##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-Q



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Quarterly Report pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934



For the quarterly period ended September 30, 2004



Commission file number 1-11011



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THE FINOVA GROUP INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 86-0695381                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                               | 
|4800 North Scottsdale Road Scottsdale, AZ                      |  | 85251-7623                          
|(Address of principal executive offices)                       |  | (Zip code)                          



Registrants telephone
number, including area code: 480-636-4800



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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   ̈    No  x



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
FIVE YEARS:



Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court.    Yes  x    No   ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



As of November 9, 2004, approximately 122,041,000 shares of Common Stock ($0.01 par value) were outstanding.



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##### Table of Contents

THE FINOVA GROUP INC.



TABLE OF CONTENTS



|                             |  |                                                                                       |  |                                                              |  |         
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | --------
|                             |  |                                                                                       |  |                                                              |  | Page No.
|PART I FINANCIAL INFORMATION |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Financial Statements                                                                  |  | 1                                                           
|                             |  |                                                                                       |  | Condensed Consolidated Balance Sheets                        |  | 1       
|                             |  |                                                                                       |  | Condensed Statements of Consolidated Operations              |  | 2       
|                             |  |                                                                                       |  | Condensed Statements of Consolidated Cash Flows              |  | 3       
|                             |  |                                                                                       |  | Condensed Statements of Consolidated Stockholders Equity    |  | 4       
|                             |  |                                                                                       |  | Notes to Interim Condensed Consolidated Financial Statements |  | 5       
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13                                                          
|                             |  |                                                                                      
|                             |  | Special Note Regarding Forward-Looking Statements                                     |  | 26                                                          
|                             |  |                                                                                      
|Item 3.                      |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 27                                                          
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                               |  | 27                                                          
|                             | 
|PART II OTHER INFORMATION    |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 28                                                          
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits                                                                              |  | 28                                                          
|                             |  |                                                                                       | 
|Signatures                   |  |                                                                                       |  |                                                              |  | 29      



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##### Table of Contents

PART I FINANCIAL INFORMATION



Item 1. Financial Statements



THE FINOVA GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)



|                                                                                           |  |                               |           |   |                            |   |           |  
|------------------------------------------------------------------------------------------ |  | ----------------------------- | --------- | - | -------------------------- | - | --------- | -
|                                                                                           |  | September 30, 2004(Unaudited) |           |   | December 31, 2003(Audited) |  
|ASSETS                                                                                     |  |                               |           |   |                            |   |           |  
|Cash and cash equivalents                                                                  |  | $                             | 509,323   |   |                            | $ | 789,138   |  
|Restricted cash - impermissible restricted payments                                        |  |                               | 29,679    |   |                            |   |          |  
|Financing Assets:                                                                          |  |                               |           |   |                            |   |           |  
|Loans and other financing contracts, net                                                   |  |                               | 550,037   |   |                            |   | 1,309,605 |  
|Direct financing leases                                                                    |  |                               | 165,066   |   |                            |   | 192,105   |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total financing assets                                                                     |  |                               | 715,103   |   |                            |   | 1,501,710 |  
|Reserve for credit losses                                                                  |  |                               | (145,353  | ) |                            |   | (274,828  | )
|                                                                                           |  |                               |           |   |                            |   |           |  
|Net financing assets                                                                       |  |                               | 569,750   |   |                            |   | 1,226,882 |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Other Financial Assets:                                                                    |  |                               |           |   |                            |   |           |  
|Assets held for sale                                                                       |  |                               | 116,760   |   |                            |   | 138,224   |  
|Operating leases                                                                           |  |                               | 66,046    |   |                            |   | 102,381   |  
|Assets held for the production of income                                                   |  |                               | 30,789    |   |                            |   | 25,477    |  
|Investments                                                                                |  |                               | 27,734    |   |                            |   | 38,192    |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total other financial assets                                                               |  |                               | 241,329   |   |                            |   | 304,274   |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total Financial Assets                                                                     |  |                               | 811,079   |   |                            |   | 1,531,156 |  
|Other assets                                                                               |  |                               | 20,089    |   |                            |   | 23,882    |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|                                                                                           |  | $                             | 1,370,170 |   |                            | $ | 2,344,176 |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                       |  |                               |           |   |                            |   |           |  
|Liabilities:                                                                               |  |                               |           |   |                            |   |           |  
|Berkadia Loan                                                                              |  | $                             |          |   |                            | $ | 525,000   |  
|Senior Notes, net (principal amount due of $2.4 billion and $3.0 billion, respectively)    |  |                               | 1,810,398 |   |                            |   | 2,338,791 |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total debt                                                                                 |  |                               | 1,810,398 |   |                            |   | 2,863,791 |  
|Accounts payable and accrued expenses                                                      |  |                               | 126,754   |   |                            |   | 129,082   |  
|Deferred income taxes, net                                                                 |  |                               | 4,964     |   |                            |   | 4,050     |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total Liabilities                                                                          |  |                               | 1,942,116 |   |                            |   | 2,996,923 |  
|                                                                                           |  |                               |           |   |                            |   |           |  
|Stockholders Equity:                                                                      |  |                               |           |   |                            |   |           |  
|Common stock, $0.01 par value, 400,000,000 shares authorized and 125,873,000 shares issued |  |                               | 1,259     |   |                            |   | 1,259     |  
|Additional capital                                                                         |  |                               | 108,256   |   |                            |   | 108,256   |  
|Accumulated deficit                                                                        |  |                               | (680,581  | ) |                            |   | (764,715  | )
|Accumulated other comprehensive (loss) income                                              |  |                               | (344      | ) |                            |   | 2,989     |  
|Common stock in treasury, 3,832,000 shares                                                 |  |                               | (536      | ) |                            |   | (536      | )
|                                                                                           |  |                               |           |   |                            |   |           |  
|Total Stockholders Equity                                                                 |  |                               | (571,946  | ) |                            |   | (652,747  | )
|                                                                                           |  |                               |           |   |                            |   |           |  
|                                                                                           |  | $                             | 1,370,170 |   |                            | $ | 2,344,176 |  
|                                                                                           |  |                               |           |   |                            |   |           |  



See notes to interim condensed
consolidated financial statements.



1



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##### Table of Contents

THE FINOVA GROUP INC.

CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)



|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|------------------------------------------------------------- |  | -------------------------------- | ----------- | - | -------------------------------- | - | ----------- | ------------------------------- |  | - | ------------------------------- | - |  | - | ----------- | -
|                                                              |  | Three MonthsEnded Sept. 30, 2004 |             |   | Three MonthsEnded Sept. 30, 2003 |   |             | Nine MonthsEnded Sept. 30, 2004 |  |   | Nine MonthsEnded Sept. 30, 2003 |  
|Revenues:                                                     |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Interest income                                               |  | $                                | 15,714      |   |                                  | $ | 63,088      |                                 |  | $ | 98,057                          |   |  | $ | 162,478     |  
|Rental income                                                 |  |                                  | 4,557       |   |                                  |   | 7,680       |                                 |  |   | 19,678                          |   |  |   | 24,004      |  
|Operating lease income                                        |  |                                  | 11,923      |   |                                  |   | 13,948      |                                 |  |   | 41,069                          |   |  |   | 38,449      |  
|Fees and other income                                         |  |                                  | 3,930       |   |                                  |   | 6,195       |                                 |  |   | 16,332                          |   |  |   | 26,036      |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Total Revenues                                                |  |                                  | 36,124      |   |                                  |   | 90,911      |                                 |  |   | 175,136                         |   |  |   | 250,967     |  
|Interest expense                                              |  |                                  | (62,246     | ) |                                  |   | (77,478     | )                               |  |   | (196,087                        | ) |  |   | (241,561    | )
|Operating lease and other depreciation                        |  |                                  | (4,076      | ) |                                  |   | (5,203      | )                               |  |   | (13,304                         | ) |  |   | (21,041     | )
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Interest Margin                                               |  |                                  | (30,198     | ) |                                  |   | 8,230       |                                 |  |   | (34,255                         | ) |  |   | (11,635     | )
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Other Revenues and (Expenses):                                |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Reversal of provision for credit losses                       |  |                                  | 32,248      |   |                                  |   | 30,195      |                                 |  |   | 102,611                         |   |  |   | 153,768     |  
|Net gain on financial assets                                  |  |                                  | 33,507      |   |                                  |   | 24,537      |                                 |  |   | 66,187                          |   |  |   | 56,909      |  
|Portfolio expenses                                            |  |                                  | (5,621      | ) |                                  |   | (3,930      | )                               |  |   | (16,205                         | ) |  |   | (22,459     | )
|General and administrative expenses                           |  |                                  | (6,866      | ) |                                  |   | (12,344     | )                               |  |   | (34,204                         | ) |  |   | (44,927     | )
|Gain from extinguishment of debt, net of fresh-start discount |  |                                  |             |   |                                  |   | 28,493      |                                 |  |   |                                 |   |  |   | 28,493      |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Total Other Revenues and (Expenses)                           |  |                                  | 53,268      |   |                                  |   | 66,951      |                                 |  |   | 118,389                         |   |  |   | 171,784     |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Income before income taxes                                    |  |                                  | 23,070      |   |                                  |   | 75,181      |                                 |  |   | 84,134                          |   |  |   | 160,149     |  
|Income tax expense                                            |  |                                  |            |   |                                  |   |            |                                 |  |   |                                |   |  |   |            |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Net Income                                                    |  | $                                | 23,070      |   |                                  | $ | 75,181      |                                 |  | $ | 84,134                          |   |  | $ | 160,149     |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Basic/diluted earnings per share                              |  | $                                | 0.19        |   |                                  | $ | 0.62        |                                 |  | $ | 0.69                            |   |  | $ | 1.31        |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  
|Weighted average shares outstanding                           |  |                                  | 122,041,000 |   |                                  |   | 122,041,000 |                                 |  |   | 122,041,000                     |   |  |   | 122,041,000 |  
|                                                              |  |                                  |             |   |                                  |   |             |                                 |  |   |                                 |   |  |   |             |  



See notes to interim condensed
consolidated financial statements.



2



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##### Table of Contents

THE FINOVA GROUP INC.

