interest and foreign
exchange rates by structuring, executing, and making markets in risk management
products.

      Our equities activities include providing clients with liquidity in the
cash and derivatives secondary markets through our global sales and trading
network. We utilize our expertise in the equities markets to structure equity
derivatives for our clients.

      Our foreign exchange capabilities include making markets in spot, options,
and short-term interest rate products, including forwards and forward rate
agreements in multiple currencies, to help clients manage their foreign currency
exposures. In commodities, we make markets in metals and energy products and we
advise clients on developing hedging, investment, and commodity-linked financing
strategies. We also provide physical commodity services such as settlement of
physical trades in the various metal and oil markets and metal borrowing and
lending services.

      Our emerging markets activities, while principally related to fixed income
activities, cross all markets, and our worldwide network enables us to fulfill
our role as a market maker and provide clients with a steady flow of market
information.

Asset Management and Servicing

Asset Management and Servicing activities encompass designing and executing
investment strategies and providing administrative and brokerage services. Our
clients include corporations, financial and governmental institutions, and
high-net-worth individuals.

      We tailor our asset management capabilities for both institutional and
private clients. For institutional clients, we offer a range of investment
strategies and products worldwide to service the investment management needs of
private and public sector retirement plans, governments, corporations,
endowments, foundations, and trusts.

      Our private client group helps high-net-worth individuals plan and execute
their investment strategies with a broad range of capabilities, which include
managed investment and trust portfolios, Morgan-advised mutual funds, and a
full-service brokerage unit. Credit, deposit, trust, and estate services are
also provided to private clients.

      Our futures and options brokerage group provides institutional clients
with worldwide access to major exchanges by acting as futures and options
brokers in executing and clearing contracts.

      We operate under contract the Euroclear System, the world's largest
clearance and settlement system for internationally traded securities. We
provide credit and deposit services to Euroclear participants.

      In addition, we provide such operational services as the administration of
depositary receipt programs and global trust and agency services, primarily in
Europe.

Equity Investments

J.P. Morgan invests globally in privately held growth companies, management
buyouts, privatizations, and recapitalizations. These investments are made and
managed with the objective of maximizing total return, which is a measure of
both long-term appreciation and net recognized gains. In addition, a number of
our Equity Investment companies become clients of the firm. Our broad global
presence and expertise is an important advantage in sourcing, evaluating, and
managing investments. These activities are managed by a small group of
professionals.


98
<PAGE>   101
      Our equity investment portfolio is diversified by industry, geographic
area, and stage of investment. Our goal is to maintain a diversified portfolio
capable of generating significant returns over time. This is a high-risk,
high-reward business, and we operate under a variety of legal and regulatory
restrictions in managing the portfolio.

      Investments are generally held for three to seven years, depending on our
view of when a sale will produce optimal returns. Typically, investments are
harvested through a public offering of securities or the sale of the investment.
The process of assessing and managing the risks and rewards of new opportunities
and existing investments continues throughout market cycles.

Proprietary Investing and Trading

Morgan actively takes market risk positions for its own account. These
activities are managed by a small group of experienced market professionals who
employ directional and relative value risk-taking strategies diversified across
markets and instruments.

      Directional strategies anticipate changes in absolute rate and price
levels, while relative value strategies anticipate changes in relationships
between markets and classes of instruments. These strategies are conducted
across many currencies and types of instruments, both on- and off-balance-sheet,
where we perceive opportunities exist to generate value for the firm.
Instruments typically used in these positioning activities include fixed income
securities, foreign exchange, equity securities, commodity products, and related
derivative instruments. Positions may be held for short or long periods of time,
depending on the strategy and actual market performance. Certain longer-term
strategies are considered to be investment activities, and primarily utilize
government and mortgage-backed fixed income securities and interest rate swaps.
The securities and interest rate swaps used in these investment activities are
classified as "available-for-sale" and "risk-adjusting" respectively.

      In addition to these risk-taking activities are the firm's capital and
liquidity management activities. Liquidity management is the management of the
firm's liquidity risk profile to ensure that we have access to funding at a
reasonable cost, even under adverse circumstances, to support all the business
activities of the firm. A strong capital position is therefore an integral part
of our liquidity management because it enables us to raise funds as
inexpensively as possible in a variety of international markets.

REGULATION

J.P. Morgan is subject to regulation under the Bank Holding Company Act of 1956
(the Act). Under the Act, J.P. Morgan is required to file certain reports with
the Board of Governors of the Federal Reserve System (the Board) and is subject
to examination by the Board. The Act generally precludes J.P. Morgan and its
subsidiaries from engaging in nonbanking activities, or from acquiring more than
5% of any class of voting securities of any company engaging in such activities,
unless the Board has determined, by order or regulation, that such proposed
activities are closely related to banking. Federal law and Board interpretations
limit the extent to which J.P. Morgan and its subsidiaries can engage in certain
aspects of the securities business.

      The Glass-Steagall Act prohibits affiliates of banks that are members of
the Federal Reserve System, including J.P. Morgan Securities Inc. (JPMSI), a
Section 20 subsidiary, from being "engaged principally" in bank-ineligible
underwriting and dealing activities (mainly corporate debt and equity
securities). As interpreted by the Board, this prohibition has restricted
JPMSI's gross revenues from such activities to a maximum of 10% of its total
gross revenues. Effective March 6, 1997, the restriction was changed from 10% to
25% of total gross revenues. J.P. Morgan continues to seek ways to expand the
limits on its securities activities, including the continued reform of the
Glass-Steagall Act, necessary to achieve our strategic objectives.


