---



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For Quarter Ended March 31, 2003



Commission File Number 1-6512



---



AIRBORNE, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                 |  | 91-2065027                       
|---------------------------------------- |  | ---------------------------------
|(State of incorporation or organization) |  | (IRS Employer Identification No.)



3101
Western Avenue

P.O. Box 662

Seattle, Washington 98111-0662

(Address of Principal Executive
Office)



Registrants telephone
number, including area code: (206) 285-4600



---



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



Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes:  x    No: ̈



Indicate the number of shares outstanding of each of the issuers classes of common stock as of the close of the period covered by this report.



|Common Stock, par value $1 per share                                |  |                  
|------------------------------------------------------------------- |  | -----------------
|Outstanding (net of 3,228,526 treasury shares) as of March 31, 2003 |  | 48,450,991 shares



---



---

FORWARD LOOKING STATEMENTS



Statements contained in this quarterly report on Form 10-Q,
which are not historical facts, are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements are based on expectations, estimates and projections as of
the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described
in this report or in Risk Factors contained in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2002.



---

PART I. FINANCIAL INFORMATION



Item 1.Financial Statements



AIRBORNE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)



|                                    |  | Three Months EndedMarch 31 |        
|----------------------------------- |  | -------------------------- | -------
|                                    |  | 2003                       |        
|REVENUES:                           |  |                            |        
|Domestic                            |  | $                          | 744,395
|International                       |  |                            | 80,475 
|                                    |  |                            |        
|                                    |  |                            | 824,870
|OPERATING EXPENSES:                 |  |                            |        
|Transportation purchased            |  |                            | 265,536
|Station and ground operations       |  |                            | 279,488
|Flight operations and maintenance   |  |                            | 142,143
|General and administrative          |  |                            | 72,992 
|Sales and marketing                 |  |                            | 21,774 
|Depreciation and amortization       |  |                            | 44,442 
|Federal legislation compensation    |  |                            | 650    
|                                    |  |                            |        
|                                    |  |                            | 827,025
|                                    |  |                            |        
|EARNINGS (LOSS) FROM OPERATIONS     |  |                            | (2,155 
|OTHER INCOME (EXPENSE):             |  |                            |        
|Interest income                     |  |                            | 1,096  
|Interest expense                    |  |                            | (7,179 
|Discount on sales of receivables    |  |                            | (1,059 
|Other                               |  |                            | (64    
|                                    |  |                            |        
|EARNINGS (LOSS) BEFORE INCOME TAXES |  |                            | (9,361 
|INCOME TAX (EXPENSE) BENEFIT        |  |                            | 3,773  
|                                    |  |                            |        
|NET EARNINGS (LOSS)                 |  | $                          | (5,588 
|                                    |  |                            |        
|EARNINGS (LOSS) PER SHARE:          |  |                            |        
|PER BASIC SHARE                     |  | $                          | (0.12  
|                                    |  |                            |        
|PER DILUTED SHARE                   |  | $                          | (0.12  
|                                    |  |                            |        
|DIVIDENDS PER SHARE                 |  | $                          | 0.04   
|                                    |  |                            |        



See notes
to consolidated financial statements.



1



---

AIRBORNE, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



|                                                                 |  | March 31, 2003 |           |   | December 31, 2002 |  
|---------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | -
|                                                                 |  | (Unaudited)    |           |   |                   |  
|ASSETS                                                           |  |                |           |   |                   |  
|CURRENT ASSETS:                                                  |  |                |           |   |                   |  
|Cash and cash equivalents                                        |  | $              | 327,060   |   |                   | $
|Restricted cash                                                  |  |                | 51,430    |   |                   |  
|Trade accounts receivable, less allowance of $14,259 and $13,616 |  |                | 153,268   |   |                   |  
|Spare parts and fuel inventory                                   |  |                | 38,239    |   |                   |  
|Refundable income taxes                                          |  |                | 1,288     |   |                   |  
|Deferred income tax assets                                       |  |                | 37,787    |   |                   |  
|Prepaid expenses and other                                       |  |                | 35,466    |   |                   |  
|                                                                 |  |                |           |   |                   |  
|TOTAL CURRENT ASSETS                                             |  |                | 644,538   |   |                   |  
|PROPERTY AND EQUIPMENT, NET                                      |  |                | 1,191,692 |   |                   |  
|OTHER ASSETS                                                     |  |                | 47,347    |   |                   |  
|                                                                 |  |                |           |   |                   |  
|TOTAL ASSETS                                                     |  | $              | 1,883,577 |   |                   | $
|                                                                 |  |                |           |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                             |  |                |           |   |                   |  
|CURRENT LIABILITIES:                                             |  |                |           |   |                   |  
|Accounts payable                                                 |  | $              | 147,831   |   |                   | $
|Salaries, wages and related taxes                                |  |                | 100,423   |   |                   |  
|Accrued expenses                                                 |  |                | 150,709   |   |                   |  
|Income taxes payable                                             |  |                |          |   |                   |  
|Current portion of long-term obligations                         |  |                | 11,290    |   |                   |  
|                                                                 |  |                |           |   |                   |  
|TOTAL CURRENT LIABILITIES                                        |  |                | 410,253   |   |                   |  
|LONG-TERM OBLIGATIONS                                            |  |                | 370,844   |   |                   |  
|DEFERRED INCOME TAX LIABILITIES                                  |  |                | 146,199   |   |                   |  
|POSTRETIREMENT LIABILITIES                                       |  |                | 59,853    |   |                   |  
|OTHER LIABILITIES                                                |  |                | 64,011    |   |                   |  
|                                                                
|COMMITMENTS AND CONTINGENCIES                                    |  |                |           |   |                   |  
|                                                                
|SHAREHOLDERS EQUITY:                                            |  |                |           |   |                   |  
|Preferred stock, without par value                              |  |                |           |   |                   |  
|Authorized 6,000,000 shares, no shares issued                    |  |                |           |   |                   |  
|Common stock, par value $1 per share                            |  |                |           |   |                   |  
|Authorized 120,000,000 shares                                    |  |                |           |   |                   |  
|Issued 51,679,517 and 51,657,886 shares                          |  |                | 51,680    |   |                   |  
|Additional paid-in capital                                       |  |                | 309,491   |   |                   |  
|Retained earnings                                                |  |                | 539,883   |   |                   |  
|Accumulated other comprehensive loss                             |  |                | (8,788    | ) |                   |  
|                                                                 |  |                |           |   |                   |  
|                                                                 |  |                | 892,266   |   |                   |  
|Treasury stock, 3,228,526 and 3,234,526 shares, at cost          |  |                | (59,849   | ) |                   |  
|                                                                 |  |                |           |   |                   |  
|                                                                 |  |                | 832,417   |   |                   |  
|                                                                 |  |                |           |   |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                       |  | $              | 1,883,577 |   |                   | $
|                                                                 |  |                |           |   |                   |  



See notes
to consolidated financial statements.



2



---

AIRBORNE, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                                           |  | Three Months Ended March 31, |        
|------------------------------------------------------------------------------------------ |  | ---------------------------- | -------
|                                                                                           |  | 2003                         |        
|OPERATING ACTIVITIES:                                                                      |  |                              |        
|Net earnings (loss)                                                                        |  | $                            | (5,588 
|Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities: |  |                              |        
|Depreciation and amortization                                                              |  |                              | 44,442 
|Deferred income taxes                                                                      |  |                              | (5,465 
|Postretirement obligations                                                                 |  |                              | 13,634 
|Casualty insurance                                                                         |  |                              | 1,861  
|Other                                                                                      |  |                              | (54    
|Change in assets and liabilities:                                                          |  |                              |        
|Restricted cash                                                                            |  |                              | (15,097
|Trade accounts receivable                                                                  |  |                              | 16,612 
|Inventories and prepaid expenses                                                           |  |                              | (6,078 
|Refundable income taxes                                                                    |  |                              | (661   
|Accounts payable                                                                           |  |                              | (12,941
|Accrued expenses, salaries and taxes payable                                               |  |                              | 7,214  
|                                                                                           |  |                              |        
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                  |  |                              | 37,879 
|                                                                                          
|INVESTING ACTIVITIES:                                                                      |  |                              |        
|Additions to property and equipment                                                        |  |                              | (50,179
|Proceeds from sale of securities                                                           |  |                              |       
|Other                                                                                      |  |                              | 3,237  
|                                                                                           |  |                              |        
|NET CASH USED BY INVESTING ACTIVITIES                                                      |  |                              | (46,942
|                                                                                          
|FINANCING ACTIVITIES:                                                                      |  |                              |        
|Issuance of convertible debt, net of issuance costs                                        |  |                              |       
|Principal payments on long-term obligations                                                |  |                              | (2,548 
|Dividends paid                                                                             |  |                              | (1,938 
|Exercise of stock options                                                                  |  |                              | 709    
|                                                                                           |  |                              |        
|NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES                                           |  |                              | (3,777 
|                                                                                           |  |                              |        
|NET (DECREASE) INCREASE IN CASH                                                            |  |                              | (12,840
|CASH AND CASH EQUIVALENTS AT JANUARY 1                                                     |  |                              | 339,900
|                                                                                           |  |                              |        
|CASH AND CASH EQUIVALENTS AT MARCH 31                                                      |  | $                            | 327,060
|                                                                                           |  |                              |        



See notes
to consolidated financial statements.



3



---

AIRBORNE, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



March 31, 2003 (Unaudited)



NOTE ASUMMARY OF FINANCIAL STATEMENT PREPARATION



The consolidated financial statements
included herein are unaudited but include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods reported.



Certain amounts for prior periods have been reclassified to
conform to the 2003 presentation.



NOTE BTRADE ACCOUNTS
RECEIVABLE



Trade accounts receivable
exclude amounts sold under the Companys accounts receivable securitization facility. As of March 31, 2003 and December 31, 2002, the Company had $200,000,000 of outstanding securitized accounts. As of March 31, 2003, the Company had
eligible receivables to support additional sales up to the full $250,000,000 permitted under the facility.