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

(Dollars in thousands)

(Unaudited)



|                                                                              |  |                                 |            |   |      |   |            |  
|----------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                              |  | Nine Months Ended September 30, |           
|                                                                              |  | 2004                            |            |   | 2003 |  
|Operating Activities:                                                         |  |                                 |            |   |      |   |            |  
|Net income                                                                    |  | $                               | 84,134     |   |      | $ | 160,149    |  
|Adjustments to reconcile net income to net cash used by operating activities: |  |                                 |            |   |      |   |            |  
|Reversal of provision for credit losses                                       |  |                                 | (102,611   | ) |      |   | (153,768   | )
|Net cash gain on disposal of financial assets                                 |  |                                 | (60,648    | ) |      |   | (79,941    | )
|Net non-cash (gain) charge-off on financial assets                            |  |                                 | (5,539     | ) |      |   | 23,032     |  
|Gain from extinguishment of debt, net of fresh-start discount                 |  |                                 |            |   |      |   | (28,493    | )
|Depreciation and amortization                                                 |  |                                 | 14,404     |   |      |   | 23,309     |  
|Deferred income taxes, net                                                    |  |                                 | 914        |   |      |   | 6,647      |  
|Other amortization                                                            |  |                                 | 10,234     |   |      |   | 2,932      |  
|Change in assets and liabilities:                                             |  |                                 |            |   |      |   |            |  
|Decrease in other assets                                                      |  |                                 | 1,845      |   |      |   | 240        |  
|Increase in accounts payable and accrued expenses                             |  |                                 | 11,153     |   |      |   | 20,203     |  
|                                                                              |  |                                 |            |   |      |   |            |  
|Net Cash Used by Operating Activities                                         |  |                                 | (46,114    | ) |      |   | (25,690    | )
|                                                                              |  |                                 |            |   |      |   |            |  
|Investing Activities:                                                         |  |                                 |            |   |      |   |            |  
|Proceeds from disposals of leases and other owned assets                      |  |                                 | 54,106     |   |      |   | 117,880    |  
|Proceeds from sales of investments                                            |  |                                 | 11,338     |   |      |   | 23,689     |  
|Proceeds from sales of loans and financing leases                             |  |                                 | 195,799    |   |      |   | 311,368    |  
|Collections from financial assets                                             |  |                                 | 643,805    |   |      |   | 1,147,894  |  
|Fundings under existing customer commitments                                  |  |                                 | (50,605    | ) |      |   | (322,116   | )
|Deposit of impermissible restricted payments into restricted cash account     |  |                                 | (29,679    | ) |      |   |            |  
|Recoveries of loans previously written off                                    |  |                                 | 30,445     |   |      |   | 53,253     |  
|                                                                              |  |                                 |            |   |      |   |            |  
|Net Cash Provided by Investing Activities                                     |  |                                 | 855,209    |   |      |   | 1,331,968  |  
|                                                                              |  |                                 |            |   |      |   |            |  
|Financing Activities:                                                         |  |                                 |            |   |      |   |            |  
|Principal repayments of Berkadia Loan                                         |  |                                 | (525,000   | ) |      |   | (1,425,000 | )
|Principal repayments of Senior Notes                                          |  |                                 | (563,910   | ) |      |   |            |  
|Repurchase of Senior Notes                                                    |  |                                 |            |   |      |   | (49,875    | )
|                                                                              |  |                                 |            |   |      |   |            |  
|Net Cash Used by Financing Activities                                         |  |                                 | (1,088,910 | ) |      |   | (1,474,875 | )
|                                                                              |  |                                 |            |   |      |   |            |  
|Decrease in Cash and Cash Equivalents                                         |  |                                 | (279,815   | ) |      |   | (168,597   | )
|                                                                              |  |                                
|Cash and Cash Equivalents, beginning of period                                |  |                                 | 789,138    |   |      |   | 575,215    |  
|                                                                              |  |                                 |            |   |      |   |            |  
|Cash and Cash Equivalents, end of period                                      |  | $                               | 509,323    |   |      | $ | 406,618    |  
|                                                                              |  |                                 |            |   |      |   |            |  



See notes to interim condensed
consolidated financial statements.



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##### Table of Contents

THE FINOVA GROUP INC.

CONDENSED STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY

(Dollars in thousands)

(Unaudited)



|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|--------------------------------------------------------- |  | ----------- | ----- | ----------------- | - | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------- | ------ | - | ------------------------ | - | ---- | - |  | - | -------- | -
|                                                          |  | CommonStock |       | AdditionalCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | CommonStock inTreasury |        |   | TotalStockholdersEquity |  
|Balance, January 1, 2003                                  |  | $           | 1,259 |                   | $ | 53,233             |  | $ | (1,020,828                                 | ) |  | $                      | (3,877 | ) |                          | $ | (536 | ) |  | $ | (970,749 | )
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Comprehensive income:                                     |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Net income                                                |  |             |       |                   |   |                    |  |   | 256,113                                    |   |  |                        |        |   |                          |   |      |   |  |   | 256,113  |  
|Net change in unrealized holding gains (losses)           |  |             |       |                   |   |                    |  |   |                                            |   |  |                        | 7,179  |   |                          |   |      |   |  |   | 7,179    |  
|Net change in foreign currency translation                |  |             |       |                   |   |                    |  |   |                                            |   |  |                        | (313   | ) |                          |   |      |   |  |   | (313     | )
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Comprehensive income                                      |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   | 262,979  |  
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Benefits realized from pre-confirmation tax contingencies |  |             |       |                   |   | 22,546             |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   | 22,546   |  
|Benefits realized from pre-confirmation NOLs              |  |             |       |                   |   | 32,477             |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   | 32,477   |  
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Balance, December 31, 2003                                |  |             | 1,259 |                   |   | 108,256            |  |   | (764,715                                   | ) |  |                        | 2,989  |   |                          |   | (536 | ) |  |   | (652,747 | )
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Comprehensive income:                                     |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Net income                                                |  |             |       |                   |   |                    |  |   | 84,134                                     |   |  |                        |        |   |                          |   |      |   |  |   | 84,134   |  
|Net change in unrealized holding gains (losses)           |  |             |       |                   |   |                    |  |   |                                            |   |  |                        | (3,302 | ) |                          |   |      |   |  |   | (3,302   | )
|Net change in foreign currency translation                |  |             |       |                   |   |                    |  |   |                                            |   |  |                        | (31    | ) |                          |   |      |   |  |   | (31      | )
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Comprehensive income                                      |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   | 80,801   |  
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  
|Balance, September 30, 2004                               |  | $           | 1,259 |                   | $ | 108,256            |  | $ | (680,581                                   | ) |  | $                      | (344   | ) |                          | $ | (536 | ) |  | $ | (571,946 | )
|                                                          |  |             |       |                   |   |                    |  |   |                                            |   |  |                        |        |   |                          |   |      |   |  |   |          |  



See notes to interim condensed
consolidated financial statements.



4



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##### Table of Contents

THE FINOVA GROUP INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Dollars in thousands in tables)

(Unaudited)



A. Nature of Operations



The accompanying financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. Capitalized terms not defined herein are used as defined in the Form 10-K.



The following discussion relates to The FINOVA Group Inc. and its subsidiaries (collectively FINOVA or the Company), including FINOVA Capital Corporation and its subsidiaries (FINOVA Capital). FINOVA is a
financial services holding company. Through its principal operating subsidiary, FINOVA Capital, the Company has provided a broad range of financing and capital markets products, primarily to mid-size businesses.



The Companys business activities are limited to maximizing the value of its portfolio through the
orderly collection of its assets. These activities include collection efforts pursuant to underlying contractual terms, negotiation of prepayments, sales of assets or collateral and may include efforts to retain certain customer relationships and
restructure or terminate other relationships. The Company has sold portions of asset portfolios and will consider future sales of any asset if buyers can be found at acceptable prices; however, there can be no assurance that the Company will be
successful in efforts to sell additional assets. Any funds generated in excess of cash reserves permitted by the Companys debt agreements are used to reduce FINOVAs obligations to its creditors. The Company is prohibited by the Indenture
governing its Senior Notes (the Indenture) from engaging in any new lending activities, except to honor existing customer commitments and in certain instances, to restructure financing relationships to maximize value.



Because substantially all of the Companys assets are pledged to secure the obligations under the
Intercompany Notes securing the Senior Notes, FINOVAs ability to obtain additional or alternate financing is severely restricted. Accordingly, FINOVA intends to rely on internally generated cash flows from the liquidation of its assets as its
only meaningful source of liquidity.



FINOVAs business continues to be operated
under a Management Services Agreement with Leucadia National Corporation that expires in 2011. Pursuant to that agreement, Leucadia has designated its employees to act as Chairman of the Board (Ian M. Cumming), President (Joseph S. Steinberg) and
Chief Executive Officer (Thomas E. Mara).



Going Concern



As of September 30, 2004, the Company has a substantial negative net worth. While FINOVA continues to
pay its obligations as they become due, the ability of the Company to continue as a going concern is dependent upon many factors, particularly the ability of its borrowers to repay their obligations to FINOVA and the Companys ability to
realize the value of its portfolio. Even if the Company is able to recover the book value of its assets, and there can be no assurance of the Companys ability to do so, the Company would not be able to repay the Senior Notes in their entirety
at maturity in November 2009. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Companys independent public accountants qualified their report on the Companys 2003, 2002 and 2001 financial statements due to concerns regarding the Companys ability
to continue as a going concern.



B. Significant Accounting Policies



The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires FINOVA to use estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Those estimates are subject to known and unknown risks,
uncertainties and other factors that could materially impact the amounts reported and disclosed in the financial statements. Significant estimates include anticipated amounts



5



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and timing of future cash flows used in the calculation of the reserve for credit losses and measurement of impairment. Other
estimates include selection of appropriate risk adjusted discount rates used in net present value calculations, determination of fair values of certain financial assets for which there is not an active market, residual assumptions for leasing
transactions and the determination of appropriate valuation allowances against deferred tax assets. Actual results could differ from those estimated.



For a listing of the Companys significant accounting policies, see Note B Significant Accounting Policies in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003. See below for interim reporting policies and any new policies established during the year.



Impermissible Restricted Payments



The Indenture defines impermissible restricted payments as dividends or distributions to and/or repurchases of stock from common stockholders that, if made, would render the
Company insolvent, would be a fraudulent conveyance or would not be permitted to be made under applicable law. Impermissible restricted payments are required to be retained by the Company until such time, if ever, that it is no longer restricted
from making a distribution to its stockholders or until it is required to use the cash to satisfy its debt obligations.



The Indenture contemplates that as principal payments are made on the Senior Notes, FINOVA stockholders will receive a distribution equal to 5.263% of each principal prepayment.
However, FINOVA believes those distributions would be impermissible restricted payments due to the Companys significant negative net worth and its belief that the Senior Notes will not be fully repaid. The Company has segregated amounts
identified as impermissible restricted payments in a separate cash account, which is reflected as restricted cash  impermissible restricted payments on the balance sheet. Due to the Indenture restrictions regarding the use of this
cash, these amounts are not considered to be cash equivalents.



Consolidation of
Interim Reporting



The interim condensed consolidated financial statements
present the financial position, results of operations and cash flows of FINOVA and its subsidiaries, including FINOVA Capital and its subsidiaries. These financial statements have been prepared in accordance with U.S. generally accepted accounting
principles. All intercompany balances have been eliminated in consolidation.



The interim
condensed consolidated financial information is unaudited. In the opinion of management, all adjustments consisting of normal recurring items necessary to present fairly the financial position as of September 30, 2004 and the results of operations
and cash flows presented herein have been included in the condensed consolidated financial statements. Interim results are not necessarily indicative of results of operations for the full year.



C. Total Financial Assets



Total financial assets represents the Companys portfolio of investment activities, primarily consisting of secured financing to commercial and
real estate enterprises principally under financing contracts (such as loans and other financing contracts, direct financing leases and leveraged leases). In addition to its financing contracts, the Company has other financial assets, including
assets held for sale, owned assets (such as operating leases and assets held for the production of income) and investments (debt and equity securities and partnership interests). As of September 30, 2004 and December 31, 2003, the carrying amount of
total financial assets (before the reserve for credit losses) was $956.4 million and $1.8 billion, respectively.