                                                                              99
<PAGE>   102
      Morgan Guaranty Trust Company of New York (Morgan Guaranty), J.P. Morgan's
largest subsidiary, is a member of the Federal Reserve System and a member of
the Federal Deposit Insurance Corporation (FDIC). Its business is subject to
both U.S. federal and state law and to examination and regulation by U.S.
federal and state banking authorities. J.P. Morgan and its nonbank subsidiaries
are affiliates of Morgan Guaranty within the meaning of the applicable federal
statutes. Morgan Guaranty is subject to restrictions on loans and extensions of
credit to J.P. Morgan and certain other affiliates and on certain other types of
transactions with them or involving their securities. Among other wholly owned
subsidiaries:

-     JPMSI is a broker-dealer registered with the Securities and Exchange
      Commission and is a member of the National Association of Securities
      Dealers, the New York Stock Exchange, and other exchanges.

-     J.P. Morgan Futures Inc. is subject to regulation by the Commodity Futures
      Trading Commission, the National Futures Association, and the commodity
      exchanges and clearinghouses of which it is a member.

-     J.P. Morgan Investment Management Inc. is registered with the Securities
      and Exchange Commission as an investment advisor under the Investment
      Advisers Act of 1940, as amended.

J.P. Morgan subsidiaries conducting business in other countries are also subject
to regulations and restrictions imposed by those jurisdictions, including
capital requirements.

COMPETITION

In all areas of business, J.P. Morgan and its subsidiaries operate in an
intensely competitive environment, especially with respect to services and
pricing. In the United States, we face competition from investment banks, money
center bank holding companies, many regional and foreign banks, and a wide range
of nonbank financial institutions. Internationally, we face competition from
investment banks, commercial banks, and universal banks in the money centers of
Europe, Asia, and Latin America.

PROPERTIES

J.P. Morgan owns and occupies buildings in New York, including its headquarters
at 60 Wall Street, as well as 23 Wall Street and 15 Broad Street. J.P. Morgan
also owns property in Delaware, London, and Paris and leases office space in New
York, Brussels, Delaware, Paris, and London. J.P. Morgan also owns and leases
property in other locations in which it conducts business throughout the world.

      As more fully described in Note 14 to the consolidated financial
statements, Long-term debt, J.P. Morgan's financing arrangement for an office
building complex in London involved the sale of a 52.5% interest in the building
complex to the lender, excluding the interior office finishing, furniture, and
technology. In addition, the 60 Wall Street building is subject to a mortgage in
the amount of $400 million at December 31, 1996. 


100
<PAGE>   103
MANAGEMENT

<TABLE>
<S>                                  <C>                          <C>                           <C>
                                     Douglas A. Warner III        Roberto G. Mendoza
                                       Chairman of the Board      Michael E. Patterson
                                       Chief Executive Officer    Kurt F. Viermetz
                                                                    Vice Chairmen


CLIENTS                              Thomas B. Ketchum            Walter A. Gubert              Peter L. Woicke
                                       Americas                     Europe, Middle East,          Asia Pacific
                                                                    Africa


CAPABILITIES AND                     Ramon de Oliveira            Nicolas S. Rohatyn            Pilar Conde
SERVICES                               Equities                     Emerging Markets            Michael R. Corey
                                       Equity Investments           Foreign Exchange              Proprietary Positioning
Finance and Advisory                                                Commodities
Market Making                        Peter D. Hancock                                           Luc Bomans
Asset Management and Servicing         Fixed Income               John T. Olds                    Euroclear System
Equity Investments                     Futures and Options          Private Client Services
Proprietary Investing and Trading
                                     Joseph P. MacHale            Keith M. Schappert
                                       Credit                       Investment Management


CORPORATE RESOURCES                  Stephen G. Thieke            John A. Mayer Jr.             Rachel F. Robbins
                                       Corporate Risk Management    Chief Financial Officer       General Counsel
                                       Credit Policy                Strategic Planning
                                       Research                                                 Ronald H. Menaker
                                                                  David H. Sidwell                Corporate Services
                                     Michael Enthoven               Controller
                                       Technology and Operations                                Laura W. Dillon
                                                                  Edward F. Murphy                Corporate Communication
                                     Herbert J. Hefke               Auditor
                                       Human Resources
</TABLE>