NOTE CLONG-TERM OBLIGATIONS



Long-term obligations consist of the following:



|                                                                                     |  | March 31, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------------ |  | -------------- | ------- | - | ----------------- | -
|                                                                                     |  | (In thousands) |        
|Convertible senior notes, 5.75%, due April 2007                                      |  | $              | 150,000 |   |                   | $
|Senior notes, 7.35%, due September 2005                                              |  |                | 100,000 |   |                   |  
|Aircraft loan                                                                        |  |                | 56,487  |   |                   |  
|Refunding revenue bonds, effective rate of 1.17% as of March 31, 2003, due June
2011 |  |                | 13,200  |   |                   |  
|Other                                                                                |  |                | 6,585   |   |                   |  
|                                                                                     |  |                |         |   |                   |  
|Total long-term debt                                                                 |  |                | 326,272 |   |                   |  
|Capital lease obligations                                                            |  |                | 55,862  |   |                   |  
|                                                                                     |  |                |         |   |                   |  
|Total long-term obligations                                                          |  |                | 382,134 |   |                   |  
|Less current portion                                                                 |  |                | (11,290 | ) |                   |  
|                                                                                     |  |                |         |   |                   |  
|Total long-term obligations, net                                                     |  | $              | 370,844 |   |                   | $
|                                                                                     |  |                |         |   |                   |  



As of
March 31, 2003 the Company had a revolving bank credit agreement that provided for a total commitment of $275,000,000. In April 2003, the Company amended this agreement and reduced the facility to $200,000,000 and revised most financial covenants
effective for the first quarter of 2003. The agreement is collateralized by a substantial majority of the Companys assets and contains restrictions that reduce the amount of available borrowing capacity by the amount of outstanding letters of
credits and by amounts based on leverage limitation provisions and the level of eligible collateral. The agreement requires a periodic appraisal of the Companys aircraft to re-measure the level of eligible collateral. An appraisal is in
process and the Company estimates the results will support the $100,000,000, 7.35% senior notes, which are collateralized by the same processes, and letters of credit of approximately $50,000,000. Support for the remaining letters of credit
outstanding as of March 31, 2003 of approximately $51,000,000 will require the pledge of additional collateral by July 15, 2003 (e.g. cash, cash equivalents or accounts receivable resulting from reduction of amounts sold through the accounts
receivable securitization facility). The Company does not plan on pledging additional collateral to create available capacity under the agreement for general borrowing purposes. At March 31, 2003, no borrowings were outstanding under the agreement
and the Company was in compliance with restrictive covenants including covenants requiring the maintenance of minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), leverage and debt service coverage ratios and
required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock in excess of $2,000,000 during any calendar quarter. The agreement expires in June 2004.



NOTE DFUEL HEDGE



In February 2003, the Company entered into a call option
contract on heating oil to hedge a significant portion of its jet fuel requirements for a three-month period ending in June 2003. The derivative is accounted for as a hedge for accounting purposes with changes in fair value deferred until the hedged
forecasted transaction occurs and is recognized in earnings. The fair value of the call option was $24,000 at March 31, 2003. In March 2003, a call option contract expired that covered most of the Companys jet fuel consumption for the first
quarter of 2003. No proceeds were received under this contract.



4



---



NOTE EEARNINGS (LOSS)
PER SHARE



Basic earnings per share are
based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus common equivalent shares applicable to
the assumed exercise of outstanding dilutive stock options and, when dilutive, the assumed conversion of the convertible senior notes.



Net earnings (loss) and average shares used in basic and diluted earnings per share calculations were as follows (in thousands except per
share data):



|                                            |  | Three Months Ended March 31,
|------------------------------------------- |  | ----------------------------
|                                            |  | 2003                        
|NET EARNINGS (LOSS):                        |  | $                           
|WEIGHTED AVERAGE SHARES OUTSTANDING:        |  |                             
|Basic weighted average shares outstanding   |  |                             
|Stock options                               |  |                             
|                                            |  |                             
|Diluted weighted average shares outstanding |  |                             
|                                            |  |                             
|EARNINGS (LOSS) PER SHARE:                  |  |                             
|Basic                                       |  | $                           
|Diluted                                     |  | $                           



The
above calculations of earnings (loss) per diluted share for the three months ended March 31, 2003 and 2002 exclude 4,565,000 and 2,106,000 respectively of common shares issuable under stock option plans because the options exercise price was
greater than the average market price of the common shares, or the common stock equivalents were anti-dilutive. Additionally, the 6,413,985 common shares issuable upon conversion of the Companys convertible senior notes were excluded from
earnings per diluted share calculations because they were anti-dilutive for the three months ended March 31, 2003 and 2002.



NOTE FSTOCK-BASED EMPLOYEE COMPENSATION



The Company has elected to follow APB Opinion No. 25 in accounting for its stock option plans. No stock-based employee compensation
expense was recorded in 2003 or 2002. Had stock-based employee compensation been measured under the fair value provisions of SFAS No. 123, the Companys net earnings (loss) and earnings (loss) per basic and diluted share for the three-months
ended March 31, 2003 and 2002 would have been reduced to the pro forma amounts as follows (in thousands, except per share data):



|                                                                                                                               |  | Three Months Ended March 31 |       
|------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------
|                                                                                                                               |  | 2003                        |       
|Net earnings (loss) as reported                                                                                                |  | $                           | (5,588
|Deduct: stock-based employee compensation expense determined under fair value based
methods for all awards, net of tax effects |  |                             | (1,089
|                                                                                                                               |  |                             |       
|Pro forma                                                                                                                      |  | $                           | (6,677
|                                                                                                                               |  |                             |       
|Earnings (loss) per basic and diluted share:                                                                                   |  |                             |       
|As reported                                                                                                                    |  | $                           | (0.12 
|Pro forma                                                                                                                      |  | $                           | (0.14 



NOTE GSEGMENT
INFORMATION



The Company has organized its
business into two reportable operating segments. The domestic segment derives its revenues from the door-to-door delivery of small packages and documents throughout the United States, Canada and Puerto Rico. Domestic operations are supported
principally by Company operated aircraft and facilities. The international segment derives its revenues from express door-to-door delivery and a variety of freight services. International revenues are recognized on shipments where the origin and/or
destination is outside of locations supported by the domestic segment. The Company uses a variable cost approach to delivering international services through use of existing commercial airline capacity in connection with its domestic network and
independent express and freight agents in locations not currently served by Company-owned foreign operations.



5



---



The following
is a summary of key segment information (in thousands):



|                                         |  | Three Months Ended March 31, |        
|---------------------------------------- |  | ---------------------------- | -------
|                                         |  | 2003                         |        
|SEGMENT REVENUES:                        |  |                              |        
|Domestic                                 |  | $                            | 744,395
|International                            |  |                              | 80,475 
|                                         |  |                              |        
|                                         |  | $                            | 824,870
|                                         |  |                              |        
|SEGMENT EARNINGS (LOSS) FROM OPERATIONS: |  |                              |        
|Domestic                                 |  | $                            | (423   
|International                            |  |                              | (1,732 
|                                         |  |                              |        
|                                         |  | $                            | (2,155 
|                                         |  |                              |        



NOTE HOTHER
COMPREHENSIVE INCOME (LOSS)



Other
comprehensive income (loss) includes the following transactions and tax effects for the three-month periods ended March 31, 2003 and 2002, respectively (in thousands):



|                                                                   |  | Three Months Ended March 31, 2003 |       
|------------------------------------------------------------------ |  | --------------------------------- | ------
|                                                                   |  | Before Tax                        |       
|Unrealized securities losses arising during the period             |  | $                                 | (186  
|Unrealized gain on interest rate swap                              |  |                                   | 441   
|Less: Reclassification adjustment for gain realized in net income  |  |                                   | (446  
|                                                                   |  |                                   |       
|Net unrealized interest rate swap loss                             |  |                                   | (5    
|Foreign currency translation adjustments                           |  |                                   | 329   
|Fuel hedge option                                                  |  |                                   | (24   
|                                                                   |  |                                   |       
|Other comprehensive income                                         |  | $                                 | 114   
|                                                                   |  |                                   |       
|                                                                  
|                                                                   |  | Three Months Ended March 31, 2002 |       
|                                                                   |  | Before Tax                        |       
|Unrealized securities gains arising during the period              |  | $                                 | 679   
|Less: Reclassification adjustment for gains realized in net income |  |                                   | (1,656
|                                                                   |  |                                   |       
|Net unrealized securities losses                                   |  |                                   | (977  
|                                                                  
|Unrealized gain on interest rate swap                              |  |                                   | 271   
|Add: Reclassification adjustment for loss realized in net income   |  |                                   | 385   
|                                                                   |  |                                   |       
|Net unrealized interest rate swap gain                             |  |                                   | 656   
|                                                                  
|Foreign currency translation adjustments                           |  |                                   | (256  
|Additional minimum pension liabilities                             |  |                                   | (1,729
|                                                                   |  |                                   |       
|Other comprehensive loss                                           |  | $                                 | (2,306
|                                                                   |  |                                   |       



6



---



NOTE IMERGER WITH DHL



On March 25, 2003, Airborne, Inc.
(Airborne) entered into a definitive merger agreement with DHL Worldwide Express B.V. (DHL) and Atlantis Acquisition Corporation, a wholly-owned indirect subsidiary of DHL (Atlantis). A copy of the merger agreement was included as an exhibit to a
Form 8-K that Airborne filed with the SEC on April 4, 2003. Under the terms of the agreement, (1) Airbornes air operations will be separated from the ground operations and retained by ABX Air, Inc. (ABX) (Airbornes wholly-owned
subsidiary that provides domestic air cargo transportation service), (2) DHL will acquire the ground operations (including all operations currently conducted by Airborne Express, Inc., including its book of business, customer service, express and
deferred services and products, and pick up and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for each share of Airborne common stock held, $21.25 in cash (representing total cash
consideration in the transaction of $1.05 billion) and one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as a wholly-owned indirect subsidiary of DHL, and ABX will become an independent public company
wholly-owned by Airbornes former shareholders (although under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airbornes operations and Airborne shareholders would receive alternative
consideration of $21.65 per share in cash). The transaction, which is subject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.



Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and
regional sort facilities, runways, taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices) will be transferred to Airborne as part of
the ground operations to be merged with Atlantis. Additionally, in connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an ACMI (aircraft, crew, maintenance and insurance) agreement and a
hub and line-haul services agreement.