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##### Table of Contents

The following table details the composition and carrying amounts of FINOVAs total financial assets at September 30, 2004:



|                          |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  |   |          |   |  |      
|------------------------- |  | --------------------- | ------- | ----------------------- | - | ------------------------ |  | ------------------------- | ------- | ------------------------ | - | -------------------- |  | - | ------- |  | - | -------- | - |  | -----
|                          |  | RevenueAccruingAssets |         | RevenueAccruingImpaired |   | NonaccruingImpairedLoans |  | NonaccruingLeases & Other |         | OwnedAssets &Investments |   | TotalFinancialAssets |  |   | %      
|Transportation            |  | $                     |         |                         | $ | 172,118                  |  | $                         | 37,757  |                          | $ | 45,745               |  | $ | 96,818  |  | $ | 352,438  |   |  | 36.8 
|Specialty Real Estate     |  |                       | 242,507 |                         |   | 2,022                    |  |                           | 12,574  |                          |   | 598                  |  |   |         |  |   | 257,701  |   |  | 27.0 
|Resort                    |  |                       | 34      |                         |   | 79                       |  |                           | 40,480  |                          |   | 205                  |  |   |         |  |   | 40,798   |   |  | 4.3  
|All other portfolios      |  |                       | 30,676  |                         |   | 59,648                   |  |                           | 178,175 |                          |   | 9,245                |  |   | 27,751  |  |   | 305,495  |   |  | 31.9 
|                          |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  |   |          |   |  |      
|Total financial assets    |  | $                     | 273,217 |                         | $ | 233,867                  |  | $                         | 268,986 |                          | $ | 55,793               |  | $ | 124,569 |  | $ | 956,432  |   |  | 100.0
|Reserve for credit losses |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  |   | (145,353 | ) |  |      
|                          |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  |   |          |   |  |      
|Total                     |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  | $ | 811,079  |   |  |      
|                          |  |                       |         |                         |   |                          |  |                           |         |                          |   |                      |  |   |         |  |   |          |   |  |      



Since FINOVAs total financial assets are
concentrated in several specialized industries, the Company is subject to both general economic risk and the additional risk of economic downturns within individual sectors of the economy. The Company has also completed multiple financial
transactions with individual borrowers and their affiliates, resulting in a greater total exposure to those borrowers beyond the typical transaction size and increased concentration risk to economic events affecting the industries (primarily
transportation) of such borrowers and their affiliates.



At September 30, 2004, the
Companys transportation portfolio consisted of the following aircraft:



|                                                  |  |                   |  |           |  |       |  |                              
|------------------------------------------------- |  | ----------------- |  | --------- |  | ----- |  | -----------------------------
|Aircraft Type                                     |  | Number ofAircraft |  | Passenger |  | Cargo |  | ApproximateAverageAge (years)
|Airbus 300                                        |  | 4                 |  |           |  | 4     |  | 21                           
|Boeing 727                                        |  | 16                |  | 4         |  | 12    |  | 26                           
|Boeing 737                                        |  | 26                |  | 26        |  |       |  | 20                           
|Boeing 747                                        |  | 8                 |  | 4         |  | 4     |  | 22                           
|Boeing 757                                        |  | 7                 |  | 7         |  |       |  | 11                           
|McDonnell Douglas DC 8 and DC 9                   |  | 13                |  | 4         |  | 9     |  | 36                           
|McDonnell Douglas DC 10                           |  | 13                |  | 4         |  | 9     |  | 26                           
|McDonnell Douglas MD series                       |  | 27                |  | 27        |  |       |  | 19                           
|Regional jets, corporate aircraft and turbo props |  | 35                |  | 35        |  |       |  | 12                           
|                                                  |  |                   |  |           |  |       |  |                              
|Total                                             |  | 149               |  | 111       |  | 38    |  | 20                           
|                                                  |  |                   |  |           |  |       |  |                              



At September 30, 2004, 54 aircraft with a
carrying value of $178.7 million were operated by U.S. domiciled carriers and 68 aircraft with a carrying value of $127.9 million were operated by foreign carriers. Additionally, 27 aircraft with a carrying value of $30.7 million were off-lease,
classified as assets held for the production of income and parked at various storage facilities in the United States and Europe, including 9 aircraft which have been identified for potential dismantling or sale as scrap.



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The following table details the composition of aircraft identified for potential dismantling or sale as scrap during the nine
months ended September 30, 2004:



|                                |  |                          |  |           |  |                    |   |  |                       |   |  |                          
|------------------------------- |  | ------------------------ |  | --------- |  | ------------------ | - |  | --------------------- | - |  | -------------------------
|Aircraft Type                   |  | Aircraft atDec. 31, 2003 |  | Additions |  | AircraftDismantled |   |  | Aircraft Soldas Scrap |   |  | Aircraft atSept. 30, 2004
|Airbus 300                      |  |                          |  | 1         |  |                    |   |  |                       |   |  | 1                        
|Boeing 727                      |  | 1                        |  | 9         |  |                    |   |  | (5                    | ) |  | 5                        
|Boeing 747                      |  |                          |  | 3         |  |                    |   |  | (2                    | ) |  | 1                        
|McDonnell Douglas DC 8 and DC 9 |  | 9                        |  | 10        |  | (13                | ) |  | (6                    | ) |  |                         
|McDonnell Douglas MD Series     |  |                          |  | 2         |  |                    |   |  |                       |   |  | 2                        
|                                |  |                          |  |           |  |                    |   |  |                       |   |  |                          
|Total                           |  | 10                       |  | 25        |  | (13                | ) |  | (13                   | ) |  | 9                        
|                                |  |                          |  |           |  |                    |   |  |                       |   |  |                          



During 2004, the Company reassessed the
likelihood of off-lease assets being re-leased, and identified 25 aircraft for potential dismantling or sale as scrap, rather than continue to incur significant storage, maintenance and other costs to potentially return to service. These 25 aircraft
are in addition to 10 aircraft that were in the process of being dismantled at December 31, 2003. As of September 30, 2004, the Company had sold as scrap or completely dismantled 26 of these aircraft, resulting in 9 aircraft which have been
identified for potential dismantling or sale as scrap. The Company may decide to dismantle or sell as scrap additional aircraft as it reassesses its portfolio, relative to demand within the aircraft industry and the used parts market.



The Companys transportation portfolio also includes domestic railroad and other transportation
equipment. The carrying value of this equipment was $15.1 million at September 30, 2004.



In addition to the concentrated exposures within the transportation portfolio, the Company has certain concentrations within its specialty real estate portfolio. The specialty real estate portfolio is concentrated within the following
industries:



|                 |  |                |         |   |       |  
|---------------- |  | -------------- | ------- | - | ----- | -
|                 |  | CarryingAmount |         | % |      
|Hospitality      |  | $              | 181,372 |   | 70.4  |  
|Office           |  |                | 63,690  |   | 24.7  |  
|Retail and other |  |                | 12,639  |   | 4.9   |  
|                 |  |                |         |   |       |  
|Total            |  | $              | 257,701 |   | 100.0 | %
|                 |  |                |         |   |       |  



D. Reserve for Credit Losses



The following table presents the balances and changes to the reserve for credit losses:



|                                        |  |                                 |          |   |      |   |          |  
|--------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                        |  | Nine Months Ended September 30, |         
|                                        |  | 2004                            |          |   | 2003 |  
|Balance, beginning of year              |  | $                               | 274,828  |   |      | $ | 540,268  |  
|Reversal of provision for credit losses |  |                                 | (102,611 | ) |      |   | (153,768 | )
|Write-offs                              |  |                                 | (57,309  | ) |      |   | (133,980 | )
|Recoveries                              |  |                                 | 30,445   |   |      |   | 53,253   |  
|Other                                   |  |                                 |          |   |      |   | 33       |  
|                                        |  |                                 |          |   |      |   |          |  
|Balance, end of period                  |  | $                               | 145,353  |   |      | $ | 305,806  |  
|                                        |  |                                 |          |   |      |   |          |  



For the nine months ended September 30, 2004,
the Company recorded a $102.6 million reversal of provision for credit losses to reduce its reserve for credit losses. The reserve reduction was primarily due to proceeds received from prepayments and asset sales in excess of recorded carrying
amounts (net of reserves), collections and recoveries of amounts previously written off. Partially offsetting this reserve reduction were new impairment reserves established on specific accounts.



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A summary of the reserve for credit losses by impaired and other assets is as follows:



|                            |  |                   |         |                  |   |        
|--------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                            |  | September 30,2004 |         | December 31,2003
|Reserves on impaired assets |  | $                 | 121,739 |                  | $ | 239,975
|Other reserves              |  |                   | 23,614  |                  |   | 34,853 
|                            |  |                   |         |                  |   |        
|Reserve for credit losses   |  | $                 | 145,353 |                  | $ | 274,828
|                            |  |                   |         |                  |   |        



At September 30, 2004, the total carrying amount
of impaired loans and leases was $555.6 million, of which $233.9 million were revenue accruing. The Company has established impairment reserves of $121.7 million related to $304.3 million of impaired assets. At December 31, 2003, the total carrying
amount of impaired loans and leases was $800.0 million, of which $220.7 million were revenue accruing. Impairment reserves at December 31, 2003 totaled $240.0 million related to $473.7 million of impaired assets.



Reserves on impaired assets decreased due to write-offs, an improvement in pay-off and collection
experience on certain assets previously reserved and the Companys application of cash received on nonaccruing assets, thus reducing the impairment reserves required on those assets. Partially offsetting these reductions were new impairment
reserves established for assets reclassified to impaired status during 2004 and additional reserves recorded on existing impaired assets.



Other reserves related to estimated inherent losses on unimpaired assets decreased as a result of collections, asset sales, changes in historical loss experience and the migration
of certain accounts to impaired assets.



Accounts classified as nonaccruing were $324.8
million or 34.0% of total financial assets (before reserves) at September 30, 2004 as compared to $593.3 million or 32.9% at December 31, 2003. The decline in nonaccruing assets was attributed to collections and asset sales of $162.2 million and
write-offs and net valuation markdowns of $55.1 million, partially offset by the migration of certain previously accruing accounts to nonaccruing status. Also contributing to the decline was the return of certain assets to accruing status following
demonstration of sustained performance and the classification of newly repossessed aircraft as assets held for the production of income, which are excluded from nonaccruing assets. During 2004, the Company returned multiple accounts to accruing
status. Certain of these accounts were previously restructured and the Company was monitoring the accounts for demonstration of sustained performance under the restructured terms before they would be returned to accruing status.