                                                                             101
<PAGE>   104
SENIOR OFFICERS

<TABLE>
<S>                       <C>                      <C>                     <C>                           <C>
                          Joseph T. Donohue        Robert H. Muller        John E. Graham                Catherine S. Bryan
                          Winfield S. Downs        Sarah E. Nash           David S. Hickman              Jolyne K. Caruso-Fitzgerald
Douglas A. Warner III     Nicholas A. Draper       El Walid Nsouli         Stephen F. Holcomb            W. Montgomery Cerf
Chairman of the Board     Richard R. Duron         Timothy J. O'Brien      Maria G. Jordan               Jenifer L. Condit
Chief Executive Officer   Terence C. Eccles        Simon R. Paterno        Kenneth A. Lang               John C. Conti
                          Robert C. Elliott        Hugh Paton              Robert Le Blanc               Etienne Deshormes
Roberto G. Mendoza        Frederic A. Escherich    Nicholas B. Paumgarten  Carl F. Munana                Ronald R. Dewhurst
Michael E. Patterson      Yuichi Ezawa             James R. Peacock        Philip W. Mc Neal             Pierre Dupont
Kurt F. Viermetz          Jean O. Facon            Barrett R. Petty        Charles C. O'Brien            S. Luke L. Ellis
Vice Chairmen of the      Kathleen M. Fisher       Werner C. Pfaffenberger Sheila J. O'Connell           James R. English
  Board                   John A. Forlines III     Howard F. Powers Jr.    John A. Payne                 Simon W.P. Flannery
                          Allen R. Friedman        P. Preben Prebensen     Joseph A. Sabatini            John B. Fullerton
CLIENTS                   Ronald T. Gault          Roberta J. Puschel      Mary E. Watkins               James J. Fuschetti
INVESTMENT BANKING        S. Lane Genatowski       Pascal J. Ravery                                      Michael F. Gambardella
Walter A. Gubert          Michael P. George        Gail M. Rogers          EMERGING MARKETS              Peter H. Gleason
Thomas B. Ketchum         Jean-Marc Georgy         James P. Rutherfurd     COMMODITIES                   Robert S. Hanft
Peter L. Woicke           John B. Goodwin Jr.      T. Timothy Ryan Jr.     FOREIGN EXCHANGE              Meryl D. Hartzband
Jacques G. Aigrain        James M. Grant           Purna R. Saggurti       Nicolas S. Rohatyn            Carlos M. Hernandez
Yasukazu Aiuchi           Alfredo D. Gutierrez     Jaime Salaverri         Frank B. Arisman              Mark A. Husson
Eric Altman               Gregory L. Guyett        Stephen Schaible        Anthony J. Best               Sharon H. Jacquet
Jan A. Amethier           James L. Hamilton Jr.    Weijian Shan            John G. Caccavale             Daniel R. Kunstler
Victor M. Arbulu          Henry Harnischfeger      Dag J. Skattum          Petros Christodoulou          Edward F. Mc Cartin
Martin R. Atkin           Maureen A. Hendricks     Stephen S. Sloan        John J. Coulter               Charles C. Mountain
Peter E. Baccile          Peter J. Hill            Damon P. Smith III      Jose Luiz Daza                Brian T. Murphy
Stefano Balsamo           Herman Hintzen           Robert Sroka            Ian R. Dubugras Jr.           Catherine L. Murray
Lloyd Bankson             Henry W. Howell          Michael W. Szeto        Patrick du Pre de Saint-Maur  Nirmal P. Narvekar
Christophe J. Bataillard  Herve Huas               Jackson P. Tai          Goetz Eggelhoefer             Martin L. O'Neil
Thaddeus T. Beczak        Yong-Hak Huh             Francis J. Tellier      Stephanie E. Ercegovic        Bintoar Palar
David A. Behnke           Gabriella Z. Icaza       Xavier Tintore          Peter F. Frey                 Timothy Purcell
Carl J. Bergendahl        Christian Jacobs         Shu Tomioka             Miguel Gutierrez              Thomas S. Quinn III
Enrico M. Bombieri        Rondy E. Jennings        Hiromichi Tsubouchi     Christopher L. Harvey         William D. Rabin
Willard S. Boothby III    John B. Jetter           Georges Van Erck        Thorkild P. Juncker           Thomas P. Reagan
Jonathan R. Brown         Gregg Johnston           Joseph A. Walker        Elizabeth L. Littlefield      Clayton S. Rose
Henry I. Bryant           Eric D. Karp             William F. Wallace      Richard S. Luddington         Declan K. Sheehan
P. Nicolas Carlisle       Toshihide Kawashima      Tira Wannamethee        Arthur S. Magnus              Nicholas E. Snee
Francis P. Carr           Edward J. Kelly III      Raymond N. Wareham      Jorge A. Maortua              Thomas M. Snell
Octavio Castello Branco   Stephen C. Kirmse        David B. Weir           Jose A. Mc Loughlin           Charles P. Soderstrom
Eduardo F. Cepeda         John D. Langlois         James A. Wethered       Guido A. Mosca                James E. Staley
Rowena W. Chu             W. David Lawson IV       David L. White          Kurt Muehlbauer               Rene Vanguestaine
Ian M. Clark              Robin A. Lawther         Deborah M. Winshel      Klaus T. Said                 Nancy S. Voye
Peter T. Clarke           Jin-Yi Lee               Jon H. Zehner           Cara L. Schnaper              Brian F. Watson
Pierre Colin              John W. Littlefield Jr.                          Stephen A. Sinacore           Christian Zugel
Cezar P. Consing          Dianne F. Lob            CREDIT                  Glenn J. Smith             
David H. Courtney         Michael C. Lobdell       Joseph P. MacHale       Thomas H. Smith               EUROCLEAR
Clifford S. Cramer        Benjamin B. Lopata       Roger B. Arner          Jakob T. Stott                Luc Bomans
William F. Cruger         Claus Lowe               Barbara J. Asch         Maria A. Trigo de Rosetti     Santina Bernardi
Guillaume D'Angerville    Charles F. Lowrey Jr.    Santiago Assalini       Joseph C. Willing             Ignace Combes
   D'Auvrecher            C.H. Randolph Lyon       William R. Barrett Jr.  Jeanette K. Wong              Erwin De Keyzer
Antoinette Daridan        Russell A. Mannis        Wesley R. Brooks                                      Richard Evans
Olivier J. de Grivel      Michael C. Mc Call       Bruce N. Carnegie-Brown EQUITIES                      Michael Fleming
William R. de Jonge       Ferrell P. Mc Clean      Timothy R. Elliott      EQUITY INVESTMENTS            Pierre Francotte
Susana M. de la Puente    John K. Mc Colloch       Martha J. Gallo         Ramon de Oliveira             Martine Patureau
David H. Deming           Kenneth S. Mc Cormick    Michael J. Gibbons      Joseph Anastasio              Pierre Slechten
Jim H. Derryberry         Benjamin Meuli           Elizabeth R. Gile       Edward C. Archer              Anne Swaelus
Klaus Diederichs          Terry R. Mills           David W. Godfrey        Molly F. Ashby                Gilbert Swinkels
Adrian W. Doherty Jr.     Marco Morelli                                    Albert C. Bashawaty           Andrew Threadgold
                          D. Leslie A. Morrison                            Carol Bell                    Yannic Weber
                          Guy Moszkowski                                   Stephen A. Berenson        
                                                                           Seth P. Bernstein          
                                                                           David Bradley 