Upon the
separation of ABX from Airborne, ABX will be required to perform a cash flow recoverability test to determine the existence of a potential impairment as required by SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets. Under provisions of this statement, assuming an impairment charge is identified through this test, a company is required to record an impairment charge for the excess of the carrying amount of the long-lived asset group over its fair
value. The Company anticipates, given the cash flows to be derived from the ACMI agreement coupled with the decline in market values for used aircraft and related equipment, that ABX will incur a significant impairment charge as a result of the
separation. The Company estimates the charge and related reductions to historical property and equipment, spare parts inventories and other asset balances would have been $633,000,000 as of December 31, 2002, had the separation occurred as of that
date. The charge ultimately recorded will depend on a number of factors that could occur before the separation date, including but not limited to, changes in the fair values of used aircraft and related equipment.



NOTE JFEDERAL LEGISLATION COMPENSATION



The Company recorded a charge of $650,000 related to its
filing in March 2003 with the Department of Transportation regarding the computation of compensation due the Company under the Air Transportation Safety and System Stabilization Act. The Company ultimately received $12,350,000 under the Act, and
recorded the charge to recognize the difference between amounts received and amounts previously recorded in 2001.



NOTE KNEW ACCOUNTING PRONOUNCEMENTS



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset
retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for the Companys fiscal year beginning on January 1, 2003, did not have a significant impact on its
financial position or results of operations.



In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This
statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability to be
recognized at the date of an entitys commitment to an exit plan. The provisions of this statement are effective for the Companys exit or disposal activities that are initiated on or after January 1, 2003. Implementation of this statement
did not have a significant impact on the Companys financial position or results of operations.



7



---



In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more
prominent disclosures in the Companys annual and interim consolidated financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company currently plans
to follow the provisions of Accounting Principles Board (APB) Opinion No. 25 in accounting for the Companys stock option plans until such time new accounting rules are adopted which require recognition of the fair value of stock options as
compensation. Accordingly, implementation of this statement will currently not have a significant impact on the Companys financial position or results of operations.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities which requires the consolidation of variable interest entities, as defined. The Company sells its receivables to a commercial paper conduit. Since the fair value of the Companys receivables are less than half of the overall
conduits assets, the Company does not have a variable interest in the conduit under this interpretation and therefore, no consolidation is required. This interpretation was effective for the Company on January 31, 2003 and did not have a
material impact on its financial position, results or operations or cash flows.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The
clarification provisions of this statement require that contracts with comparable characteristics be accounted for similarly. This statement is effective for any new derivative instruments the Company enters into after June 30, 2003. Implementation
of this statement is not anticipated to have a significant impact on the Companys financial position or results of operations.



NOTE LSUPPLEMENTAL GUARANTOR INFORMATIONSENIOR NOTES



In connection with the issuance of $100,000,000 of 7.35% Senior Notes (Notes) by Airborne Express, Inc.
(AEI), certain subsidiaries (collectively, Guarantors) of the Company have fully and unconditionally guaranteed, on a joint and several basis, the obligations to pay principal, premium, if any, and interest with respect to the Notes. The
Guarantors are ABX Air Inc. (ABX) and Sky Courier, Inc. (SKY), which are wholly-owned subsidiaries of the Company, and Airborne FTZ Inc. (FTZ) and Wilmington Air Park Inc. (WAP), which are wholly-owned
subsidiaries of ABX.



AEI provides domestic and
international delivery services in addition to performing customer service, sales and marketing activities. ABX is a certificated air carrier that owns and operates the domestic express cargo services for which AEI is the sole customer. ABX also
offers air charter services on a limited basis to third-party customers. FTZ owns certain aircraft parts inventories that it sells primarily to ABX but also has limited sales to third-party customers. FTZ is also the holder of a foreign trade zone
certificate at Wilmington airport property. WAP is the owner of the Wilmington airport property, which includes the Companys main sort facility, aircraft maintenance facilities, runways and related airport facilities and airline administrative
and training facilities. ABX is the only occupant and customer of WAP. SKY provides expedited courier services and regional logistics warehousing primarily to third-party customers.



Revenues and net earnings recorded by ABX, FTZ, and WAP are controlled by the Company and are based on
various discretionary factors. Investment balances and revenues between Guarantors have been eliminated for purposes of presenting the financial information below. Intercompany advances and liabilities represent net amounts due between the various
entities. The Company provides its subsidiaries with a majority of the cash necessary to fund operating and capital expenditure requirements.



The Companys revolving bank credit agreement imposes certain restrictions on loans made by the Company, AEI and ABX to certain
nonguarantor subsidiaries. Loans to these subsidiaries must be approved by the agent for such credit agreement to the extent that these loans, together with certain other non-permitted investments, exceed $20.0 million.



Further, the agreement governing the Companys accounts
receivable securitization facility prohibits Airborne Credit, Inc. (ACI), the subsidiary of the Company that sells accounts receivable under that facility, from making any loans. The agreement generally allows ACI to pay dividends to the
Company, so long as ACI maintains minimum net worth levels ($22.3 million as of March 31, 2003).



Except as described above, there are no contractual restrictions on the ability of the Company, AEI or any of the Guarantors to borrow money or receive dividends from any of their respective
subsidiaries, or on the ability of such subsidiaries to make loans or pay dividends to their respective parents.



8



---



The following
are consolidating condensed statements of operations of the Company for the three month period ended March 31, 2003 and 2002, the consolidating condensed balance sheets of the Company as of March 31, 2003 and December 31, 2002, and the consolidating
condensed statements of cash flows for the three month periods ended March 31, 2003 and 2002:



Statement of Operations Information:



|                                    |  | Three months ended March 31, 2003 |        
|----------------------------------- |  | --------------------------------- | -------
|                                    |  | Airborne Express, Inc.            |        
|                                    |  | (In thousands)                    |        
|Revenues                            |  | $                                 | 812,598
|Operating expenses:                 |  |                                   |        
|Transportation purchased            |  |                                   | 501,368
|Station and ground operations       |  |                                   | 230,076
|Flight operations and maintenance   |  |                                   | 103    
|General and administrative          |  |                                   | 52,699 
|Sales and marketing                 |  |                                   | 21,607 
|Depreciation and amortization       |  |                                   | 10,298 
|Federal legislation compensation    |  |                                   | 650    
|                                    |  |                                   |        
|                                    |  |                                   | 816,801
|Earnings (loss) from operations     |  |                                   | (4,203 
|Other income (expense):             |  |                                   |        
|Interest income                     |  |                                   | 1,096  
|Interest expense                    |  |                                   | (5,428 
|Discount on sales of receivables    |  |                                   | (775   
|Other                               |  |                                   | (64    
|                                    |  |                                   |        
|Earnings (loss) before income taxes |  |                                   | (9,374 
|Income tax (expense) benefit        |  |                                   | 3,890  
|                                    |  |                                   |        
|Net earnings (loss)                 |  | $                                 | (5,484 
|                                    |  |                                   |        
|                                   
|                                    |  | Three months ended March 31, 2002 |        
|                                    |  | Airborne Express, Inc.            |        
|                                    |  | (In thousands)                    |        
|Revenues                            |  | $                                 | 773,041
|Operating expenses:                 |  |                                   |        
|Transportation purchased            |  |                                   | 469,072
|Station and ground operations       |  |                                   | 223,482
|Flight operations and maintenance   |  |                                   | (455   
|General and administrative          |  |                                   | 44,789 
|Sales and marketing                 |  |                                   | 22,076 
|Depreciation and amortization       |  |                                   | 11,813 
|                                    |  |                                   |        
|                                    |  |                                   | 770,777
|Earnings (loss) from operations     |  |                                   | 2,264  
|Other income (expense):             |  |                                   |        
|Interest income                     |  |                                   | 808    
|Interest expense                    |  |                                   | (5,563 
|Discount on sales of receivables    |  |                                   | (965   
|Other                               |  |                                   | 1,896  
|                                    |  |                                   |        
|Earnings (loss) before income taxes |  |                                   | (1,560 
|Income tax (expense) benefit        |  |                                   | 166    
|                                    |  |                                   |        
|Net earnings (loss)                 |  | $                                 | (1,394 
|                                    |  |                                   |        



9



---



Balance Sheet Information:



|March 31, 2003                             |  | Airborne Express, Inc. |         |   | Airborne, Inc. |   |         | Guarantors |  |   | Non- guarantors |   | Elimination |   |         | Consolidated |  
|------------------------------------------ |  | ---------------------- | ------- | - | -------------- | - | ------- | ---------- |  | - | --------------- | - | ----------- | - | ------- | ------------ | -
|                                           |  | (In thousands)         |        
|ASSETS                                     |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Current Assets:                            |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Cash and cash equivalents                  |  | $                      | 323,423 |   |                | $ |        |            |  | $ | 171             |   |             | $ | 3,466   |              | $
|Restricted cash                            |  |                        | 51,430  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Trade accounts receivable, less allowance  |  |                        | 33,793  |   |                |   |        |            |  |   | 8,090           |   |             |   | 111,385 |              |  
|Spare parts and fuel inventory             |  |                        |        |   |                |   |        |            |  |   | 33,641          |   |             |   | 4,598   |              |  
|Refundable income taxes                    |  |                        | 1,288   |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Deferred income tax assets                 |  |                        | 37,787  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Prepaid expenses and other                 |  |                        | 21,983  |   |                |   |        |            |  |   | 13,209          |   |             |   | 274     |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total current assets                       |  |                        | 469,704 |   |                |   |        |            |  |   | 55,111          |   |             |   | 119,723 |              |  
|Property and equipment, net                |  |                        | 90,340  |   |                |   |        |            |  |   | 1,097,483       |   |             |   | 3,869   |              |  
|Intercompany advances                      |  |                        | (29,244 | ) |                |   | 230,956 |            |  |   | 26,261          |   |             |   | 104,288 |              |  
|Other assets                               |  |                        | 28,781  |   |                |   | 225,300 |            |  |   | 8,368           |   |             |   | 10      |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total assets                               |  | $                      | 559,581 |   |                | $ | 456,256 |            |  | $ | 1,187,223       |   |             | $ | 227,890 |              | $
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Current liabilities:                       |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Accounts payable                           |  | $                      | 102,991 |   |                | $ |        |            |  | $ | 40,585          |   |             | $ | 4,311   |              | $
|Salaries, wages and related taxes          |  |                        | 56,366  |   |                |   |        |            |  |   | 44,057          |   |             |   |        |              |  
|Accrued expenses                           |  |                        | 140,261 |   |                |   | 4,336   |            |  |   | 5,329           |   |             |   | 783     |              |  
|Current portion of long-term obligations   |  |                        | 4,088   |   |                |   |        |            |  |   | 7,202           |   |             |   |        |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total current liabilities                  |  |                        | 303,706 |   |                |   | 4,336   |            |  |   | 97,173          |   |             |   | 5,094   |              |  
|Long-term obligations                      |  |                        | 115,616 |   |                |   | 150,000 |            |  |   | 105,228         |   |             |   |        |              |  
|Intercompany liabilities                   |  |                        |        |   |                |   |        |            |  |   | 332,205         |   |             |   |        |              |  
|Deferred income tax liabilities            |  |                        | (15,184 | ) |                |   |        |            |  |   | 160,759         |   |             |   | 624     |              |  
|Postretirement liabilities                 |  |                        | 50,132  |   |                |   |        |            |  |   | 9,721           |   |             |   |        |              |  
|Other liabilities                          |  |                        | 64,011  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Shareholders equity:                      |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Common stock                               |  |                        | 1       |   |                |   | 51,680  |            |  |   | (9              | ) |             |   | 120     |              |  
|Additional paid-in capital                 |  |                        |        |   |                |   | 309,491 |            |  |   | (753            | ) |             |   | 215,753 |              |  
|Retained earnings                          |  |                        | 50,086  |   |                |   | 598     |            |  |   | 482,900         |   |             |   | 6,299   |              |  
|Accumulated other comprehensive loss       |  |                        | (8,787  | ) |                |   |        |            |  |   | (1              | ) |             |   |        |              |  
|Treasury stock                             |  |                        |        |   |                |   | (59,849 | )          |  |   |                |   |             |   |        |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total shareholders equity                 |  |                        | 41,300  |   |                |   | 301,920 |            |  |   | 482,137         |   |             |   | 222,172 |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total liabilities and shareholders equity |  | $                      | 559,581 |   |                | $ | 456,256 |            |  | $ | 1,187,223       |   |             | $ | 227,890 |              | $
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  