An analysis of nonaccruing assets included in total financial assets is as follows:



|                                                                               |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                               |  | September 30,2004 |         |   | December 31,2003 |  
|Contracts                                                                      |  | $                 | 321,690 |   |                  | $ | 579,252 |  
|Repossessed assets                                                             |  |                   | 3,089   |   |                  |   | 14,049  |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Total nonaccruing assets                                                       |  | $                 | 324,779 |   |                  | $ | 593,301 |  
|                                                                               |  |                   |         |   |                  |   |         |  
|Nonaccruing assets as a percentage of total financial assets (before reserves) |  |                   | 34.0    | % |                  |   | 32.9    | %
|                                                                               |  |                   |         |   |                  |   |         |  



E. Debt



A summary of the Companys total debt outstanding is as follows:



|                               |  |                   |           |   |                  |   |           |  
|------------------------------ |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                               |  | September 30,2004 |           |   | December 31,2003 |  
|Berkadia Loan                  |  | $                 |           |   |                  | $ | 525,000   |  
|Senior Notes:                  |  |                   |           |   |                  |   |           |  
|Principal                      |  |                   | 2,404,039 |   |                  |   | 2,967,949 |  
|Fresh-start reporting discount |  |                   | (593,641  | ) |                  |   | (629,158  | )
|                               |  |                   |           |   |                  |   |           |  
|Total Senior Notes, net        |  |                   | 1,810,398 |   |                  |   | 2,338,791 |  
|                               |  |                   |           |   |                  |   |           |  
|Total debt                     |  | $                 | 1,810,398 |   |                  | $ | 2,863,791 |  
|                               |  |                   |           |   |                  |   |           |  



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During the first quarter of 2004, FINOVA fully repaid its loan from Berkadia. The Berkadia Loan was scheduled to mature in 2006,
but was repaid earlier due to sooner-than-expected collections from FINOVAs liquidating portfolio.



During the third quarter of 2004, the Company made a $326.4 million partial principal prepayment on the Senior Notes, which reduced the outstanding principal to $2.4 billion. FINOVA announced two additional partial prepayments
each in the amount of $118.7 million. The first payment was made in October, while the second payment is scheduled for November 15, 2004. Following these prepayments, cumulative principal prepayments through November 15, 2004 will total $801.3
million or 27% of the $3.0 billion principal amount outstanding as of December 31, 2003.



In accordance with the terms of the Indenture, the Company is required to use any excess cash, as defined in the Indenture, to make semi-annual interest and principal payments on the Senior Notes. Additionally, the Indenture permits
voluntary prepayments at the Companys option. The Company believes principal prepayments may not continue at the same pace. The Companys asset pool continues to decline and generally contains less desirable assets than previously
collected or sold.



The Company does not believe that it has sufficient assets to fully
repay the Senior Notes, and the Indenture prohibits the Company from engaging in new business. Therefore, FINOVA intends to rely on the liquidation of its remaining assets as its only meaningful source of liquidity. Following repayment of the
Berkadia Loan in February 2004, the Senior Notes have a first priority security interest in substantially all of FINOVAs assets.



At September 30, 2004, the Senior Notes are reflected on the Companys balance sheet net of a remaining $593.6 million unamortized fresh-start discount. The book value of the
Senior Notes is scheduled to increase over time through the partial amortization of the discount as interest expense. Discount amortization was accelerated following the principal prepayments, which occurred earlier than originally anticipated when
fresh-start guidelines were applied upon emergence. Discount amortization is expected to be further adjusted as principal prepayments are made.



Stockholders should not expect any payments or distributions from FINOVA. The Indenture contemplates that as principal payments are made on the Senior Notes, FINOVA stockholders
will receive a distribution equal to 5.263% (i.e. 5%/95% as noted below) of each principal prepayment. Ninety-five percent (95%) of the remaining available cash after establishment of cash reserves as defined in the Indenture will be used to make
prepayments of principal on the Senior Notes and five percent (5%) is identified for distributions to and/or repurchases of stock from common stockholders. However, the Indenture prohibits FINOVA from making distributions to and/or repurchases from
stockholders if the payments would render the Company insolvent, would be a fraudulent conveyance or would not be permitted to be made under applicable law. Any such distribution and/or repurchase would be considered an impermissible restricted
payment under the Indenture. Given the Companys significant negative net worth and its belief that the Senior Notes will not be fully repaid, FINOVA is required to retain impermissible restricted payments until such time, if ever, that it is
no longer restricted from making a distribution to its stockholders or until it is required to use the cash to satisfy its debt obligations. In conjunction with the prepayments of Senior Notes noted above, the Company will have retained a total of
$42.2 million by November 15, 2004. Retained amounts are being segregated and reflected as restricted cash on the balance sheet.



F. Pension Plan



The Company sponsors a trusteed, noncontributory pension plan that covers substantially all of its employees. Benefits are based primarily on final average salary and years of service. The Companys funding policy for the pension plan
is to make at least the minimum annual contribution required by applicable regulations.



During the second quarter of 2004, the Companys Board of Directors approved the termination of the pension plan effective December 31, 2004. No pension benefits will accrue beyond December 31, 2004 and participant benefits under the
plan shall be fully vested and not forfeitable as of that date. The Board also approved discretionary contributions, which are expected to be sufficient to fully fund and enable the plan to pay all of its obligations to each participant.



Cash Flows



The Company has no minimum funding requirement for its pension plan in 2004; however, the Company continues to evaluate the current funded status of
the plan, its investment strategy and the pending termination of the plan noted above. The Company made a $3.0 million discretionary contribution during July 2004 to improve the funded status of the plan. The Company anticipates making further
discretionary contributions in 2004 or 2005.



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Components of Net Periodic Benefit Cost



|                               |  |                                 |       |   |      |   |        |  
|------------------------------ |  | ------------------------------- | ----- | - | ---- | - | ------ | -
|                               |  | Nine Months Ended September 30, |      
|                               |  | 2004                            |       |   | 2003 |  
|Service Cost                   |  | $                               | 573   |   |      | $ | 906    |  
|Interest Cost                  |  |                                 | 1,800 |   |      |   | 1,901  |  
|Expected return on plan assets |  |                                 | (972  | ) |      |   | (2,715 | )
|Recognized net actuarial loss  |  |                                 | 174   |   |      |   | 171    |  
|                               |  |                                 |       |   |      |   |        |  
|Net periodic benefit cost      |  | $                               | 1,575 |   |      | $ | 263    |  
|                               |  |                                 |       |   |      |   |        |  



G. Costs Associated with Exit or Disposal
Activities



|                           |  |                     |        |   |                     |   |        |  
|-------------------------- |  | ------------------- | ------ | - | ------------------- | - | ------ | -
|                           |  | TerminationBenefits |        |   | ContractTermination |  
|Balance, beginning of year |  | $                   | 3,415  |   |                     | $ | 4,926  |  
|Payments                   |  |                     | (3,829 | ) |                     |   | (2,100 | )
|Net additions              |  |                     | 4,124  |   |                     |   |        |  
|                           |  |                     |        |   |                     |   |        |  
|Balance, end of period     |  | $                   | 3,710  |   |                     | $ | 2,826  |  
|                           |  |                     |        |   |                     |   |        |  



As of September 30, 2004, FINOVA had a liability
for termination benefits of $3.7 million for 36 individuals at various levels within the Company. During the nine months ended September 30, 2004, the Company paid termination benefits of $3.8 million and recorded a net charge of $4.1 million for
employees notified of their pending termination.



As of September 30, 2004, the remaining
liability for contract termination costs related to office leases totaled $2.8 million. The decrease since December 31, 2003 was due to the payment of scheduled lease rentals (net of sublease income) and termination costs.



H. Income Taxes



For the nine months ended September 30, 2004 and 2003, income tax expense related to pre-tax book income was entirely offset by a decrease in
valuation allowances, which were previously established due to the Companys concern regarding its ability to utilize deferred tax assets generated from losses in prior periods. The Company may not be able to utilize all the deferred tax assets
due to uncertainty about the amount of future earnings, a variety of loss or other tax attribute carryover limitations in the various jurisdictions in which the Company files tax returns and uncertainty regarding the timing of the reversal of
deferred tax liabilities. As of September 30, 2004, the Company had federal net operating losses of $996.1 million available for carryforward.



I. Litigation and Claims



Legal Proceedings



FINOVA is party either as
plaintiff or defendant to various actions, proceedings and pending claims, including legal actions, some of which involve claims for compensatory, punitive or other damages in significant amounts. Litigation often results from FINOVAs attempts
to enforce its lending agreements against borrowers and other parties to those transactions. Litigation is subject to many uncertainties. It is possible that some of the legal actions, proceedings or claims could be decided against FINOVA. Other
than the matters described below, FINOVA believes that any resulting liability from its legal proceedings should not materially affect FINOVAs financial position, results of operations or cash flows. The following matters could have a material
adverse impact on FINOVAs financial position, results of operations or cash flow.



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If any legal proceedings result in a significant adverse judgment against the Company, which is not anticipated, it is unlikely
that FINOVA would be able to satisfy that liability due to its financial condition. As previously noted, due to the Companys financial condition, it does not expect that it can satisfy all its secured debt obligations at maturity. Attempts to
collect on those judgments could lead to future reorganization proceedings of either a voluntary or involuntary nature.



Litigation Related to Loans to The Thaxton Group Inc. and Related Companies



Between October 17, 2003, and January 13, 2004, FINOVA Capital Corporation was served with and named as a defendant (with other parties) in five lawsuits that relate to its loan
to The Thaxton Group Inc. and several related entities (collectively the Thaxton Entities). Under its loan agreement, FINOVA has a senior secured loan to the Thaxton Entities of approximately $108 million at September 30, 2004. The
Thaxton Entities were declared in default under their loan agreement with FINOVA after they advised FINOVA that they would have to restate earnings for the first two fiscal quarters of 2003, and had suspended payments on their subordinated notes. As
a result of the default, FINOVA exercised its rights under the loan agreement, and accelerated the indebtedness. The Thaxton Entities then filed a petition for bankruptcy protection under chapter 11 of the federal bankruptcy code in the United
States Bankruptcy Court for the District of Delaware on October 17, 2003, listing assets of approximately $206 million and debts of $242 million.



The first lawsuit, a complaint captioned Earle B. Gregory, et al, v. FINOVA Capital Corporation, James T. Garrett, et al., (the Gregory action) was filed in the
Court of Common Pleas of Lancaster County, South Carolina, case no. 2003-CP-29-967, and was served on FINOVA on October 17, 2003. An amended complaint was served on November 5, 2003, prior to the deadline for FINOVA to answer, plead, or otherwise
respond to the original complaint. The Gregory action was properly removed to the United States District Court for the District of South Carolina on November 17, 2003, pursuant to 28 U.S.C. §§ 1334 and 1452. The plaintiffs filed a motion
to remand the case to state court, but the U.S. District Court denied this motion in an order dated December 18, 2003.



The second Thaxton-related complaint, captioned Tom Moore, Anna Nunnery, et al., v. FINOVA Capital Corporation, Moore & Van Allen PLLC, and Cherry, Bekaert & Holland
LLP, case No. 8:03-372413 (Moore), was filed in the United States District Court for the District of South Carolina on November 25, 2003, and was served on FINOVA on December 2, 2003. The third complaint, captioned Sam Jones Wood
and Kathy Annette Wood, et al., v. FINOVA Capital Corporation, Moore & Van Allen PLLC, and Cherry, Bekaert & Holland LLP, (Wood) was filed in the Superior Court for Gwinnett County, Georgia, case no. 03-A13343-B, and was
served on FINOVA on December 9, 2003. FINOVA properly removed the Wood action to the United States District Court for the Northern District of Georgia (Atlanta Division) on January 5, 2004. The fourth complaint, captioned Grant Hall and Ruth Ann
Hall, et al., v. FINOVA Capital Corporation, Moore & Van Allen PLLC, and Cherry, Bekaert & Holland LLP,case no.03CVS20572, (Hall) was filed in the Mecklenberg County, North Carolina, Superior Court, and was also
served on FINOVA on December 9, 2003. FINOVA properly removed the Hall action to the United States District Court for the Western District of North Carolina (Charlotte Division) on January 5, 2004. The fifth complaint, captioned Charles Shope, et
al., v. FINOVA Capital Corporation, Moore & Van Allen PLLC, and Cherry, Bekaert & Holland LLP, case No. C 204022 (Shope), was filed in the United States District Court for the Southern District of Ohio, Eastern Division, and
was served on FINOVA on January 13, 2004.