</TABLE>
    
102



<PAGE>   105
<TABLE>
<S>                        <C>                      <C>                         <C>                         <C>
FIXED INCOME               Robert D. Birnbaum       Susan E. Ulick              Giovanni Gorno Tempini      Robert McGinn
FUTURES AND OPTIONS        Jean L. Brunel           Gilbert Van Hassel          Michael J. Henderson        Rachel F. Robbins
Peter D. Hancock           Andrew J. Canning        Hendrick Van Riel           Maureen R. Lee              David J. Schraa
Thomas J. Aylward IV       Henry D. Cavanna         William D. Walker           Pierre Lenders              Hildy J. Simmons
Terrence M. Belton         John C. Chigounis        William L. Warner           Lazaros P. Mavrides         Ernest Stern
Richard D. Berliand        William L. Cobb Jr.      Kurt J. Wolfgruber          Colin W.P. McKechnie        Debra F. Stone
Eric Bertrand              Warren K. Corning        Gerd Woort-Menker           Constantin E. Megiris       Cory N. Strupp
Mark C. Brickell           Richard S. Davis         Paul L. Zemsky              Hubert Penot
Bart J. Broadman           Douglas J. Dooley        Philipp M. Zenz-Spitzweg    Georges-Arnaud Saier        ECONOMIC RESEARCH
Margaret A. Brody          Roger L. Du Bois                                     Peter T. Schwicht           William A. Brown
Robert S. Butler           Christopher J. Durbin    PRIVATE CLIENTS             Guy Van Pelt                Philip J. Suttle
Russell Church             Douglas M. Fleming       John T. Olds                
Alan R. Collins            Pablo Forero             Sean A. Amery               SECURITIES SERVICES         FINANCIAL
Thomas C. Connor           Gordon B. Fowler Jr.     Carlos M. Arias             Charlton H. Chatfield       John A. Mayer Jr.
Joseph P. Cook             L. George Gardella       Susan G. Bell               Jean M. Pellegrini          Deborah L. Cuny
John R. Corrie             Stephen R. Goldman       Saumyendra Bhattacharya                                 Michael P. D'Angelo
Louis Dehler               Michael R. Granito       Thomas R. Boehlke           AUDIT                       Richard Johnson
William S. Demchak         Evelyn E. Guernsey       Ann D. Borowiec             Edward F. Murphy            Patricia A. Jones
Amin H. Ezz Al-Arab        Andrew Harmstone         David D. Burrows            Bonnie L. Howard            Allan B. Lubarsky
Jeanne V. Feldhusen        Timothy J. Heise         Didier Cherpitel            Mark L. Kay                 Dean R. Miller
Alain L. Grisay            Paul Hicks Jr.           Joel I. Cohen               Edmond J. Sannini           Louis Rauchenberger
Thomas F. Hagerstrom       Pieter Hoets             Philippe Damas              Joel Tancer                 David H. Sidwell
Stephen D. Heard           Martyn C. Hole           Herve de Montlivault                                    Stephen M. Skoczylas
Paul J. Hearn              Robert Holland           Daniel W. Drake             CORPORATE RISK MANAGEMENT   Gareth G. Stephens
Rachel Hines               Alistair Jessiman        John R. Duffy               Stephen G. Thieke           Edmund H. Sutton
Adam H. Howard             Arthur J. Kalita         Benoit H. Dumont            Marc E. Berman
Robert J. Hugin            Dennis M. Kass           Walter L. Fabricius         Kyung Hee A. Choi           HUMAN RESOURCES
Mary L. Hustings           Ivan Kerno               Daniel M. Fitzpatrick       James R. Helvey III         Herbert J. Hefke
Philippe K. Khuong-Huu     Adrian Lee               John A. Gent                Alastair I. Hunter-         Thomas R. Bain
Fawzi S. Kyriakos-Saad     Rudolph Leuthold         Martyn E. Goossen              Henderson                James P. Baughman
Richard G. Leibovitch      Gerard W. Lillis         Stephanie S. Hanbury-Brown  Charles R. Monet            John F. Bradley       
Martin K. Matsui           Geoffrey M. Lindey       Owen H. Harper              David L. Roscoe III         Gerard G. Cameron II
James W. McAleenan         Thomas M. Luddy          James H. Higgins III        Stephen A. Tyler            Barbara M. Hack
Richard M. McVey           Thomas P. Madsen         David A. Kelso                                          Nancy B. Harwood
David L. Meyer             Robert J. Miller         Chase W. Landreth           CORPORATE SERVICES          C. Dixon Kunzelmann
Stephen Miller             Jorg A. Mitterer         Javier Muguiro              Ronald H. Menaker           Christopher R. Lowney
T. Kelley Millet           Thruston B. Morton III   R. Scott Nycum Jr.          John G. Daniello            Isabel H. Sloane
Michael J. Moore           Patrick J. Murphy        J. Edward Odegaard          Theodore V. Farace          Cecilia Y. Tsim
John P. Mullen             Fredric A. Nelson III    William L. Oullin           Derek G. Hall               Andrew O. Watson
Satoshi Nagase             Lisa J. Oram             Elizabeth J. Patrick        Brian S. Howells
Kenichi Noguchi            James B. Otness          Bruce T. Prolow             William J. Kelly            STRATEGIC PLANNING
David M. Pryde             Marian U. Pardo          Susan G. Restler            William J. Schneider        John A. Mayer Jr.
Eunice T. Reich-Berman     Wesley I. Paul           David B. Robb Jr.           David W. Singleton          David H. Brigstocke
Robert L. Rossman          William B. Petersen      George W. Rowe              Richard Speciale
John G. Stathis            Connie J. Plaehn         Nicholas P. Sargen          John J. Vahey               TECHNOLOGY & OPERATIONS
David J. Theobald          Judith J. Plows          John W. Schmidlin                                       Michael Enthoven
Charles M. Trunz III       William M. Riegel Jr.    Robert G. Simon             CORPORATE STAFF             Michael A. Azarian
Alice Wang                 Roger A. Sayler          Debra B. Treyz              Charles A. Alexander        Malcolm J. Beane
Mark B. Werner             Mark A. Sheridan         Alexander G. Zaharoff       Donald R. Brunner           John Carlisle
William T. Winters         Terry Shu                                            Laura W. Dillon             Charles P. Costa
Alain Younes               Guenther P. Skrzypek     PROPRIETARY POSITIONING     Travis F. Epes              Penelope A. Flugger
Peter P. Zuppinger         Laurence R. Smith        Pilar Conde                 John W. Field Jr.           Kenneth C. Fuller
                           M. Steven Soltis         Michael R. Corey            Diane M. Genova             Christophe E. Hioco
INVESTMENT MANAGEMENT      Yukiko Sugimoto          Christopher C. Belchamber   Dominique George            Pamela V. Huttenberg
Keith M. Schappert         Robert J. Teatom         Douglas A. Dachille         Dennis C. Hensley           Thomas F. Hynd
Kenneth W. Anderson        John R. Thomas           Kim E. Fox-Moertl           Hugh T. Kemper              James F. Krass
Robert A. Anselmi                                   Takeshi Fujimaki            Stephen E. Kowitt           Peter A. Miller
Joseph K. Azelby                                                                                            Veronique Weill
Keith T. Banks                                                                                              Olivia C. Wyer
                      