10



---



Balance Sheet Information:



|December 31, 2002                          |  | Airborne Express, Inc. |         |   | Airborne, Inc. |   |         | Guarantors |  |   | Non- guarantors |   | Elimination |   |         | Consolidated |  
|------------------------------------------ |  | ---------------------- | ------- | - | -------------- | - | ------- | ---------- |  | - | --------------- | - | ----------- | - | ------- | ------------ | -
|                                           |  | (in thousands)         |        
|ASSETS                                     |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Current assets:                            |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Cash and cash equivalents                  |  | $                      | 338,517 |   |                | $ |        |            |  | $ | 73              |   |             | $ | 1,310   |              | $
|Restricted cash                            |  |                        | 36,333  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Accounts receivable, less allowance        |  |                        | 31,314  |   |                |   |        |            |  |   | 8,314           |   |             |   | 130,252 |              |  
|Spare parts and fuel inventory             |  |                        |        |   |                |   |        |            |  |   | 33,600          |   |             |   | 2,623   |              |  
|Refundable income taxes                    |  |                        | 627     |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Deferred income tax assets                 |  |                        | 32,444  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Prepaid expenses and other                 |  |                        | 16,494  |   |                |   |        |            |  |   | 14,647          |   |             |   | 263     |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total current assets                       |  |                        | 455,729 |   |                |   |        |            |  |   | 56,634          |   |             |   | 134,448 |              |  
|Property and equipment, net                |  |                        | 92,401  |   |                |   |        |            |  |   | 1,085,093       |   |             |   | 3,936   |              |  
|Intercompany advances                      |  |                        |        |   |                |   | 230,137 |            |  |   | 34,818          |   |             |   | 89,498  |              |  
|Other assets                               |  |                        | 31,565  |   |                |   | 225,532 |            |  |   | 8,850           |   |             |   | 10      |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total assets                               |  | $                      | 579,695 |   |                | $ | 455,669 |            |  | $ | 1,185,395       |   |             | $ | 227,892 |              | $
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Current liabilities:                       |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Accounts payable                           |  | $                      | 106,826 |   |                | $ |        |            |  | $ | 50,934          |   |             | $ | 3,045   |              | $
|Salaries, wages and related taxes          |  |                        | 57,507  |   |                |   |        |            |  |   | 37,074          |   |             |   |        |              |  
|Accrued expenses                           |  |                        | 123,972 |   |                |   | 2,181   |            |  |   | 5,678           |   |             |   | 913     |              |  
|Income taxes payable                       |  |                        | 4,912   |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Current portion of long-term obligations   |  |                        | 3,306   |   |                |   |        |            |  |   | 7,066           |   |             |   |        |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total current liabilities                  |  |                        | 296,523 |   |                |   | 2,181   |            |  |   | 100,752         |   |             |   | 3,958   |              |  
|Long-term obligations                      |  |                        | 113,014 |   |                |   | 150,000 |            |  |   | 107,077         |   |             |   |        |              |  
|Intercompany liabilities                   |  |                        | 39,652  |   |                |   |        |            |  |   | 314,768         |   |             |   |        |              |  
|Deferred income tax liabilities            |  |                        | (4,183  | ) |                |   |        |            |  |   | 149,972         |   |             |   | 532     |              |  
|Postretirement liabilities                 |  |                        | 27,567  |   |                |   |        |            |  |   | 32,153          |   |             |   |        |              |  
|Other liabilities                          |  |                        | 60,410  |   |                |   |        |            |  |   |                |   |             |   |        |              |  
|Shareholders equity:                      |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Common stock                               |  |                        | 1       |   |                |   | 51,658  |            |  |   | (9              | ) |             |   | 120     |              |  
|Additional paid-in capital                 |  |                        |        |   |                |   | 308,813 |            |  |   | (753            | ) |             |   | 215,753 |              |  
|Retained earnings                          |  |                        | 55,570  |   |                |   | 2,875   |            |  |   | 481,435         |   |             |   | 7,529   |              |  
|Accumulated other comprehensive loss       |  |                        | (8,859  | ) |                |   |        |            |  |   |                |   |             |   |        |              |  
|Treasury stock                             |  |                        |        |   |                |   | (59,858 | )          |  |   |                |   |             |   |        |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total shareholders equity                 |  |                        | 46,712  |   |                |   | 303,488 |            |  |   | 480,673         |   |             |   | 223,402 |              |  
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  
|Total liabilities and shareholders equity |  | $                      | 579,695 |   |                | $ | 455,669 |            |  | $ | 1,185,395       |   |             | $ | 227,892 |              | $
|                                           |  |                        |         |   |                |   |         |            |  |   |                 |   |             |   |         |              |  



11



---



Statement of Cash Flows
Information:



|                                                                                           |  | Three months ended March 31, 2003 |        
|------------------------------------------------------------------------------------------ |  | --------------------------------- | -------
|                                                                                           |  | Airborne Express, Inc.            |        
|                                                                                           |  | (In thousands)                    |        
|OPERATING ACTIVITIES:                                                                      |  |                                   |        
|Net earnings (loss)                                                                        |  | $                                 | (5,484 
|Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities: |  |                                   |        
|Non-cash operating activities                                                              |  |                                   | 41,695 
|Change in current assets and liabilities                                                   |  |                                   | (50,177
|                                                                                           |  |                                   |        
|Net cash provided (used) by operating activities                                           |  |                                   | (13,966
|INVESTING ACTIVITIES:                                                                      |  |                                   |        
|Net cash used by investing activities                                                      |  |                                   | (476   
|FINANCING ACTIVITIES:                                                                      |  |                                   |        
|Net cash used by financing activities                                                      |  |                                   | (651   
|                                                                                           |  |                                   |        
|Net increase (decrease) in cash and cash equivalents                                       |  |                                   | (15,093
|Cash and cash equivalents at January 1, 2003                                               |  |                                   | 338,516
|                                                                                           |  |                                   |        
|Cash and cash equivalents at March 31, 2003                                                |  | $                                 | 323,423
|                                                                                           |  |                                   |        
|                                                                                          
|                                                                                           |  | Three months ended March 31, 2002 |        
|                                                                                           |  | Airborne Express, Inc.            |        
|                                                                                           |  | (In thousands)                    |        
|OPERATING ACTIVITIES:                                                                      |  |                                   |        
|Net earnings (loss)                                                                        |  | $                                 | (1,394 
|Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities: |  |                                   |        
|Non-cash operating activities                                                              |  |                                   | 48,379 
|Change in current assets and liabilities                                                   |  |                                   | 157,671
|                                                                                           |  |                                   |        
|Net cash provided (used) by operating activities                                           |  |                                   | 204,656
|INVESTING ACTIVITIES:                                                                      |  |                                   |        
|Net cash used by investing activities                                                      |  |                                   | (185   
|FINANCING ACTIVITIES:                                                                      |  |                                   |        
|Net cash provided (used) by financing activities                                           |  |                                   | (4,630 
|                                                                                           |  |                                   |        
|Net increase (decrease) in cash and cash equivalents                                       |  |                                   | 199,841
|Cash and cash equivalents at January 1, 2002                                               |  |                                   | 191,629
|                                                                                           |  |                                   |        
|Cash and cash equivalents at March 31, 2002                                                |  | $                                 | 391,470
|                                                                                           |  |                                   |        



NOTE
MSUPPLEMENTAL GUARANTOR INFORMATIONCONVERTIBLE SENIOR NOTES



In connection with the issuance of $150 million of 5.75% Convertible Senior Notes due April 2007 (Notes), the Company and certain subsidiaries (collectively, Guarantors) have
fully and unconditionally guaranteed, on a joint and several basis, the obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantors are AEI, ABX, SKY, WAP, FTZ, Aviation Fuel, Inc. (AFI) and
Sound Suppression, Inc. (SSI). AFI purchases and sells aviation and other fuels. SSI is holder of certain aircraft equipment patents. A description of the operating activities of the other guarantors and their relationship to the Company
is contained in Note L. Note L also contains a description of the intercompany loan and dividend restrictions that apply to the Company and its subsidiaries.



12



---



The following
are consolidating condensed statements of operations of the Company for the three-month periods ended March 31, 2003 and 2002, the consolidating condensed balance sheets of the Company as of March 31, 2003 and December 31, 2002, and the
consolidating condensed statements of cash flows for the three-month period ended March 31, 2003 and 2002. A description regarding the basis of presenting these statements is contained in Note L.