Each of the five Thaxton-related lawsuits are
styled as class actions, purportedly brought on behalf of certain defined classes of people who had purchased subordinated notes from the Thaxton Entities. The complaints by the subordinated noteholders allege claims of fraud, securities fraud, and
various other civil conspiracy and business torts in the sale of the subordinated notes. Each of the complaints seeks an unspecified amount of damages, among other remedies. In addition to FINOVA, the complaints each name as co-defendants
Thaxtons accountants and attorneys, and in the Gregory case, several officers of the Thaxton Entities.



Upon motion by FINOVA to the United States Judicial Panel for MultiDistrict Litigation (Docket 1612), all five Thaxton-related actions were transferred on June 18, 2004 to the United States District Court for the District of
South Carolina for coordinated pre-trial proceedings (the MDL Litigation).



There are approximately 6,800 holders of the subordinated notes issued in several states, with a total subordinated indebtedness of approximately $122 million. The unsecured creditors committee has also filed an action in the Thaxton
bankruptcy against FINOVA, seeking to set aside FINOVAs liens and payments collected due to alleged securities fraud, violations of banking regulations, preference payments and similar claims. The Company believes all the claims against FINOVA
are without merit. FINOVA intends to vigorously defend the claims asserted against it in the MDL Litigation and by the creditors committee, and to protect its senior secured position in the bankruptcy proceedings for the Thaxton Entities.



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



The following section should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and the Special Note Regarding
Forward-Looking Statements included herein. Capitalized terms not defined herein are used as defined in the Form 10-K. The following discussion relates to The FINOVA Group Inc. and its subsidiaries (collectively FINOVA or the
Company), including its principal operating subsidiary, FINOVA Capital Corporation and its subsidiaries (FINOVA Capital).



OVERVIEW



Restrictions on Business Activities. The Companys business activities are limited to maximizing the value of its portfolio through the orderly collection of its assets. These activities include collection efforts pursuant to
underlying contractual terms, negotiation of prepayments, sales of assets or collateral and may include efforts to retain certain customer relationships and restructure or terminate other relationships. The Company has sold substantial portions of
asset portfolios and will consider future sales of any asset if buyers can be found at acceptable prices; however, there can be no assurance that the Company will be successful in efforts to sell additional assets. Any funds generated in excess of
cash reserves permitted by the Companys debt agreements are used to reduce FINOVAs obligations to its creditors. The Company is prohibited by the Indenture governing its Senior Notes (the Indenture) from engaging in any new
lending activities, except to honor existing customer commitments and in certain instances, to restructure financing relationships to maximize value.



Liquidity.Because substantially all of the Companys assets are pledged to secure the obligations under the Intercompany Notes securing the Senior Notes, FINOVAs
ability to obtain additional or alternate financing is severely restricted. Berkadia has no obligation to lend additional sums to or to further invest in the Company. Accordingly, FINOVA intends to rely on internally generated cash flows from the
liquidation of its assets as its only meaningful source of liquidity.



Collection/Liquidation of Assets. During the nine months ended September 30, 2004, internally generated net cash flows from the portfolio totaled $824.2 million. These net cash flows together with existing cash on hand at year end
were used to fund operations and service the Companys debt obligations.



Total
financial assets, net of the reserve for credit losses, declined to $811.1 million at September 30, 2004, down from $1.5 billion at December 31, 2003. The asset decline was primarily attributable to the sale and prepayment of the Companys
resort portfolio, scheduled collections, and additional asset sales and prepayments spread across the other asset portfolios.



The decline in net financial assets was partially offset by $104.2 million of non-cash activity, primarily the reversal of reserve for credit losses. Reserve reversals are down
from the prior year, but the Company continues to experience better than previously anticipated realization on the portfolio. The majority of the reversal activity has been driven by prepayments, asset sales and collections in excess of recorded
carrying amounts (net of reserves); however during the third quarter, a portion of the reversal was also attributable to valuation improvements in our transportation portfolio. In the second quarter, the aircraft-financing market began showing some
signs of improvement. This positive trend continued throughout the third quarter, resulting in reserve reversals related to certain financing assets.



The non-cash reversal of reserve for credit losses and cash gains realized from asset sales were the primary drivers in the Companys $84.1 million net income for the nine
months ended September 30, 2004.



Partial Prepayment of Senior Notes.During the
third quarter of 2004, the Company made a $326.4 million partial principal prepayment on the Senior Notes, which reduced the outstanding principal to $2.4 billion. FINOVA announced two additional partial prepayments each in the amount of $118.7
million. The first payment was made in October, while the second payment is scheduled for November 15, 2004. Following these prepayments, cumulative principal prepayments through November 15, 2004 will total $801.3 million or 27% of the $3.0 billion
principal amount outstanding as of December 31, 2003.



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A summary of prepayment activity on the Senior Notes is as follows:



|                  |  |                  |  |                  |         |                                  |               |  
|----------------- |  | ---------------- |  | ---------------- | ------- | -------------------------------- | ------------- | -
|Prepayment Date   |  | Record Date      |  | Principal Amount |         | Cumulative % ofPrincipal Prepaid |              
|May 17, 2004      |  | May 10, 2004     |  | $                | 237,500 |                                  | Approx.     8 | %
|August 16, 2004   |  | August 9, 2004   |  |                  | 326,410 |                                  | 19            | %
|October 15, 2004  |  | October 7, 2004  |  |                  | 118,718 |                                  | 23            | %
|November 15, 2004 |  | November 5, 2004 |  |                  | 118,718 |                                  | 27            | %
|                  |  |                  |  |                  |         |                                  |               |  
|                  |  |                  |  | $                | 801,346 |                                  |               |  
|                  |  |                  |  |                  |         |                                  |               |  



In accordance with the terms of the Indenture,
the Company is required to use any excess cash, as defined in the Indenture, to make semi-annual interest and principal payments on the Senior Notes. Additionally, the Indenture permits voluntary prepayments at the Companys option. The Company
believes principal prepayments may not continue at the same pace. The Companys asset pool continues to decline and generally contains less desirable assets than previously collected or sold.



The Company does not believe that it has sufficient assets to fully repay the Senior Notes, and the
Indenture prohibits the Company from engaging in new business. Therefore, FINOVA intends to rely on the liquidation of its remaining assets as its only meaningful source of liquidity. Following repayment of the Berkadia Loan in February 2004, the
Senior Notes have a first priority security interest in substantially all of FINOVAs assets.



No Stockholder Payments Anticipated.Stockholders should not expect any payments or distributions from FINOVA. The Indenture contemplates that as principal payments are made on the Senior Notes, FINOVA stockholders will
receive a distribution equal to 5.263% (i.e. 5%/95% as noted below) of each principal prepayment. Ninety-five percent (95%) of the remaining available cash after establishment of cash reserves as defined in the Indenture will be used to make
prepayments of principal on the Senior Notes and five percent (5%) is identified for distributions to and/or repurchases of stock from common stockholders. However, the Indenture prohibits FINOVA from making distributions to and/or repurchases from
stockholders if the payments would render the Company insolvent, would be a fraudulent conveyance or would not be permitted to be made under applicable law. Any such distribution and/or repurchase would be considered an impermissible restricted
payment under the Indenture. Given the Companys significant negative net worth and its belief that the Senior Notes will not be fully repaid, FINOVA is required to retain impermissible restricted payments until such time, if ever, that it is
no longer restricted from making a distribution to its stockholders or until it is required to use the cash to satisfy its debt obligations. In conjunction with the prepayments of Senior Notes noted above, the Company will have retained a total of
$42.2 million by November 15, 2004. Retained amounts are being segregated and reflected as restricted cash on the balance sheet.



HIGH INVESTMENT RISK OF SECURITIES. As previously stated, FINOVA believes that it will be unable to fully repay its Senior Notes and that it is unlikely that it will be able to
make any distributions to its stockholders. Consequently, investing in the Senior Notes and common stock involves a high level of risk.



CRITICAL ACCOUNTING ESTIMATES



The Companys consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires FINOVA to use estimates and assumptions
that affect reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. These estimates are subject to known and unknown risks, uncertainties and other factors that could materially impact
the amounts reported and disclosed in the financial statements. The Company believes the following to be among the most critical judgment areas in the application of its accounting policies.



Carrying Amounts, Impairment and Use of Estimates



Several of the Companys accounting policies pertain to the ongoing determination of impairment
reserves on financing assets and the carrying amount valuation of other financial assets. Determination of impairment reserves and carrying amounts rely, to a great extent, on the estimation and timing of future cash flows. FINOVAs cash flow
estimates assume that its asset portfolios are collected in an orderly fashion over time. These cash flows do not represent estimated recoverable amounts if FINOVA were to liquidate its asset portfolios over a short period of time. Management
believes that a short-term asset liquidation could have a material negative impact on the Companys ability to recover recorded amounts.



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FINOVAs process of determining impairment reserves and carrying amounts includes a periodic assessment of its portfolios on a
transaction by transaction basis. Cash flow estimates are based on current information and numerous assumptions concerning future general economic conditions, specific market segments, the financial condition of the Companys customers and
FINOVAs collateral. In addition, assumptions are sometimes necessary concerning the customers ability to obtain full refinancing of balloon obligations or residuals at maturity. As a result, the Companys cash flow estimates assume
FINOVA incurs refinancing discounts for certain transactions.



Changes in facts and
assumptions have resulted in, and may in the future result in, significant positive or negative changes to estimated cash flows and therefore, impairment reserves and carrying amounts.



Impairment of financing assets (subsequent to implementation of fresh-start reporting) is recorded through the Companys reserve for credit
losses, and accounting rules permit the reserve for credit losses to be increased or decreased as facts and assumptions change. However, certain financing assets were previously marked down for impairments that existed at the time fresh-start
reporting was implemented. These marked down values became the Companys cost basis in those assets, and accounting rules do not permit the carrying value of these assets to be increased above that fresh-start cost basis if subsequent facts and
assumptions result in a projected increase in value. Recoveries of amounts in excess of the fresh-start cost basis are recorded through operations when collected.



Impairment of other financial assets is marked down directly against the assets carrying amount. Accounting rules permit further markdown if
changes in facts and assumptions result in additional impairment; however, most of these assets (except certain investments and assets held for sale, which may be marked up for subsequent events) may not be marked up if subsequent facts and
assumptions result in a projected increase in value. Recoveries of previous markdowns are recorded through operations when collected.



Because of these accounting restrictions, FINOVA is not permitted to fully reflect some anticipated improvements in the portfolio until they are actually realized.



The carrying amounts and reserve for credit losses recorded on FINOVAs financial statements
reflect the Companys expectation of collecting less than the full contractual amounts owed by some of its customers and recovering less than its original investment in certain owned assets. The Company continues to pursue collection of full
contractual amounts and original investments, where appropriate, in an effort to maximize the value of its asset portfolios.