</TABLE>



                                                                     103
<PAGE>   106
J.P. MORGAN DIRECTORY
Principal subsidiaries and offices - wholly owned except where noted

NORTH AMERICA

NEW YORK
J.P. Morgan & Co. Incorporated
Morgan Guaranty Trust Company of New York
J.P. Morgan Securities Inc.
J.P. Morgan Investment Management Inc.
J.P. Morgan Futures Inc.
J.P. Morgan Capital Corporation
J.P. Morgan Community Development Corporation

BOSTON
J.P. Morgan Securities - Boston office

CHICAGO
J.P. Morgan & Co. - Chicago office
J.P. Morgan Securities - Chicago office
J.P. Morgan Futures - Chicago office
J.P. Morgan Trust Company of Illinois
Morgan Guaranty - representative office

HOUSTON
J.P. Morgan Securities - Houston office
J.P. Morgan Investment Management -
  Houston office

LOS ANGELES
Morgan Guaranty - representative office
J.P. Morgan - Los Angeles office
J.P. Morgan California
J.P. Morgan Investment Management -
  Los Angeles office

NEWARK, DELAWARE
Morgan Guaranty - banking office
J.P. Morgan Services Inc.
J.P. Morgan Overseas Capital Corporation
Morgan Guaranty International Finance
  Corporation

PALM BEACH
J.P. Morgan Florida, FSB
J.P. Morgan Securities - Palm Beach office

PHILADELPHIA
Morgan Guaranty - limited purpose banking office

SAN FRANCISCO
J.P. Morgan & Co. -  San Francisco office
Morgan Guaranty - representative office
J.P. Morgan California - San Francisco office
J.P. Morgan Capital -  San Francisco office
J.P. Morgan Futures - San Francisco office
J.P. Morgan Securities - San Francisco office

WASHINGTON, DC
J.P. Morgan Securities - Washington office

WILMINGTON
Morgan Guaranty - banking office
J.P. Morgan Trust Company of Delaware

TORONTO
J.P. Morgan Canada
J.P. Morgan Securities Canada Inc.

NASSAU
Morgan Guaranty - banking office
Morgan Trust Company of The Bahamas Limited

CAYMAN ISLANDS
Morgan Fonciere Cayman Islands Ltd.
Morgan Trust Company of the Cayman Islands Ltd.


EUROPE

LONDON
Morgan Guaranty - banking and private
  banking offices
J.P. Morgan Securities Ltd.
J.P. Morgan Sterling Securities Ltd.
J.P. Morgan Investment Management -
  London office
J.P. Morgan Whitefriars Inc.

AMSTERDAM
J.P. Morgan Nederland N.V.

BRUSSELS
Morgan Guaranty - banking office
J.P. Morgan Benelux S.A./N.V.
Euroclear Operations Centre+

FRANKFURT
Morgan Guaranty - banking office
J.P. Morgan GmbH
J.P. Morgan Investment GmbH
J.P. Morgan Investment Management Inc.
J.P. Morgan Holding Deutschland GmbH

GENEVA
J.P. Morgan (Suisse) S.A.