Statement of Operations Information:



|                                    |  | Three months ended March 31, 2003 |     
|----------------------------------- |  | --------------------------------- | ----
|                                    |  | Airborne, Inc.                    |     
|                                    |  | (In thousands)                    |     
|Revenues                            |  | $                                 |    
|Operating expenses:                 |  |                                   |     
|Transportation purchased            |  |                                   |    
|Station and ground operations       |  |                                   |    
|Flight operations and maintenance   |  |                                   |    
|General and administrative          |  |                                   | 522 
|Sales and marketing                 |  |                                   |    
|Depreciation and amortization       |  |                                   |    
|Federal legislation compensation    |  |                                   |    
|                                    |  |                                   |     
|                                    |  |                                   | 522 
|                                    |  |                                   |     
|Loss from operations                |  |                                   | (522
|Other income:                       |  |                                   |     
|Interest income                     |  |                                   |    
|Interest expense                    |  |                                   |    
|Discount on sales of receivables    |  |                                   |    
|Other                               |  |                                   |    
|                                    |  |                                   |     
|Loss before income taxes            |  |                                   | (522
|Income tax (expense) benefit        |  |                                   | 183 
|                                    |  |                                   |     
|Net earnings (loss)                 |  | $                                 | (339
|                                    |  |                                   |     
|                                   
|                                    |  | Three months ended March 31, 2002 |     
|                                    |  | Airborne, Inc.                    |     
|                                    |  | (In thousands)                    |     
|Revenues                            |  | $                                 |    
|Operating expenses:                 |  |                                   |     
|Transportation purchased            |  |                                   |    
|Station and ground operations       |  |                                   |    
|Flight operations and maintenance   |  |                                   |    
|General and administrative          |  |                                   | 271 
|Sales and marketing                 |  |                                   |    
|Depreciation and amortization       |  |                                   |    
|                                    |  |                                   |     
|                                    |  |                                   | 271 
|                                    |  |                                   |     
|Loss from operations                |  |                                   | (271
|Other income (expense):             |  |                                   |     
|Interest income                     |  |                                   |    
|Interest expense                    |  |                                   | (175
|Discounts on sales of receivables   |  |                                   |    
|Other                               |  |                                   |    
|                                    |  |                                   |     
|Earnings (loss) before income taxes |  |                                   | (446
|Income tax (expense) benefit        |  |                                   | 156 
|                                    |  |                                   |     
|Net earnings (loss)                 |  | $                                 | (290
|                                    |  |                                   |     



13



---



Balance Sheet Information:



|March 31, 2003                             |  | Airborne, Inc. |         |   | Guarantors |   |           | Non- guarantors |  | Elimination |         |  | Consolidated |         
|------------------------------------------ |  | -------------- | ------- | - | ---------- | - | --------- | --------------- |  | ----------- | ------- |  | ------------ | --------
|                                           |  | (In thousands) |        
|ASSETS                                     |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Current Assets:                            |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Cash and cash equivalents                  |  | $              |        |   |            | $ | 323,454   |                 |  | $           | 3,606   |  | $            |        
|Restricted cash                            |  |                |        |   |            |   | 51,430    |                 |  |             |        |  |              |        
|Trade accounts receivable, less allowance  |  |                |        |   |            |   | 41,903    |                 |  |             | 111,365 |  |              |        
|Spare parts and fuel inventory             |  |                |        |   |            |   | 38,239    |                 |  |             |        |  |              |        
|Refundable income taxes                    |  |                |        |   |            |   | 1,288     |                 |  |             |        |  |              |        
|Deferred income tax assets                 |  |                |        |   |            |   | 37,787    |                 |  |             |        |  |              |        
|Prepaid expenses and other                 |  |                |        |   |            |   | 35,286    |                 |  |             | 180     |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total current assets                       |  |                |        |   |            |   | 529,387   |                 |  |             | 115,151 |  |              |        
|Property and equipment, net                |  |                |        |   |            |   | 1,191,692 |                 |  |             |        |  |              |        
|Intercompany advances                      |  |                | 230,956 |   |            |   | (283      | )               |  |             | 101,588 |  |              | (332,261
|Other assets                               |  |                | 225,300 |   |            |   | 37,159    |                 |  |             |        |  |              | (215,112
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total assets                               |  | $              | 456,256 |   |            | $ | 1,757,955 |                 |  | $           | 216,739 |  | $            | (547,373
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Current Liabilities:                       |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Accounts payable                           |  | $              |        |   |            | $ | 147,887   |                 |  | $           |        |  | $            | (56     
|Salaries, wages and related taxes          |  |                |        |   |            |   | 100,423   |                 |  |             |        |  |              |        
|Accrued expenses                           |  |                | 4,336   |   |            |   | 145,806   |                 |  |             | 567     |  |              |        
|Current portion of long-term obligations   |  |                |        |   |            |   | 11,290    |                 |  |             |        |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total current liabilities                  |  |                | 4,336   |   |            |   | 405,406   |                 |  |             | 567     |  |              | (56     
|Long-term obligations                      |  |                | 150,000 |   |            |   | 220,844   |                 |  |             |        |  |              |        
|Intercompany liabilities                   |  |                |        |   |            |   | 332,205   |                 |  |             |        |  |              | (332,205
|Deferred income tax liabilities            |  |                |        |   |            |   | 146,199   |                 |  |             |        |  |              |        
|Postretirement liabilities                 |  |                |        |   |            |   | 59,853    |                 |  |             |        |  |              |        
|Other liabilities                          |  |                |        |   |            |   | 64,011    |                 |  |             |        |  |              |        
|Shareholders equity:                      |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Common stock                               |  |                | 51,680  |   |            |   | 102       |                 |  |             | 10      |  |              | (112    
|Additional paid-in capital                 |  |                | 309,491 |   |            |   |          |                 |  |             | 215,000 |  |              | (215,000
|Retained earnings                          |  |                | 598     |   |            |   | 538,123   |                 |  |             | 1,162   |  |              |        
|Accumulated other comprehensive loss       |  |                |        |   |            |   | (8,788    | )               |  |             |        |  |              |        
|Treasury stock                             |  |                | (59,849 | ) |            |   |          |                 |  |             |        |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total shareholders equity                 |  |                | 301,920 |   |            |   | 529,437   |                 |  |             | 216,172 |  |              | (215,112
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total liabilities and shareholders equity |  | $              | 456,256 |   |            | $ | 1,757,955 |                 |  | $           | 216,739 |  | $            | (547,373
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         



14



---



Balance Sheet Information:



|December 31, 2002                          |  | Airborne, Inc. |         |   | Guarantors |   |           | Non- guarantors |  | Elimination |         |  | Consolidated |         
|------------------------------------------ |  | -------------- | ------- | - | ---------- | - | --------- | --------------- |  | ----------- | ------- |  | ------------ | --------
|                                           |  | (In thousands) |        
|ASSETS                                     |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Current Assets:                            |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Cash and cash equivalents                  |  | $              |        |   |            | $ | 338,550   |                 |  | $           | 1,350   |  | $            |        
|Restricted cash                            |  |                |        |   |            |   | 36,333    |                 |  |             |        |  |              |        
|Trade accounts receivable, less allowance  |  |                |        |   |            |   | 39,655    |                 |  |             | 130,225 |  |              |        
|Spare parts and fuel inventory             |  |                |        |   |            |   | 36,223    |                 |  |             |        |  |              |        
|Refundable income taxes                    |  |                |        |   |            |   | 627       |                 |  |             |        |  |              |        
|Deferred income tax assets                 |  |                |        |   |            |   | 32,444    |                 |  |             |        |  |              |        
|Prepaid expenses and other                 |  |                |        |   |            |   | 31,176    |                 |  |             | 228     |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total current assets                       |  |                |        |   |            |   | 515,008   |                 |  |             | 131,803 |  |              |        
|Property and equipment, net                |  |                |        |   |            |   | 1,181,430 |                 |  |             |        |  |              |        
|Intercompany advances                      |  |                | 230,137 |   |            |   | (500      | )               |  |             | 85,164  |  |              | (314,801
|Other assets                               |  |                | 225,532 |   |            |   | 40,425    |                 |  |             |        |  |              | (215,112
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total assets                               |  | $              | 455,669 |   |            | $ | 1,736,363 |                 |  | $           | 216,967 |  | $            | (529,913
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Current Liabilities:                       |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Accounts payable                           |  | $              |        |   |            | $ | 160,805   |                 |  | $           |        |  | $            | (33     
|Salaries, wages and related taxes          |  |                |        |   |            |   | 94,581    |                 |  |             |        |  |              |        
|Accrued expenses                           |  |                | 2,181   |   |            |   | 129,953   |                 |  |             | 610     |  |              |        
|Income taxes payable                       |  |                |        |   |            |   | 4,912     |                 |  |             |        |  |              |        
|Current portion of long-term obligations   |  |                |        |   |            |   | 10,372    |                 |  |             |        |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total current liabilities                  |  |                | 2,181   |   |            |   | 400,623   |                 |  |             | 610     |  |              | (33     
|Long-term obligations                      |  |                | 150,000 |   |            |   | 220,091   |                 |  |             |        |  |              |        
|Intercompany liabilities                   |  |                |        |   |            |   | 314,768   |                 |  |             |        |  |              | (314,768
|Deferred income tax liabilities            |  |                |        |   |            |   | 146,321   |                 |  |             |        |  |              |        
|Postretirement liabilities                 |  |                |        |   |            |   | 59,720    |                 |  |             |        |  |              |        
|Other liabilities                          |  |                |        |   |            |   | 60,410    |                 |  |             |        |  |              |        
|Shareholders equity:                      |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Common stock                               |  |                | 51,658  |   |            |   | 102       |                 |  |             | 10      |  |              | (112    
|Additional paid-in capital                 |  |                | 308,813 |   |            |   |          |                 |  |             | 215,000 |  |              | (215,000
|Retained earnings                          |  |                | 2,875   |   |            |   | 543,187   |                 |  |             | 1,347   |  |              |        
|Accumulated other comprehensive loss       |  |                |        |   |            |   | (8,859    | )               |  |             |        |  |              |        
|Treasury stock                             |  |                | (59,858 | ) |            |   |          |                 |  |             |        |  |              |        
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total shareholders equity                 |  |                | 303,488 |   |            |   | 534,430   |                 |  |             | 216,357 |  |              | (215,112
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         
|Total liabilities and shareholders equity |  | $              | 455,669 |   |            | $ | 1,736,363 |                 |  | $           | 216,967 |  | $            | (529,913
|                                           |  |                |         |   |            |   |           |                 |  |             |         |  |              |         