FINOVA has a number of aircraft that are off-lease and anticipates that additional aircraft will be returned to the Company as leases expire or operators are unable or unwilling to
continue making payments. In accordance with the provisions of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, FINOVA has recorded impairment losses on owned aircraft by calculating the present value of
estimated cash flows. For many of these aircraft, scrap value was assumed, but for certain aircraft, the Company elected (or anticipates electing upon return of the aircraft) to park and maintain the aircraft under the assumption that they will be
re-leased or sold in the future despite limited demand for certain of these aircraft today. While the current market makes it difficult to quantify, the Company believes that the recorded values determined under this methodology may significantly
exceed the values that the Company would realize if it was required to liquidate those aircraft today; however, actual amounts recovered from these aircraft may differ from recorded amounts and will be significantly impacted by the used aircraft
market in the future, which is difficult to predict.



The process of determining
appropriate carrying amounts for these aircraft is particularly difficult and subjective, as it requires the Company to estimate future demand, lease rates and scrap values for assets for which there is limited demand. The Company re-assesses its
estimates and assumptions each quarter. In particular, the Company assesses market activity and the likelihood that certain aircraft types, which are forecast to go back on lease in the future, will in fact be re-leased.



Reserve for Credit Losses. The reserve for credit losses represents FINOVAs estimate of
losses inherent in the portfolio and includes reserves on impaired assets and on assets that are not impaired. Impairment reserves are created if the carrying amount of an asset exceeds its estimated recovery, which is measured by estimating the
present value of expected future cash flows (discounted at contractual rates), market value, or the fair value of collateral. These methodologies include the use of significant estimates and assumptions regarding future customer performance (which
are inherently dependent upon assumptions about



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general economic conditions and those affecting the customers business), amount and timing of future cash flows and
collateral value. Reserves on assets that are not impaired are based upon assumptions including general economic conditions, overall portfolio performance, including loss experience, delinquencies and other inherent portfolio characteristics. Actual
results have in the past and could in the future, differ from these estimates, resulting in an increase or reversal of reserves. As of September 30, 2004 and December 31, 2003, the reserve for credit losses totaled $145.4 million and $274.8 million,
respectively.



Owned Assets. Assets held for the production of income and
operating leases are carried at amortized cost with impairment adjustments, if any, recorded as permanent markdowns through operations. An owned asset is considered impaired if anticipated undiscounted cash flows are less than the carrying amount of
the asset. Once the asset has been deemed impaired, accounting rules allow for several acceptable methods for measuring the amount of impairment. FINOVAs typical method of measuring impairment is based on the comparison of the carrying amount
of those assets to the present value of estimated future cash flows, using risk adjusted discount rates. These estimates include assumptions regarding lessee performance, the amount and timing of future cash flows, selection of risk adjusted
discount rates for net present value calculations and residual value assumptions for leases. If future portfolio assessments indicate additional impairment, additional markdowns may be necessary. Recoveries of previous markdowns are recorded through
operations when collected. As of September 30, 2004 and December 31, 2003, owned assets totaled $96.8 million and $127.9 million, or 10.1% and 7.1% of total financial assets (before reserves), respectively.



Assets Held for Sale. Assets held for sale are comprised of assets previously classified as
financing transactions and other financial assets that management does not have the intent and/or the expected ability to hold to maturity. These assets are revalued quarterly and are carried at the lower of cost or market less anticipated selling
expenses, with adjustment to estimated market value, if any, recorded as a gain or loss on financial assets. Market value is often determined by the estimation of anticipated future cash flows discounted at risk adjusted market rates to determine
net present value. Valuation of assets held for sale includes estimates regarding market conditions and ultimate sales prices. Actual sales prices could differ from estimates, impacting results from operations. As of September 30, 2004 and December
31, 2003, assets held for sale totaled $116.8 million and $138.2 million, or 12.2% and 7.7% of total financial assets (before reserves), respectively.



Nonaccruing Assets. Accounts are generally classified as nonaccruing and recognition of income is suspended when a customer becomes 90 days past due on the payment of
principal or interest, or earlier, if in the opinion of management, full recovery of contractual income and principal becomes doubtful. The decision to classify accounts as nonaccruing on the basis of criteria other than delinquency, is based on
certain assumptions and estimates including current and future general economic conditions, industry specific economic conditions, customer financial performance, the ability of customers to obtain full refinancing of balloons or residuals due to
FINOVA at maturity and FINOVAs ability or willingness to provide such refinancing. In certain instances, accounts may be returned to accruing status if sustained contractual performance is demonstrated. Changes in borrower performance,
assumptions or estimates could result in a material change in nonaccruing account classification and income recognition. As of September 30, 2004 and December 31, 2003, $324.8 million and $593.3 million, or 34.0% and 32.9% of total financial assets
(before reserves), were classified as nonaccruing, respectively.



Fresh-Start
Reporting.Upon emergence from chapter 11, the Company adopted fresh-start reporting, which resulted in material adjustments to the carrying amounts of the Companys assets and liabilities. The $863.7 million adjustment to assets was based
on the present value of estimated future cash flows discounted at appropriate risk adjusted interest rates selected at that time. Of this amount, $365.4 million was originally scheduled to amortize into income over the life of the underlying
transactions, while $80.7 million remained unamortized as of September 30, 2004. If the underlying transactions are subsequently classified as nonaccruing, amortization ceases. As of September 30, 2004, accretion had been suspended on $42.0 million
of the amortizable balance. The Senior Notes were initially recorded at $2.48 billion, reflecting their estimated fair value based upon their trading price shortly after they were issued. The $771.3 million original discount ($593.6 million as of
September 30, 2004) to the Senior Notes is being partially amortized as additional interest expense over the term of the notes. Discount amortization is adjusted as principal payments are made. The amortization will continue to increase the recorded
amount of the debt to the principal amount expected to be repaid at the time of emergence (approximately $2.8 billion). In the event that any Senior Notes are repurchased and extinguished, the unamortized fresh-start adjustment related to those
notes is written off and reflected as part of the gain or loss recognized from extinguishment of the debt.



The adjustments relating to the adoption of fresh-start reporting were based on estimates of anticipated future cash flows, risk adjusted discount rates and the market value of the Companys debt securities shortly after
emergence, but prior to September 11, 2001. Changes to estimated cash flows could further impact the reserve for credit losses or cause additional write downs of assets. Accounting principles generally accepted in the United States do not permit
additional fair value adjustments to the Senior Notes after the initial fresh-start reporting date, including those that would have resulted from the impact of September 11.



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RESULTS OF OPERATIONS



As a result of the application of fresh-start reporting guidelines upon emergence from bankruptcy and the Companys continued asset liquidation and shrinking operations, the
consolidated financial statements are not necessarily comparable from period to period. Trends during any given period may not be indicative of future trends; however, the following discussion of results may provide useful information regarding the
current status of the Company.



|                                        |  |                                  |         |   |                                 |   |         |        |  |   |         |   |  |      |         |   |        |   |         |   |  |   |         |  
|--------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ------ |  | - | ------- | - |  | ---- | ------- | - | ------ | - | ------- | - |  | - | ------- | -
|                                        |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                        |  | 2004                             |         |   | 2003                            |   |         | Change |  |   | 2004    |   |  | 2003 |         |   | Change |  
|                                        |  | (Dollars in thousands)           |        
|Interest margin                         |  | $                                | (30,198 | ) |                                 | $ | 8,230   |        |  | $ | (38,428 | ) |  | $    | (34,255 | ) |        | $ | (11,635 | ) |  | $ | (22,620 | )
|Reversal of provision for credit losses |  |                                  | 32,248  |   |                                 |   | 30,195  |        |  |   | 2,053   |   |  |      | 102,611 |   |        |   | 153,768 |   |  |   | (51,157 | )
|Net gain on financial assets            |  |                                  | 33,507  |   |                                 |   | 24,537  |        |  |   | 8,970   |   |  |      | 66,187  |   |        |   | 56,909  |   |  |   | 9,278   |  
|Portfolio expenses                      |  |                                  | (5,621  | ) |                                 |   | (3,930  | )      |  |   | (1,691  | ) |  |      | (16,205 | ) |        |   | (22,459 | ) |  |   | 6,254   |  
|General and administrative expenses     |  |                                  | (6,866  | ) |                                 |   | (12,344 | )      |  |   | 5,478   |   |  |      | (34,204 | ) |        |   | (44,927 | ) |  |   | 10,723  |  
|Gain from extinguishment of debt, net   |  |                                  |         |   |                                 |   | 28,493  |        |  |   | (28,493 | ) |  |      |         |   |        |   | 28,493  |   |  |   | (28,493 | )
|                                        |  |                                  |         |   |                                 |   |         |        |  |   |         |   |  |      |         |   |        |   |         |   |  |   |         |  
|Net income                              |  | $                                | 23,070  |   |                                 | $ | 75,181  |        |  | $ | (52,111 | ) |  | $    | 84,134  |   |        | $ | 160,149 |   |  | $ | (76,015 | )
|                                        |  |                                  |         |   |                                 |   |         |        |  |   |         |   |  |      |         |   |        |   |         |   |  |   |         |  



Nine Months Ended September 30, 2004 and
2003



Net Income.For the nine months ended September 30, 2004, the
Company reported net income of $84.1 million compared to net income of $160.1 million for the nine months ended September 30, 2003. The results for 2004 included a $102.6 million reversal of provision for credit losses and a net gain on financial
assets of $66.2 million, partially offset by a negative interest margin of $34.3 million, portfolio expenses of $16.2 million and general and administrative expenses of $34.2 million.



In general, the decrease in net income was primarily attributable to the nine months ended September 30, 2004 containing a lower level of asset
realization in excess of recorded carrying amounts and the Company not generating any gains from repurchases of debt in 2004. During the nine months ended September 30, 2003, the Company had experienced substantially better than anticipated
realization and performance of asset portfolios. The Company has been cautioning investors that those asset realization trends were not expected to continue at the same rate. Many of our more desirable and marketable assets have been liquidated and
the remaining portfolio is becoming more concentrated in used aircraft. However, the Company has seen some shift in our realization trends. In the second quarter of 2004, the aircraft-financing market began showing some signs of improvement. This
positive trend has continued and as a result, the Company had a greater level of asset realization in excess of recorded carrying amounts from its transportation portfolio than occurred in 2003. The Company has seen an increase in demand for certain
types of aircraft; however, the Company is still cautious because of uncertainty in the airline industry. The uncertainty in the airline industry and our ability to realize values centers around what might happen to lease rates and aircraft values
if additional carriers go into liquidation and excess aircraft are parked and forced into the market, among other factors. Numerous reports suggest that most major domestic carriers will post substantial losses during the third quarter due to high
fuel costs, and if the high fuel costs continue for a lengthy period of time, many airlines, except some healthy low-cost carriers, will be put on bankruptcy watch by the marketplace.



In certain instances, assets liquidated during the first nine months of 2004 returned amounts in excess of recorded values, but as expected,
realization has not amassed the level of the prior period. Opportunities for recoveries in excess of recorded values continue to exist and are expected to occur, but the Company expects those events to be more sporadic. The Company is encouraged by
the positive signs in the aircraft-financing market, but remains cautious due to the fragile nature of the marketplace. As a result, the Company expects net income for 2004 to be below the prior year level.