MADRID
Morgan Guaranty - banking and private
  banking offices
Morgan Gestion, S.A.
J.P. Morgan Espana S.A.
J.P. Morgan Iberica S.L.
J.P. Morgan Sociedad de Valores y Bolsa, S.A.

MILAN
Morgan Guaranty - banking office
J.P. Morgan S.p.A.
J.P. Morgan Fondi Italia S.p.A.

PARIS
Morgan Guaranty - banking and private
  banking offices
J.P. Morgan & Cie S.A.
Societe de Bourse J.P. Morgan S.A.

PRAGUE
J.P. Morgan International Ltd.

ROME
Morgan Guaranty - representative office

WARSAW
J.P. Morgan Polska Sp. z o.o.

ZURICH
Morgan Guaranty - banking office


AFRICA

JOHANNESBURG
J.P. Morgan Securities South Africa
  (Proprietary) Limited

  *50% owned
 **40% owned
  +operated by J.P. Morgan


104
<PAGE>   107
J.P. MORGAN DIRECTORY (continued)
Principal subsidiaries and offices - wholly owned except where noted

ASIA PACIFIC

TOKYO
Morgan Guaranty - banking and private
  banking offices
J.P. Morgan Investment Management -
  Tokyo office
J.P. Morgan Trust Bank Ltd.
J.P. Morgan Securities Asia* - Tokyo office

BANGKOK
J.P. Morgan Securities Asia* - representative office

BEIJING
J.P. Morgan & Co. - representative office

BOMBAY
ICICI Asset Management Company Limited**
ICICI Securities and Finance Company Limited**

HONG KONG
Morgan Guaranty - banking and private
  banking offices
J.P. Morgan Futures Hong Kong Ltd.
J.P. Morgan Securities Hong Kong Ltd.
J.P. Morgan International Capital - Hong
   Kong office
J.P. Morgan Securities Asia* - Hong Kong office

JAKARTA
Morgan Guaranty - representative office

MANILA
Morgan Guaranty - representative office

MELBOURNE
Morgan Guaranty - banking office
J.P. Morgan Australia Limited
J.P. Morgan Investment Management
  Australia Limited
J.P. Morgan Australia Securities Limited

OSAKA
J.P. Morgan Securities Asia* - Osaka office

SEOUL
Morgan Guaranty - representative office
J.P. Morgan Securities Asia* - representative office

SHANGHAI
J.P. Morgan & Co. - representative office

SINGAPORE
Morgan Guaranty - banking and private
  banking offices
J.P. Morgan Securities Asia Ltd.*
J.P. Morgan Futures - Singapore office
J.P. Morgan International Capital Corporation - Singapore office
J.P. Morgan Investment Management -
  Singapore office

SYDNEY
Morgan Guaranty - banking office
J.P. Morgan Australia - Sydney office
J.P. Morgan Australia Securities - Sydney office

TAIPEI
Morgan Guaranty - representative office
J.P. Morgan Securities Asia* - representative office


LATIN AMERICA

BUENOS AIRES
Morgan Guaranty - banking office
J.P. Morgan Argentina Sociedad de Bolsa S.A.

CARACAS
J.P. Morgan Venezuela, S.A.

LIMA
Morgan Guaranty - representative office

MEXICO CITY
Morgan Guaranty - representative office
J.P. Morgan Grupo Financiero, S.A. de C.V.
J.P. Morgan Casa de Bolsa, S.A. de C.V.
Banco J.P. Morgan, S.A.

RIO DE JANEIRO
Morgan Guaranty - banking office
Banco J.P. Morgan, S.A. - Rio de Janeiro office
JPM Corretora de Cambio, Titulos e Valores
  Mobiliarios - Rio de Janeiro office
J.P. Morgan Investimentos e Financas -
  Rio de Janeiro office

SANTIAGO
J.P. Morgan Chile Ltda.

SAO PAULO
Morgan Guaranty - banking office Banco J.P. Morgan, S.A.
JPM Corretora de Cambio, Titulos e Valores Mobiliarios S.A.
J.P. Morgan Investimentos e Financas Ltda.


  *50% owned
 **40% owned
  +operated by J.P. Morgan


                                                                             105
<PAGE>   108
BOARD OF DIRECTORS
J.P. Morgan & Co. Incorporated

DOUGLAS A. WARNER III
Chairman of the Board
Chief Executive Officer



RILEY P. BECHTEL
Chairman and Chief Executive Officer
Bechtel Group, Inc.

MARTIN FELDSTEIN
President and Chief Executive Officer
National Bureau of Economic Research, Inc.

HANNA H. GRAY
President Emeritus and Harry Pratt Judson
Distinguished Service Professor of History
The University of Chicago

JAMES R. HOUGHTON
Retired Chairman of the Board
Corning Incorporated

JAMES L. KETELSEN
Retired Chairman and Chief Executive Officer
Tenneco Inc.