15



---

Statements of Cash Flows Information:



|                                                                                           |  | Three months ended March 31, 2003 |         
|------------------------------------------------------------------------------------------ |  | --------------------------------- | --------
|                                                                                           |  | Airborne, Inc.                    |         
|                                                                                           |  | (In thousands)                    |         
|Operating Activities:                                                                      |  |                                   |         
|Net loss                                                                                   |  | $                                 | (339    
|Adjustments to reconcile net loss to net cash provided by operating
activities:            |  |                                   |         
|Non-cash operating activities                                                              |  |                                   | 231     
|Change in current assets and liabilities                                                   |  |                                   | 1,521   
|                                                                                           |  |                                   |         
|Net cash provided (used) by operating activities                                           |  |                                   | 1,413   
|                                                                                          
|Investing Activities:                                                                      |  |                                   |         
|Net cash used by investing activities                                                      |  |                                   |        
|                                                                                          
|Financing Activities:                                                                      |  |                                   |         
|Net cash used by financing activities                                                      |  |                                   | (1,413  
|                                                                                           |  |                                   |         
|Net increase (decrease) in cash                                                            |  |                                   |        
|Cash and cash equivalents at January 1, 2003                                               |  |                                   |        
|                                                                                           |  |                                   |         
|Cash and cash equivalents at March 31, 2003                                                |  | $                                 |        
|                                                                                           |  |                                   |         
|                                                                                          
|                                                                                           |  | Three months ended March 31, 2002 |         
|                                                                                           |  | Airborne, Inc.                    |         
|                                                                                           |  | (In thousands)                    |         
|Operating Activities:                                                                      |  |                                   |         
|Net earnings (loss)                                                                        |  | $                                 | (290    
|Adjustments to reconcile net earnings (loss) to net cash provided by operating
activities: |  |                                   |         
|Non-cash operating activities                                                              |  |                                   | (4,895  
|Change in current assets and liabilities                                                   |  |                                   | (144,992
|                                                                                           |  |                                   |         
|Net cash provided (used) by operating activities                                           |  |                                   | (150,177
|                                                                                          
|Investing Activities:                                                                      |  |                                   |         
|Net cash used by investing activities                                                      |  |                                   |        
|                                                                                          
|Financing Activities:                                                                      |  |                                   |         
|Net cash provided (used) by financing activities                                           |  |                                   | 150,177 
|                                                                                           |  |                                   |         
|Net increase (decrease) in cash                                                            |  |                                   |        
|Cash and cash equivalents at January 1, 2002                                               |  |                                   |        
|                                                                                           |  |                                   |         
|Cash and cash equivalents at March 31, 2002                                                |  | $                                 |        
|                                                                                           |  |                                   |         



16



---

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Results of Operations



We had a net loss in the first quarter of 2003 of $5.6
million, or $.12 per share, compared to net earnings of $5.3 million or $.11 per share in the first quarter of 2002. The results for the first quarter of 2003 reflect continued weak core shipment volumes due to a difficult economic environment and
higher operating costs due to escalating fuel costs, expenses associated with our announced merger with DHL, and costs related to the adverse winter weather conditions. Also, as anticipated, corporate costs related to pension and employee healthcare
were significantly higher in the first quarter of 2003 than in the first quarter of 2002.



The results for the first quarter of 2003 include a non-recurring charge of $650,000, or $.01 per share after tax, related to our filing with the Department of Transportation regarding the computation
of compensation due the Company under the Air Transportation Safety and System Stabilization Act. This charge reflects the difference between the $12.3 million we ultimately received under the Act, and amounts previously recorded in 2001. Results
for the first quarter of 2002 included a non-recurring credit of $1.7 million, or $.02 per share after-tax, related to a gain on the sale of securities.



The following table is an overview of our shipments, revenue and weight trends for the quarters indicated:



|                              |  | Three Months Ended March 31 |        | Change |  
|----------------------------- |  | --------------------------- | ------ | ------ | -
|                              |  | 2003                        |        | 2002   |  
|                              |  | (in thousands)              |       
|Shipments:                    |  |                             |        |        |  
|Domestic                      |  |                             |        |        |  
|Overnight                     |  |                             | 37,311 |        |  
|Next Afternoon Service        |  |                             | 12,180 |        |  
|Second Day Service            |  |                             | 16,187 |        |  
|Ground Delivery Service       |  |                             | 13,854 |        |  
|airborne@home                 |  |                             | 6,494  |        |  
|                              |  |                             |        |        |  
|Total Domestic                |  |                             | 86,026 |        |  
|                              |  |                             |        |        |  
|International                 |  |                             |        |        |  
|Express                       |  |                             | 1,318  |        |  
|Freight                       |  |                             | 69     |        |  
|                              |  |                             |        |        |  
|Total International           |  |                             | 1,387  |        |  
|                              |  |                             |        |        |  
|Total Shipments               |  |                             | 87,413 |        |  
|                              |  |                             |        |        |  
|Average Pounds per Shipment:  |  |                             |        |        |  
|Domestic                      |  |                             | 5.09   |        |  
|International                 |  |                             | 56.33  |        |  
|                             
|Average Revenue per Pound:    |  |                             |        |        |  
|Domestic                      |  | $                           | 1.68   |        | $
|International                 |  | $                           | 1.01   |        | $
|                             
|Average Revenue per Shipment: |  |                             |        |        |  
|Domestic                      |  | $                           | 8.63   |        | $
|International                 |  | $                           | 58.02  |        | $



Total
revenues increased 4.3% to $824.9 million in the first quarter of 2003 compared to revenues of $790.6 million in the first quarter of 2002. Shipment volumes increased 3.4% to 87.4 million in the first quarter compared to 84.5 million in the same
quarter a year ago. There were the same number of operating days in the first quarter of 2003 as were in the first quarter of 2002. Domestic revenues increased 4.2% to $744.4 million in the first quarter of 2003 compared to $714.1 million in the
first quarter of 2002. Revenue per shipment of our core air express products has experienced improvement over the past year, increasing to $9.48 in the first quarter of 2003 compared to $8.86 in the same quarter a year ago. Core express products
include our Overnight, Next Afternoon (NAS) and Second Day (SDS) services. Average revenue per shipment for all products was $8.63 in the first quarter of 2003 to compared $8.55 in the first quarter of 2002. The improvement in core product and
average revenues per shipment are due to rate and fee actions we have taken as well as increased fuel surcharge rates. In addition to several new ancillary fees, which we added in late 2002, in January 2003 we took additional fee actions and
increased rates for most domestic and international services commensurate with rate increases announced by other major carriers.



17



---



Domestic
revenues include fuel surcharge revenues that are used to help offset the historically high prices of fuel affecting our air and surface operations. We have increased our fuel surcharges since the price of fuel has increased significantly during the
latter part of 2002 and through the first quarter of 2003 as a result of the conflicts in the Middle East. The fuel surcharge had been increased to 4.3% on core express products and 1.3% on deferred products in November 2002 from surcharges of 2.9%
and 1.0%, respectively, which were in effect prior to the increase and for the majority of the first quarter of 2002. In early March 2003, the fuel surcharge was increased to 5.1% on core express products and 1.8% on deferred products and further
increased to 5.5% and 2.0%, respectively, beginning early April 2003. We continue to monitor fuel cost trends and will make changes to the surcharges as warranted.



Domestic shipments increased 3.5% to 86.0 million in the first quarter of 2003 compared to 83.1 million in
the first quarter of 2002. The shipment growth is due to expansion of our deferred Ground Delivery Service (GDS) and airborne@home products. GDS growth has been strong since its introduction in April 2001, producing 13.9 million shipments in the
first quarter of 2003 compared to 5.8 million shipments in the first quarter of 2002. Having achieved a higher level of GDS volume, we are focused on achieving a more balanced approach of yield management and volume growth. Our airborne@home product
grew 10.7% to 6.5 million shipments in the first quarter of 2003 compared to 5.9 million shipments in last years first quarter. The airborne@home service is intended to capture primarily business-to-consumer shipments from e-commerce and
catalog fulfillment providers and utilizes an arrangement with the U.S. Postal Service to provide final delivery of the product.



Our core express shipment volumes, which comprised 76.3% of our domestic shipment volumes in the first quarter of 2003, declined 8.0% to
65.7 million shipments compared to 71.4 million shipments in the first quarter of 2002. We believe the decline is due to the difficult economic environment, in which customers tend to shift their business to lower yielding express and deferred
services. Higher yielding Overnight shipments decreased 6.5% in the first quarter of 2003 compared to a decline of 12.6% in the first quarter of 2002. NAS shipment volumes decreased 7.6% in this years first quarter compared to 1.8% in the same
quarter of 2002. SDS shipment volumes declined 11.7% compared to a decline of 3.6% in the first quarter of 2002.



International revenues increased 5.3% in the first quarter of 2003 to $80.5 million compared to $76.5 million in the first quarter of
2002. Total international shipments decreased 2.1% to 1.4 million shipments in this years first quarter compared to an increase of 4.9% in the first quarter of 2002. Our lower-yielding, small package international express shipments declined
0.9% in the first quarter compared to a decline of 16.9% in the same period of 2002. The higher yielding, heavyweight international freight shipments declined 20.7% in the first quarter of 2003 compared to a 14.7% decline a year ago. The
international segment had a loss from operations of $1.7 million in the first quarter of 2003, the same as reported in the first quarter of 2002.



Operating expense per shipment increased 3.1% to $9.46 in the first quarter of 2003 compared to $9.18 in the first quarter of 2002 and
$9.23 for the full year of 2002. While we continue to aggressively manage our costs and improve labor productivity, increases in fuel, employee healthcare and pension costs coupled with our merger-related costs and higher costs due to adverse
weather resulted in higher costs measured on a per shipment basis in the first quarter of 2003 compared to the same period in 2002. Labor productivity, as measured by shipments handled per paid employee hour, improved 3.7% compared to an improvement
of 3.9% in the first quarter of 2002.