The results for 2003 included a $153.8 million reversal of provision for credit losses, a net gain on
financial assets of $56.9 million, and a $28.5 million net gain from extinguishment of debt, partially offset by a negative interest margin of $11.6 million, portfolio expenses of $22.5 million and general and administrative expenses of $44.9
million.



Interest Margin.For the nine months ended September 30, 2004, interest
margin was a negative $34.3 million, which reflected a $22.6 million decrease as compared to a negative $11.6 million for the first nine months of 2003. The negative margins were primarily due to a significantly lower level of earning assets ($507.1
million and $1.6 billion at September 30, 2004 and 2003, respectively) than the face amount of outstanding debt ($2.4 billion and $3.7 billion at September 30, 2004 and 2003, respectively)



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and the Companys high aggregate cost of funds (aggregate effective rate of 11.5% and 8.1% for the nine months ended September
30, 2004 and 2003, respectively), which continued to increase as the lower cost Berkadia Loan was repaid and higher cost Senior Notes became a higher percentage of the outstanding debt. Additionally, the aggregate effective rate has increased, to a
lesser extent, due to the acceleration of fresh-start discount amortization following principal prepayment of the Senior Notes earlier than originally anticipated when fresh-start guidelines were applied upon emergence.



Also contributing to the decline in interest margin was the recognition of a lower level of suspended
and deferred income ($67.3 million and $72.4 million for the nine months ended September 30, 2004 and 2003, respectively), which was generated from payoffs of certain assets in excess of their carrying amounts and the return to earning status of
certain assets following demonstration of sustained performance. Income recognition is suspended when an account is classified as a nonaccruing asset and any subsequent interest payments received are applied against its carrying amount to mitigate
the Companys exposure. In certain instances, suspended income is recognized upon payoff, if proceeds realized are in excess of the carrying amount or if after sustained performance is demonstrated, the account is returned to accruing status.



During the first nine months of 2004 and 2003, the Company returned multiple accounts to
accruing status. Certain of these accounts were previously restructured and the Company was monitoring the accounts for demonstration of sustained performance under the restructured terms before they would be returned to accruing status and prior
suspended income recognized. The Company believes that further instances where it will recognize suspended and deferred income may occur; however, income recognition is not expected to reach 2003 levels for the year. The portfolio is considerably
smaller and many of the accounts that have stabilized and demonstrated sustained performance have already been returned to earning status.



Provision for Credit Losses. For the nine months ended September 30, 2004, the Company recorded a $102.6 million reversal of provision for credit losses to reduce its
reserve for credit losses. The reserve reduction was primarily due to $30.4 million of recoveries of amounts previously written off, proceeds received from prepayments and asset sales in excess of recorded carrying amounts (net of reserves),
collections and the Companys detailed assessment of estimated inherent losses in its portfolio. In addition, the Companys income recognition policy for nonaccruing accounts can result in periodic reserve reductions. In accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, impairment reserves are recorded if the carrying amount of a loan exceeds the net present value of expected cash flows. For nonaccruing accounts, any cash received is
applied against the carrying amount of the transaction. As a result, carrying amounts decline at a faster pace than net present value, thus reducing the impairment reserve.



The $153.8 million reversal of provision for credit losses in 2003 was primarily due to proceeds from prepayments and asset sales exceeding recorded
carrying amounts (net of reserves), collections and recoveries of amounts previously written off.



The pace of collections and account payoffs has continued to be faster than expected. In most portfolios, amounts collected have often exceeded anticipated cash flows, resulting in a partial reversal of previously established reserves.
However, as expected, asset realization trends declined from the prior year. During the nine months ended September 30, 2003, the Company had experienced substantially better than anticipated realization and performance of asset portfolios. The
Company believes it is unlikely that those asset realization trends will continue at the same rate. While 2004 has shown continued accelerated collections, the volume and realization has not kept pace with the 2003 levels due in part to the smaller
portfolio.



The measurement of credit impairment and asset valuation is dependent upon
the significant use of estimates and management discretion when predicting expected cash flows. These estimates are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts reported and disclosed
herein. See Critical Accounting Estimates and the Special Note Regarding Forward-Looking Statements for a discussion of these and additional factors impacting the use of estimates.



Net Gain on Financial Assets. The Company realized a net gain on financial assets of $66.2
million for the nine months ended September 30, 2004 compared to a net gain of $56.9 million for the nine months ended September 30, 2003. The net gain during 2004 was primarily attributable to sales of owned assets and financing contracts in excess
of carrying amounts, the most significant of which included a $21.4 million gain realized on the sale of a portion of the Companys remaining timeshare resort portfolio, $7.1 million of net gains realized from the sale and valuation of private
and public investments and $29.1 million of gains realized from sales of aircraft and parts, and the forfeiture by aircraft operators of security deposits and maintenance reserves. The Company is expected to realize another significant gain in the
fourth quarter from its transportation portfolio, as a result of anticipated insurance proceeds equal to the contractual value of a financing lease related to an aircraft that was destroyed in a crash. This financing lease had previously been
written down to its estimated fair value.



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The carrying amount of the resort portfolio had previously been reduced by various adjustments, the majority of which were due to
the estimation of fair value in connection with FINOVAs implementation of fresh-start reporting upon emergence from bankruptcy. Accounting rules did not permit subsequent adjustments for increases in estimated valuation until they were
realized.



Additionally, the net gain on financial assets included a net gain of $1.7
million from the partial sale and valuation of the Companys real estate leveraged lease portfolio (classified as assets held for sale). The net gain is comprised of an $8.4 million gain realized on the sale of one property in excess of its
original contractual balance, partially offset by $6.7 million of net valuation markdowns based upon marketing efforts and updated appraisals received during the year. The Company has entered into letters of intent to sell the majority of the
remaining real estate leveraged lease portfolio, pending final due diligence. Sales of the assets are expected to close in the fourth quarter of 2004.



The net gain during 2003 was primarily attributable to sales of owned assets and financing contracts in excess of carrying amounts, the most significant of which included a $12.0
million gain from the sale of an equity investment in a resort timeshare company, an $11.4 million gain from the sale of a real estate leveraged lease, a $5.8 million gain realized from the sale of nine healthcare related loans and a $4.4 million
gain realized on the first quarter rediscount portfolio sale. The remainder of the gain activity is attributable to numerous individual asset sales (including repossessed assets, loans, residual positions and investments) spread across several
portfolios. Partially offsetting the gains were $28.5 million of owned asset impairment markdowns within the transportation portfolio. The impairment losses on the transportation portfolio resulted from the Companys revised estimate of future
cash flows expected to be realized through the operation or sale of its predominately older vintage owned aircraft portfolio.



The Company entered into a number of transactions to sell assets over the past year and expects asset sales to continue. However, the Company, barring continued improvement in the
aircraft-financing market, generally does not expect to maintain aggregate realization levels comparable to 2003 in future asset sales, due to the fact that many of its more attractive and marketable assets within the portfolio have been liquidated,
sold or collected. The Companys remaining portfolio of assets is concentrated in owned aircraft and impaired loans and financing leases. In the second quarter of 2004, the aircraft-financing market began showing some signs of improvement. This
positive trend has continued and as a result, the Company had a greater level of asset realization in excess of recorded carrying amounts from its transportation portfolio than occurred in 2003. The Company has seen an increase in demand for certain
types of aircraft; however, the Company is still cautious because of uncertainty in the airline industry. The uncertainty in the airline industry and our ability to realize values centers around what might happen to lease rates and aircraft values
if additional carriers go into liquidation and excess aircraft are parked and forced into the market, among other factors. Numerous reports suggest that most major domestic carriers will post substantial losses during the third quarter due to high
fuel costs, and if the high fuel costs continue for a lengthy period of time, many airlines, except some healthy low-cost carriers, will be put on bankruptcy watch by the marketplace. FINOVA will consider future sales if buyers can be found at
acceptable prices; however, there can be no assurance that the Company will be successful in efforts to sell additional assets or that realization will keep pace with prior year levels.



The measurement of owned asset impairment is dependent upon the significant use of estimates and management discretion when predicting expected future
cash flows and asset values. An asset is considered impaired if anticipated undiscounted cash flows are less than the carrying amount of the asset. Once the asset has been deemed impaired, accounting rules provide several acceptable methods for
measuring impairment. FINOVAs typical practice is to compare the carrying amount of the asset to the present value of the estimated future cash flows, using an appropriate risk adjusted discount rate. The process of measuring impairment
requires judgment and estimation, and the actual results may differ from the estimates. See Critical Accounting Estimates and the Special Note Regarding Forward-Looking Statements for a discussion of many factors that could
impact these estimates.



Portfolio Expenses.For the nine months ended September
30, 2004, portfolio expenses totaled $16.2 million compared to $22.5 million for 2003. The decrease was primarily due to a decline in the level of problem account and workout expenses for most portfolios, a slight increase in the level of reimbursed
expenses ($6.2 million during the first nine months of 2004 as compared to $5.7 million for the same period of 2003) and the timing of certain expenses anticipated during 2004.



The transportation portfolio continues to incur the majority of the Companys portfolio costs ($10.7 million and $13.3 million during the nine
months ended September 30, 2004 and 2003, respectively). These costs are related to the maintenance of older vintage aircraft and the cost of storing, maintaining and preparing off-lease aircraft for potential return to service.



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General and Administrative Expenses. General and administrative expenses decreased $10.7 million to $34.2 million for the
nine months ended September 30, 2004. The decrease was primarily due to a $5.8 million reversal of excess accruals, which resulted from the settlement of bankruptcy claims for amounts less than what had originally been accrued and $7.4 million of
cost savings resulting from staffing and office occupancy reductions (118 employees at September 30, 2004 compared to 233 at September 30, 2003), partially offset by higher severance costs ($3.9 million) related to those individuals notified of
their pending termination. The remainder of the decrease was the result of an overall decline in general and administrative expenses caused by decreases in portfolio and staffing levels. The Company expects the dollar level of general and
administrative expenses to continue to decrease as portfolio and staffing levels decrease; however, general and administrative expenses as a percentage of assets or revenues will likely increase over time as a result of certain fixed costs and the
high level of work intensive assets in the portfolio. The Company expects the dollar level decline in general and administrative expenses to be slowed due to the implementation of the control requirements of Section 404 of the Sarbanes-Oxley Act of
2002, which may result in staffing additions in certain areas or a decline in anticipated reductions in force, as well as an increase in consulting costs and professional services.



Income Tax Expense. For the nine months ended September 30, 2004 and 2003, income tax expense related to pre-tax book income was entirely
offset by a decrease in valuation allowances, which were previously established due to the Companys concern regarding its ability to utilize income tax benefits generated from losses in prior periods. As of September 30, 2004, the Company had
federal net operating losses of $996.1 million available for carryforward.



Three
Months Ended September 30, 2004 and 2003



Net Income.For the three
months ended September 30, 2004, the Company reported net income of $23.1 million compared to net income of $75.2 million for the three months ended September 30, 2003. The results for 2004 included a $32.2 million reversal of provision for credit
losses and a net gain on financial assets of $33.5 million, partially offset by a negative interest margin of $30.2 million, portfolio expenses of $5.6 million and general and administrative expenses of $6.8 million.