JOHN A. KROL
President and Chief Executive Officer
E.I. du Pont de Nemours and Company

ROBERTO G. MENDOZA
Vice Chairman of the Board

MICHAEL E. PATTERSON
Vice Chairman of the Board

LEE R. RAYMOND
Chairman of the Board and
Chief Executive Officer
Exxon Corporation

RICHARD D. SIMMONS
Retired President
The Washington Post Company and
International Herald Tribune

KURT F. VIERMETZ
Vice Chairman of the Board

DENNIS WEATHERSTONE
Retired Chairman of the Board

DOUGLAS C. YEARLEY
Chairman, President, and
Chief Executive Officer
Phelps Dodge Corporation

COMMITTEES OF THE BOARD

EXECUTIVE COMMITTEE
J.P. MORGAN AND MORGAN GUARANTY
Messrs. Warner (Chairman), Houghton,
Mendoza, Patterson, Viermetz, Weatherstone

AUDIT COMMITTEE
J.P. MORGAN
EXAMINING COMMITTEE
MORGAN GUARANTY
Messrs. Ketelsen (Chairman), Feldstein, Krol,
Yearley

COMMITTEE ON TRUST MATTERS
J.P. MORGAN
Dr. Gray (Chairman), Messrs. Ketelsen, Simmons

COMMITTEE ON MANAGEMENT DEVELOPMENT AND
EXECUTIVE COMPENSATION
J.P. MORGAN
Messrs. Houghton (Chairman), Bechtel, Raymond

COMMITTEE ON DIRECTOR NOMINATIONS AND
BOARD AFFAIRS
J.P. MORGAN
Mr. Raymond (Chairman), Dr. Gray, Mr. Yearley

COMMITTEE ON EMPLOYMENT POLICIES
AND BENEFITS
MORGAN GUARANTY
Messrs. Simmons (Chairman), Feldstein, Weatherstone


106
<PAGE>   109
INTERNATIONAL COUNCIL
J.P. Morgan & Co. Incorporated

Formed in 1967 and composed of business leaders and prominent individuals from
public life, the International Council advises the senior management of
J.P.Morgan on matters relating to its global business. It meets approximately
every eight months to discuss relevant issues of international concern and
interest.

      The Hon. Bill Bradley was named Vice Chairman of the Council and Miguel
Etchenique became a member early in 1997.

HON. GEORGE P. SHULTZ
Chairman of the Council
Distinguished Fellow, Hoover Institution
Stanford University
Stanford, California

HON. BILL BRADLEY
Vice Chairman of the Council
Former U.S. Senator
Montclair, New Jersey



MOHAMMED ABALKHAIL
Former Minister of Finance and Economy
Kingdom of Saudi Arabia
Riyadh, Saudi Arabia

ROBERT E. ALLEN
Chairman and Chief Executive Officer
AT&T Corporation
Basking Ridge, New Jersey

BO BERGGREN
Chairman
Stora Kopparbergs Bergslags AB
Stockholm, Sweden

JORGE BORN
President
Bomagra S.A.
Buenos Aires, Argentina

LAWRENCE A. BOSSIDY
Chairman and Chief Executive Officer
AlliedSignal Inc.
Morristown, New Jersey

ING. CARLO DE BENEDETTI
Chairman
CIR S.p.A.
Milan, Italy

H. MIGUEL ETCHENIQUE
Chairman of the Board and President
Brasmotor S.A.
Sao Paulo, Brazil

SIR CHRISTOPHER HOGG
Chairman
Reuters Holdings PLC
London, England

THE RT. HON. THE LORD HOWE OF
Aberavon, PC, QC
House of Lords
London, England

DURK I. JAGER
President and Chief Operating Officer
The Procter & Gamble Company
Cincinnati, Ohio

ALAIN A. JOLY
Chairman and Chief Executive Officer
L'Air Liquide S.A.
Paris, France

DEREK L. KEYS
Executive Director
Gencor Limited
Johannesburg, South Africa

YOTARO KOBAYASHI
Chairman and Chief Executive Officer
Fuji Xerox Co., Ltd.
Tokyo, Japan

HON. LEE KUAN YEW
Senior Minister
Singapore

CARLOS MARCH
Chairman
The March Group
Madrid, Spain

HELMUT O. MAUCHER
Chairman and Chief Executive Officer
Nestle S.A.
Vevey, Switzerland

KARL OTTO POHL
Partner
Sal. Oppenheim Jr. & Cie.
Frankfurt, Germany

JOHN B. PRESCOTT
Managing Director and Chief Executive Officer
The Broken Hill Proprietary Company Ltd.
Melbourne, Australia

CONDOLEEZZA RICE
Provost
Stanford University
Stanford, California

JURGEN E. SCHREMPP
Chairman of the Board of Management
Daimler-Benz AG
Stuttgart, Germany

JESS SODERBERG
Partner and Chief Executive Officer
A.P. Moller
Copenhagen, Denmark

DENNIS WEATHERSTONE
Retired Chairman
J.P. Morgan & Co. Incorporated
New York, New York

L.R. WILSON
Chairman and Chief Executive Officer
BCE Inc.
Montreal, Canada


                                                                             107
<PAGE>   110
DIRECTORS ADVISORY COUNCIL
Morgan Guaranty Trust Company of New York

The Directors Advisory Council of Morgan Guaranty Trust Company, whose members
are retired directors of J.P. Morgan, provides counsel to management and the
Board.

ELLMORE C. PATTERSON
Chairman
Directors Advisory Council
Retired Chairman
J.P. Morgan & Co. Incorporated



RALPH E. BAILEY
Former Vice Chairman
E.I. du Pont de Nemours and Company
and Retired Chairman and Chief Executive Officer
Conoco Inc.