Transportation purchased as a percentage of revenues increased to 32.2% in the first quarter of 2003 as compared to 31.5% in the same period a year ago. Total transportation purchased expense increased 6.6% in the first quarter
compared to last year. The increase in costs as a percentage of revenues in the first quarter of 2003 was due to incremental costs associated with higher GDS and airborne@home shipment volumes. Pickup and delivery costs paid to independent
contractors and surface linehaul costs increased due to the higher volumes of deferred service shipments. International airline costs also increased in the first quarter of 2003 due to additional weight transported.



Station and ground expense as a percentage of revenues was
33.9% in this years first quarter compared to 33.4% in the first quarter of 2002. Total station and ground expense increased 5.8% in the first quarter of 2003 compared to a year ago. The cost increases in this category include additional wage
and benefit costs and costs incurred to service deferred shipment growth. Additionally, the adverse winter weather, particularly in the Midwest and Northeast, had negative effects on shipment volumes and labor productivity and added an estimated
$2.9 million to our facilities costs over levels incurred in the first quarter of 2002. Despite the weather disruptions, cost increases were partially offset by improvements in labor productivity.



18



---



Flight
operations and maintenance expense as a percentage of revenues was 17.2% in the first quarter of 2003 compared to 15.9% in the first quarter of 2002. This category of expense increased 13.4% in the first quarter of 2003 compared to a year ago due
primarily to higher jet fuel prices and aircraft deicing costs compared to the same period in 2002. The average aviation fuel price per gallon was $1.12 in the first quarter of 2003 compared to $.71 and $.93 in the first and fourth quarters of 2002,
respectively. Fuel prices peaked at $1.21 in March 2003 and declined somewhat in April 2003 to $1.04 per gallon. To mitigate potential exposure from extreme price increases in jet fuel, we have entered into call option contracts on heating oil to
hedge a significant portion of our projected jet fuel requirements. In March 2003, a contract expired that covered most of our consumption for the first quarter of 2003. No proceeds were received under this contract. In February 2003, we entered
into a contract for the three-month period extending through June 2003. This contract would mitigate exposure on most of our consumption if prices were to rise above $1.26 per gallon. Aviation fuel consumption decreased 4.8% in the first quarter to
36.5 million gallons compared to a decrease of 12.0% in the first quarter of 2002. The decrease in consumption was primarily due to the reduction and combination of certain flight segments and the placement of three 767 aircraft in service since the
first quarter of 2002, which allowed less fuel efficient DC-8 aircraft to be moved to shorter lane segments or backup status or removed from service. Flight operations and maintenance expense was negatively impacted by the adverse winter weather,
which caused deicing costs, among other cost increases, to increase $1.7 million in the first quarter of 2003 compared to the first quarter of 2002. Aircraft maintenance expenses were 5.7% of revenues in the first quarter of 2003 compared to 5.8% in
the first quarter of 2002.



General and
administrative expense as a percentage of revenues was 8.8% in the first quarter of 2003 compared to 8.3% the first quarter of 2002. Total general and administrative costs increased 11.4% in the first quarter of 2003 compared to the first quarter of
2002. Included in this category of expense in the first quarter was approximately $6.0 million for legal and professional expenses incurred due to our proposed merger with DHL. Also included in general and administrative expenses were increases of
$2.7 million in pension expense associated with our Company-sponsored defined benefit pension plans. As expected, pension costs increased due to market-driven events, including negative investment returns on plan assets and lower discount rates
applied to future pension obligations. These increased costs were partially offset by a $2.6 million insurance recovery related to the disruption of our New York operations after the events of September 11, 2001.



Employee healthcare costs increased $5.0 million in the first
quarter of 2003 over levels incurred in the first quarter of 2002. The increase in costs is due primarily to higher utilization of plan benefits and general healthcare industry cost trends. These costs are included in the station and ground, flight
operations and maintenance, general and administrative and sales and marketing expense categories.



Sales and marketing expenses as a percentage of revenues decreased to 2.6% in the first quarter of 2003 compared to 2.8% in the first
quarter of 2002. Lower packaging expenses resulted in a 2.3% decline in this category of expense in comparison to the first quarter of 2002.



Depreciation and amortization expense totaled 5.4% of revenues in the first quarter of 2003 and 6.2% in the first quarter of 2002.
Depreciation and amortization expense decreased 9.5% in the first quarter of 2003 compared to the same period in 2002 due to relatively lower levels of capital expenditures made over the past several years coupled with the timing of certain aircraft
assets becoming fully depreciated.



Interest
income increased to $1.1 million in the first quarter of 2003 compared to $.8 million in the first quarter of 2002. The increase in interest income is due primarily to higher average levels of cash equivalent short-term investments resulting from
liquidity actions we have taken over the last year.



Interest expense decreased in the first quarter of 2003 compared to the same period a year ago due to higher levels of capitalized interest and lower average interest rates. There was no interest capitalized during the first quarter
of 2002 compared to $.3 million of capitalized interest in the first quarter of 2003 on the acquisition and modification of 767 aircraft.



Discounts on the sales of receivables associated with recording the obligation to fund the purchasers costs under our accounts
receivable securitization facility were $1.1 million in the first quarter of 2003 compared to $1.3 million in the first quarter of 2002. The decrease in cost is due to lower discounts on amounts sold as a result of the lower interest rate
environment. Because of the sales recognition treatment associated with these securitization transactions, the cost is recorded separate from interest expense.



Included in other income in the first quarter of 2002 was a non-recurring gain of $1.7 million from the sale of an equity interest in one
of our international agents.



Our effective tax
benefit rate of 40.3% in the first quarter of 2002 compares to a tax expense rate of 40.9% in the first quarter of 2003.



19



---



Merger with DHL



On March 25, 2003, we entered into a
definitive merger agreement with DHL Worldwide Express B.V. (DHL) and Atlantis Acquisition Corporation, a wholly-owned indirect subsidiary of DHL (Atlantis). A copy of the merger agreement was included as an exhibit to a Form 8-K that we filed with
the SEC on April 4, 2003. Under the terms of the agreement, (1) Airbornes air operations will be separated from the ground operations and retained by ABX Air, Inc. (ABX) (our wholly-owned subsidiary that provides us with domestic air cargo
transportation service), (2) DHL will acquire the ground operations (including all operations currently conducted by Airborne Express, Inc., including its book of business, customer service, express and deferred services and products, and pick up
and delivery network) through a merger of Airborne and Atlantis, and (3) Airborne shareholders will receive, for each share of Airborne common stock held, $21.25 in cash (representing total cash consideration in the transaction of $1.05 billion) and
one share of common stock of ABX. Upon closing of the transaction, Airborne will operate as an indirect wholly-owned subsidiary of DHL, and ABX will become an independent public company wholly-owned by Airbornes former shareholders (although
under certain circumstances, in accordance with the merger agreement, DHL could purchase all of Airbornes operations and Airborne shareholders would receive alternative consideration of $21.65 per share in cash). The transaction, which is
subject to shareholder and regulatory approvals, is targeted to be completed in the third quarter of 2003.



Upon closing of the transaction, the net assets of the ground portion of ABX (including its central and regional sort facilities, runways,
taxiways, aprons, buildings serving as aircraft and equipment maintenance facilities, storage facilities, a training center and both operations and administrative offices) will be transferred to Airborne as part of the ground operations to be merged
with Atlantis. Additionally, in connection with the transaction, ABX will enter into a number of commercial agreements with Airborne, including an ACMI (aircraft, crew, maintenance and insurance) agreement and a hub services agreement.



Upon the separation of ABX from Airborne, ABX will be required
to perform a cash flow recoverability test to determine the existence of a potential impairment as required by SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. Under provisions of this statement, assuming an
impairment charge is identified through this test, a company is required to record an impairment charge for the excess of the carrying amount of the long-lived asset group over its fair value. We anticipate, given the cash flows to be derived from
the ACMI agreement coupled with the decline in market values for used aircraft and related equipment, that ABX will incur a significant impairment charge as a result of the separation. We estimate the charge and related reductions to historical
property and equipment, spare parts inventories and other asset balances would have been $633 million as of December 31, 2002, had the separation occurred as of that date. The charge ultimately recorded will depend on a number of factors that could
occur before the separation date, including but not limited to, changes in the fair values of used aircraft and related equipment.



Outlook



The performance of the U.S. and global economies will have an impact on our operating results for the balance of 2003 and beyond. As the
economy does not appear to be showing signs of sustained growth, we are cautious regarding the prospects of shipment growth in our core air express products. While we expect 2003 will show overall shipment growth, these increases will come from our
deferred products as we anticipate our core air express volumes will decline on a year-over-year basis, including declines in the second quarter of 2003. We are targeting 220,000 to 230,000 GDS shipments per day and 100,000 to 110,000 airborne@home
shipments per day in the second quarter.



We
expect continued operating performance pressure in 2003 from higher operating costs, due in part to higher GDS shipment volumes, increased pension and employee healthcare costs, and higher fuel expenses. The level of legal and professional expenses
in 2003 are expected to remain higher than in 2002 due to ongoing work related to the DHL transaction. Fuel prices, while having abated some from the March 2003 level, will likely remain higher than levels experienced in the second quarter of 2002.
While the increased fuel surcharge revenues should help mitigate the increase in fuel costs, it may be difficult to completely offset incremental fuel costs compared to last year.



Financial Condition, Liquidity and Capital Resources



Our operating cash flow is a major source of liquidity. Cash provided by operating activities was $37.9
million in the first quarter of 2003 compared to $75.1 million in the first quarter in 2002. The decline in cash provided by operating activities was due primarily to lower operating performance coupled with increases in restricted cash. Cash and
cash equivalents were $378.5 million and $376.2 million as of March 31, 2003 and December 31, 2002, respectively. Included in these cash and cash equivalent totals are restricted cash balances, which are restricted from general use and held in
insurance trusts to support a portion of outstanding self-insured casualty liabilities, including workers compensation, automobile and general liability coverages. Restricted cash balances were $51.4 million and $36.3 million as of March 31,
2003 and December 31, 2003. There were no restricted cash balances at March 31, 2003.