BORIS S. BERKOVITCH
Retired Vice Chairman
J.P. Morgan & Co. Incorporated

JAMES O. BOISI
Retired Vice Chairman
J.P. Morgan & Co. Incorporated

CARTER L. BURGESS

FRANK T. CARY
Retired Chairman of the Board
International Business Machines Corporation

CHARLES D. DICKEY JR.
Retired Chairman of the Board
Scott Paper Company

WALTER A. FALLON
Former Chairman of the Board
Eastman Kodak Company

LEWIS W. FOY
Former Chairman
Bethlehem Steel Corporation

HOWARD GOLDFEDER
Retired Chairman and Chief Executive Officer
Federated Department Stores, Inc.

JOHN J. HORAN
Former Chairman and Chief Executive Officer
Merck & Co., Inc.

HOWARD W. JOHNSON
President Emeritus and Former
Chairman of the Corporation
Massachusetts Institute of Technology

EDWARD R. KANE
Former President
E.I. du Pont de Nemours and Company

RALPH F. LEACH
Retired Chairman of the Executive Committee
J.P. Morgan & Co. Incorporated

ROBERT V. LINDSAY
Retired President
J.P. Morgan & Co. Incorporated

HOWARD J. MORGENS
Chairman Emeritus
The Procter & Gamble Company

WALTER H. PAGE
Retired Chairman
J.P. Morgan & Co. Incorporated

DEWITT PETERKIN JR.
Retired Vice Chairman
J.P. Morgan & Co. Incorporated

DONALD E. PROCKNOW
Former Vice Chairman and Chief Operating Officer
AT&T Technologies, Inc.

THOMAS RODD
Retired Vice Chairman
J.P. Morgan & Co. Incorporated

JOHN P. SCHROEDER
Retired Vice Chairman
J.P. Morgan & Co. Incorporated

WARREN M. SHAPLEIGH
Retired Vice Chairman of the Board
Ralston Purina Company

JOHN G. SMALE
Chairman of the Executive Committee of the Board
General Motors Corporation
and Retired Chairman of the Board and Chief Executive Officer
The Procter & Gamble Company

OLCOTT D. SMITH
Retired Chairman
Aetna Life and Casualty Company

                                         (C) 1997 J.P. Morgan & Co. Incorporated
                                             Printed in USA on recycled paper.


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CORPORATE INFORMATION

     CORPORATE HEADQUARTERS

     J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260-0060,
     1-212-483-2323

     ANNUAL MEETING

     The annual meeting of stockholders of J.P. Morgan will be held on
     Wednesday, May 14, 1997, at 11:00 a.m. in Morgan Hall West, 46th floor, 60
     Wall Street, New York.

     LISTING

     The common stock of J.P. Morgan is listed on the New York, Amsterdam,
     London, Paris, Swiss, and Tokyo stock exchanges. International Depositary
     Receipts for the stock are listed on the Brussels and London stock
     exchanges. NYSE symbol: JPM

     The Adjustable Rate Cumulative Preferred Stock, Series A of J.P. Morgan is
     listed on the New York Stock Exchange. NYSE symbol: JPM Pr A

     Depositary shares representing a one-tenth interest in 6-5/8% Cumulative
     Preferred Stock, Series H of J.P. Morgan are listed on the New York Stock
     Exchange. NYSE symbol: JPM Pr H

     TRANSFER AGENT AND REGISTRAR

     Common Stock, Adjustable Rate Cumulative Preferred Stock, Series A,
     Depositary shares on 6-5/8% Cumulative Preferred Stock, Series H:

     First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, NJ
     07303-2500, 1-800-519-3111

     Variable Cumulative Preferred Stock, Series B through F:

     Bankers Trust Company, 4 Albany Street, 7th floor, New York, NY 10006-1500,
     1-212-250-6850

     FORM 10-K

     J.P. Morgan's Annual report on Form 10-K as filed with the Securities and
     Exchange Commission is incorporated in this report.

     DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN

     Stockholders wishing to receive a prospectus for the dividend reinvestment
     and stock purchase plan are invited to write to First Chicago Trust Company
     of New York, J.P. Morgan Dividend Reinvestment Plan, P.O. Box 2500, Jersey
     City, NJ 07303-2500, or call 1-800-519-3111.

     1996 ANNUAL REVIEW
     REPORT ON CONTRIBUTIONS

     For a copy of J.P. Morgan's 1996 Annual review, the companion publication
     to this Annual report, or for a report on J.P. Morgan's philanthropic
     activities in 1996, write to Corporate Communication - Publications, J.P.
     Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260-0060, or call
     (1-212) 648-9607.

     CONTACTS

     Investor Relations: 1-212-648-9446
     Media Relations: 1-212-648-9553

     Please visit us on the Internet: www.jpmorgan.com

     EQUAL OPPORTUNITY AT J.P. MORGAN

     J.P. Morgan is committed to providing equal opportunity in the workplace.
     The company, through this commitment, benefits from the full use and
     development of its employees.


                                                                             109
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J.P. Morgan & Co. Incorporated
60 Wall Street
New York, NY 10260-0060
1-212-483-2323
<PAGE>   113

                                GRAPHIC INDEX


PAGE 13
(1) Depicted on page 13 is a timeline of Daily Earnings at Risk for our
combined trading activities for each business day in 1995 and 1996, as well as
the average quarterly DEaR, in millions of dollars, for each quarter of 1995
and 1996.  For 1995, in millions of dollars, the high was $31, the low was $11,
the average was $19, and the period end amount was $27.  For 1996, in millions
of dollars, the high was $28, the low was $13, the average was $21, and the
period end amount was $27.


PAGE 14
(1) Depicted on page 14 is a histogram showing the frequency distribution of
1996 daily combined trading-related revenue generated by our trading
businesses, in millions of dollars.