20



---



Capital
expenditures and financing associated with those expenditures are significant factors that affect our financial condition. During the first quarter of 2003, capital expenditures, net of dispositions, were $50.2 million compared to $27.2 million in
the first quarter of 2002. A significant portion of our capital expenditures relates to the acquisition and modification of aircraft and related flight equipment. In the first quarter of 2003, we took delivery of two 767 aircraft compared to one 767
delivery in the first quarter of 2002. We anticipate taking delivery of three 767 aircraft in 2003, the same number of aircraft deliveries as in 2002. Our level of capital spending for 2003 is anticipated to be $150.0 million, an increase of $41.6
million over 2002 spending of $108.4 million. The increase in capital spending is primarily the result of sort facility expansion and improvement as well as technology investments. In addition to our capital expenditures, we financed $4.2 million in
vehicles and shipment scanning equipment through operating and capital leases in the first quarter of 2003 compared to $2.8 million in the first quarter of 2002.



In addition to our existing cash and cash equivalent reserves, we had eligible receivables as of March 31,
2003 to support an additional $50 million of sales proceeds under our accounts receivable securitization facility. The facility is accounted for as a sale of assets and, accordingly, receivables sold and the amounts outstanding are not reflected on
the consolidated balance sheet. At March 31, 2003 and December 31, 2002 we had received $200 million in sales proceeds under the facility.



As of March 31, 2003 we had a revolving bank credit agreement that provided for a total commitment of $275 million. In April 2003, we
amended this agreement and reduced the facility to $200 million and revised most financial covenants effective for the first quarter of 2003. The agreement is collateralized by a substantial majority of our assets and contains restrictions that
reduce the amount of available borrowing capacity by the amount of outstanding letters of credit and by amounts based on leverage limitation provisions and the level of eligible collateral. The agreement requires a periodic appraisal of our aircraft
to re-measure the level of eligible collateral. An appraisal is in process and we estimate the results will support the $100 million, 7.35% senior notes, which are collateralized by the same processes, and outstanding letters of credit of
approximately $50 million under the revolving credit facility. Support for the remaining $51 million of outstanding letters of credit will require the pledge of additional collateral by July 15, 2003 (e.g. cash, cash equivalents or accounts
receivable resulting from reduction of amounts sold through the accounts receivable sercuritization facility). We do not plan on pledging additional collateral to create available capacity under the agreement for general borrowing purposes.



In our opinion, existing cash and cash
equivalents coupled with anticipated cash flow from operations and available capacity under the accounts receivable securitization facility should provide adequate flexibility for financing operations and capital expenditures in 2003.



While we believe we have the ability to sufficiently fund our
planned operations and capital expenditures for 2003, certain circumstances could arise that would materially affect liquidity. Cash flows from operations could be affected by continued deterioration in core shipment volumes caused by a continued
slow economy, further geopolitical conflicts or terrorist attacks, or our inability to successfully implement sales growth initiatives in a cost effective manner. Operating results could also be negatively impacted by prolonged labor disputes or
changes in our cost structure from areas such as a significant rise in fuel prices. Weakening operating performance also could result in our inability to remain in compliance with financial covenants contained in our bank credit and accounts
receivable securitization agreements, thereby reducing liquidity sources and potentially requiring the further restriction of cash to support outstanding letters of credit. Lower revenues could also cause amounts currently drawn under the
securitization facility to be reduced.



Critical Accounting
Policies and Estimates



The
Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures included elsewhere in the Form 10-Q, are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting polices and make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In certain cases, there are alternative polices or estimation techniques which could be selected. On an on-going basis, we evaluate our selection of
policies and the estimation techniques we use, including those related to revenue recognition, postretirement liabilities, bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of spare-parts inventory, useful lives
and impairments of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to
commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the
preparation of the consolidated financial statements.



21



---



Revenue Recognition



We recognize revenue when shipments are
delivered to the customer. For shipments picked up but not delivered, direct costs are deferred and recognized upon delivery. We estimate the amount of direct costs to be deferred utilizing recent shipment level cost trends applied to the actual
shipments in transit as of a particular reporting date.



Asset
Valuation



We maintain an allowance for
doubtful accounts for estimated losses resulting from the potential inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.



We
continually evaluate the useful lives and fair values of our property and equipment. Acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of assets due to a
number of factors, such as a determination that excess capacity exists in our air or ground networks, or changes in regulations grounding the use of our aircraft. When an asset is considered impaired the asset is adjusted to its fair value.



We value our aircraft spare parts inventory at
weighted-average cost and maintain a related obsolescence reserve. A provision for spare parts obsolescence is recorded over the estimated useful life of our aircraft and considers the amount of spare parts expected to be on hand on the date the
aircraft are anticipated to be removed from service. Should changes occur regarding expected spare parts to be on hand or anticipated useful lives of aircraft, revisions to the estimated obsolescence reserve may be required.



We have not recorded a valuation allowance to reduce our
deferred tax assets, as we believe it is more likely than not that the deferred tax asset will be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance. Should we determine that we will not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.



Self-Insurance



We self-insure certain claims relating to workers
compensation, automobile, general liability, healthcare and loss and damage on customer shipments. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated
utilizing historical paid claims data, recent claims trends and, in the case of workers compensation and healthcare, independent actuarial reports. Changes in claim severity and frequency could result in actual claims being materially different than
the amounts provided for in our annual results of operations.



Contingencies



We are
involved in legal matters that have a degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts, if any, provided for these matters. There can be no assurance that the ultimate
outcome of those matters will not differ materially from our assessment of them. There also can be no assurance that we know all matters that may be brought against us at any point in time.



Postretirement Obligations



We sponsor qualified defined benefit pension plans and
healthcare plans that provide postretirement benefits for certain union and a substantial portion of our non-union employees. Additionally, we have unfunded excess plans for certain employees, including our executive management, that provide
benefits in addition to amounts permitted to be paid under provisions of the tax law to participants in our qualified plans.



The accounting and valuation for these postretirement obligations are determined by prescribed accounting and actuarial methods that
consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long-term nature of these benefit payouts increases
the sensitivity of certain estimates on our postretirement costs. In actuarially valuing our pension obligations and determining related expense amounts, assumptions we consider most sensitive are discount rates, expected long-term investment
returns on plan assets and future salary increases. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. For our postretirement healthcare plans, consideration of future medical cost
trend rates is a critical assumption in valuing these obligations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our annual results of operations.



22



---



New Accounting
Pronouncements



In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Additionally, the associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The adoption of SFAS No. 143, which is effective for our
fiscal year beginning on January 1, 2003, did not have a significant impact on our financial position or results of operations.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.
Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability to be recognized at the date of an entitys commitment to an exit plan. The provisions of this statement are effective for our exit or
disposal activities that are initiated on or after January 1, 2003. Implementation of this statement did not have a significant impact on our financial position or results of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in our annual and interim consolidated financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported results. We currently plan to follow the provisions of Accounting Principles Board (APB) Opinion No. 25 in accounting for our stock option plans until
such time new accounting rules are adopted which require recognition of the fair value of stock options as compensation. Accordingly, implementation of this statement will currently not have a significant impact on our financial position or results
of operations.



In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities which requires the consolidation of variable interest entities, as defined. We sell our receivables to a commercial paper conduit. Since the fair value of our receivables
are less than half of the overall conduits assets, we do not have a variable interest in the conduit under this interpretation and therefore, no consolidation is required. This interpretation was effective for us on January 31, 2003 and
did not have a material impact on our financial position, results or operations or cash flows.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The
clarification provisions of this statement require that contracts with comparable characteristics be accounted for similarly. This statement is effective for any new derivative instruments we enter into after June 30, 2003. Implementation of this
statement is not anticipated to have a significant impact on our financial position or results of operations.



Item 3.Quantitative and Qualitative Disclosures about Market Risk



There have been no material changes in market risks from the information provided in Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, contained in the Companys Annual Report on Form 10-K, as amended, for the year ended December 31, 2002.



Item 4.Controls and Procedures



|(a) |  | Evaluation of Disclosure Controls and Procedures
|--- |  | ------------------------------------------------



Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)). Based upon the evaluation, the Companys Chairman and Chief Executive Officer and its Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective to ensure
that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and
forms.



|(b) |  | Evaluation of Disclosure Controls and Procedures
|--- |  | ------------------------------------------------



There were no significant changes in the Companys internal controls or in other factors that could significantly affect the
Companys disclosure controls and procedures subsequent to the date of the evaluation. There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.



23



---



PART II.
OTHER INFORMATION



Item 5.Other
Information.



The Audit Committee
of the Board of Directors approved the categories of all non-audit services performed by the Companys independent accountants during the period covered by this report.



Item 6.Exhibits and Reports on Form 8-K.



(a) Exhibits 



|EXHIBIT NO. |  | 12 |     |  | Statements Regarding Computation of Ratios                                                                             
|----------- |  | -- | --- |  | -----------------------------------------------------------------------------------------------------------------------
|           
|            |  | 12 | (a) |  | Ratio of Earnings to Fixed Charges                                                                                     
|           
|EXHIBIT NO. |  | 99 |     |  |                                                                                                                        
|           
|            |  | 99 | (a) |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|           
|            |  | 99 | (b) |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



(b)
Reports on Form 8-K 



On February 4, 2003,
the Company filed a Form 8-K to announce that the Board of Directors voted to amend the Companys bylaws so that each class of directors elected subsequent to the 2003 annual meeting of shareholders will have a term of one year. The amended and
restated bylaws and a press release announcing the action were filed as exhibits thereto.



On March 24, 2003, the Company filed a Form 8-K to furnish a press release that confirmed it was in discussions with DHL Worldwide Express regarding a potential transaction in which DHL would acquire
Airbornes ground operations for cash at a premium to Airbornes current stock price. As part of the transaction, Airbornes air operations would become an independent public company that would continue to be wholly owned by
Airbornes current shareholders.



24



---



SIGNATURES



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



|             
|-------------
|             
|             
|             
|Date: 5/15/03
|             
|             
|Date: 5/15/03
|             
|             
|Date: 5/15/03
|             



25



---



CERTIFICATION
PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Carl D. Donaway, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Airborne, Inc.;
| | -- |  | ---------------------------------------------------------------------

| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: May 15, 2003 |  |  |  |  |  | /s/    CARL D.
DONAWAY
|------------------ |  |  |  |  |  | ----------------------
|                   |  |  |  |  |  |                       



26



---



CERTIFICATION
PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Lanny H. Michael, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Airborne, Inc.;
| | -- |  | ---------------------------------------------------------------------

| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of the registrants board of directors:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: May 15, 2003 |  |  |  |  |  | /s/    LANNY H.
MICHAEL
|------------------ |  |  |  |  |  | -----------------------
|                   |  |  |  |  |  |                        



27