In general, the decrease in net income during the third quarter of 2004 was primarily attributable to a
lower level of asset realization in excess of recorded carrying amounts and the Company not generating any gains from repurchases of debt in 2004. During the third quarter of 2003, the Company experienced substantially better than anticipated
realization and performance of asset portfolios. The Company has been cautioning investors that those asset realization trends were not expected to continue at the same rate. Many of our more desirable and marketable assets have been liquidated and
the remaining portfolio is becoming more concentrated in used aircraft. However, the Company has seen some shift in our realization trends. In the second quarter of 2004, the aircraft-financing market began showing some signs of improvement. This
positive trend has continued and as a result, the Company had a greater level of asset realization in excess of recorded carrying amounts from its transportation portfolio than occurred in 2003. The Company has seen an increase in demand for certain
types of aircraft; however, the Company is still cautious because of uncertainty in the airline industry. The uncertainty in the airline industry and our ability to realize values centers around what might happen to lease rates and aircraft values
if additional carriers go into liquidation and excess aircraft are parked and forced into the market, among other factors. Numerous reports suggest that most major domestic carriers will post substantial losses during the third quarter due to high
fuel costs, and if the high fuel costs continue for a lengthy period of time, many airlines, except some healthy low-cost carriers, will be put on bankruptcy watch by the marketplace.



In certain instances, assets liquidated during the quarter returned amounts in excess of recorded values, but as expected, realization has slowed from
prior periods. Opportunities for recoveries in excess of recorded values continue to exist and are expected to occur, but the Company expects those events to be more sporadic. The Company is encouraged by the positive signs in the aircraft-financing
market, but remains cautious due to the fragile nature of the marketplace. As a result, the Company expects net income for 2004 to be below the prior year level.



The results for 2003 included interest margin of $8.2 million, a $30.2 million reversal of provision for credit losses, a net gain on financial assets
of $24.5 million and a $28.5 million net gain from extinguishment of debt, partially offset by portfolio expenses of $3.9 million and general and administrative expenses of $12.3 million.



Interest Margin.For the three months ended September 30, 2004, interest margin was negative $30.2 million, which reflected a $38.4 million
decrease as compared to a positive margin of $8.2 million for the three months ended September 30, 2003. The decline in interest margin was primarily attributable to the recognition of a lower level of suspended and deferred income ($7.0 million and
$37.1 million for the three months ended September 30, 2004 and 2003, respectively), which was generated from payoffs of certain assets in excess of their carrying amounts and the return to earning status of certain assets following



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demonstration of sustained performance. Income recognition is suspended when an account is classified as a nonaccruing asset and
any subsequent interest payments received are applied against its carrying amount to mitigate the Companys exposure. In certain instances, suspended income is recognized upon payoff, if proceeds realized are in excess of the carrying amount or
if after sustained performance is demonstrated, the account is returned to accruing status.



The Company believes that further instances where it will recognize suspended and deferred income may occur; however, income recognition is not expected to reach 2003 levels for the year. The portfolio is considerably smaller and many of
the accounts that have stabilized and demonstrated sustained performance have already been returned to earning status.



Also contributing to the negative margin is a significantly lower level of earning assets ($507.1 million and $1.6 billion at September 30, 2004 and 2003, respectively) than the
face amount of outstanding debt ($2.4 billion and $3.7 billion at September 30, 2004 and 2003, respectively) and the Companys high aggregate cost of funds (aggregate effective rate of 12.1% and 8.5% for the three months ended September 30,
2004 and 2003, respectively). The increase in the aggregate effective rate was primarily due to the repayment of the lower cost Berkadia Loan and to a lesser extent, due to the acceleration of fresh-start discount amortization following principal
prepayment of the Senior Notes earlier than originally anticipated when fresh-start guidelines were applied upon emergence.



Provision for Credit Losses. For the three months ended September 30, 2004, the Company recorded a $32.2 million reversal of provision for credit losses to reduce its
reserve for credit losses. The reserve reduction was primarily due to $8.7 million of recoveries of amounts previously written off, proceeds received from prepayments in excess of recorded carrying amounts (net of reserves), collections and the
Companys detailed assessment of estimated inherent losses in its portfolio. In addition, the Companys income recognition policy for nonaccruing accounts can result in periodic reserve reductions. In accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, impairment reserves are recorded if the carrying amount of a loan exceeds the net present value of expected cash flows. For nonaccruing accounts, any cash received is applied against the
carrying amount of the transaction. As a result, carrying amounts decline at a faster pace than net present value, thus reducing the impairment reserve.



The reversal of provision for credit losses in 2003 was primarily due to proceeds from prepayments and asset sales exceeding recorded carrying amounts (net of reserves),
collections and recoveries of amounts previously written off.



The pace of collections
and account payoffs has continued to be faster than expected. In most portfolios, amounts collected have often exceeded anticipated cash flows, resulting in a partial reversal of previously established reserves. The Company believes it is unlikely
that those asset realization trends will continue at the same rate.



The measurement of
credit impairment and asset valuation is dependent upon the significant use of estimates and management discretion when predicting expected cash flows. These estimates are subject to known and unknown risks, uncertainties and other factors that
could materially impact the amounts reported and disclosed herein. See Critical Accounting Estimates and the Special Note Regarding Forward-Looking Statements for a discussion of these and additional factors impacting the use
of estimates.



Net Gain on Financial Assets. The Company realized a net gain on
financial assets of $33.5 million for the three months ended September 30, 2004 compared to a net gain of $24.5 million for the three months ended September 30, 2003. The net gain during the third quarter of 2004 was primarily attributable to sales
of owned assets and financing contracts in excess of carrying amounts, the most significant of which included $12.7 million of net gains from the partial sale and valuation of the Companys real estate leveraged lease portfolio, $1.7 million of
net gains realized from the sale and valuation of private and public investments and $16.7 million of gains realized from sales of aircraft and parts, and the forfeiture by aircraft operators of security deposits and maintenance reserves. The
Company is expected to realize another significant gain in the fourth quarter from its transportation portfolio, as a result of anticipated insurance proceeds equal to the contractual value of a financing lease related to an aircraft that was
destroyed in a crash. This financing lease had previously been written down to its estimated fair value.



The net gain on the real estate leveraged lease portfolio (classified as assets held for sale) is comprised of an $8.4 million gain realized on the sale of one property in excess of its original contractual balance and $4.3
million of net valuation markups based upon marketing efforts during the quarter. The Company has entered into letters of intent to sell the majority of the remaining real estate leveraged lease portfolio, pending final due diligence. Sales of the
assets are expected to close in the fourth quarter of 2004.



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The net gain during the third quarter of 2003 was primarily attributable to sales of owned assets and financing contracts in excess
of carrying amounts, the most significant of which included a $12.0 million gain from the sale of an equity investment in a resort timeshare company, a $3.5 million gain from the sale of a repossessed healthcare facility, a $3.5 million gain from
the liquidation of sub-prime auto paper and a $3.3 million gain from the sale of a residual position in an aircraft leveraged lease. Partially offsetting the gains were $4.0 million of owned asset impairment markdowns within the transportation
portfolio.



The Company entered into a number of transactions to sell assets over the
past year and expects asset sales to continue. However, the Company, barring continued improvement in the aircraft-financing market, generally does not expect to maintain aggregate realization levels comparable to 2003 in future asset sales, due to
the fact that many of its more attractive and marketable assets within the portfolio have been liquidated, sold or collected. The Companys remaining portfolio of assets is concentrated in owned aircraft and impaired loans and financing leases.
In the second quarter of 2004, the aircraft-financing market began showing some signs of improvement. This positive trend has continued and as a result, the Company had a greater level of asset realization in excess of recorded carrying amounts from
its transportation portfolio than occurred in 2003. The Company has seen an increase in demand for certain types of aircraft; however, the Company is still cautious because of uncertainty in the airline industry. The uncertainty in the airline
industry and our ability to realize values centers around what might happen to lease rates and aircraft values if additional carriers go into liquidation and excess aircraft are parked and forced into the market, among other factors. Numerous
reports suggest that most major domestic carriers will post substantial losses during the third quarter due to high fuel costs, and if the high fuel costs continue for a lengthy period of time, many airlines, except some healthy low-cost carriers,
will be put on bankruptcy watch by the marketplace. FINOVA will consider future sales if buyers can be found at acceptable prices; however, there can be no assurance that the Company will be successful in efforts to sell additional assets or that
realization will keep pace with prior year levels.



The measurement of owned asset
impairment is dependent upon the significant use of estimates and management discretion when predicting expected future cash flows and asset values. An asset is considered impaired if anticipated undiscounted cash flows are less than the carrying
amount of the asset. Once the asset has been deemed impaired, accounting rules provide several acceptable methods for measuring impairment. FINOVAs typical practice is to compare the carrying amount of the asset to the present value of the
estimated future cash flows, using an appropriate risk adjusted discount rate. The process of measuring impairment requires judgment and estimation, and the actual results may differ from the estimates. See Critical Accounting Estimates
and the Special Note Regarding Forward-Looking Statements for a discussion of many factors that could impact these estimates.



Portfolio Expenses.For the three months ended September 30, 2004, portfolio expenses totaled $5.6 million compared to $3.9 million for 2003. The increase was primarily due
to the timing of certain expenses within the transportation portfolio.



The
transportation portfolio continues to incur the majority of the Companys portfolio costs ($4.2 million and $1.2 million during the three months ended September 30, 2004 and 2003, respectively). These costs are related to the maintenance of
older vintage aircraft and the cost of storing, maintaining and preparing off-lease aircraft for potential return to service.



General and Administrative Expenses. General and administrative expenses decreased $5.5 million to $6.9 million for the three months ended September 30, 2004. The decrease
was primarily due to a $5.8 million reversal of excess accruals, which resulted from the settlement of bankruptcy claims for amounts less than what had originally been accrued and $1.4 million of cost savings resulting from staffing and office
occupancy reductions (118 employees at September 30, 2004 compared to 233 at September 30, 2003), partially offset by higher severance costs ($1.7 million) related to those individuals notified of their pending termination. The Company expects the
dollar level of general and administrative expenses to continue to decrease as portfolio and staffing levels decrease; however, general and administrative expenses as a percentage of assets or revenues will likely increase over time as a result of
certain fixed costs and the high level of work intensive assets in the portfolio. The Company expects the dollar level decline in general and administrative expenses to be slowed due to the implementation of the control requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which may result in staffing additions in certain areas or a decline in anticipated reductions in force, as well as an increase in consulting costs and professional services.



Income Tax Expense. For the three months ended September 30, 2004 and 2003, income tax expense
related to pre-tax book income was entirely offset by a decrease in valuation allowances, which were previously established due to the Companys concern regarding its ability to utilize income tax benefits generated from losses in prior
periods. As of September 30, 2004, the Company had federal net operating losses of $996.1 million available for carryforward.



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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES



Because substantially all of the Companys assets are pledged to secure the obligations under the Intercompany Notes securing the Senior Notes,
FINOVAs ability to obtain additional or alternate financing is severely restricted. Berkadia has no obligation to lend additional sums to or to further invest in the Company. Accordingly, FINOVA intends to rely on internally generated cash
flows from the liquidation of its assets as its only meaningful source of liquidity.



The
terms of the Indenture prohibit the Company from using available funds (after certain permitted uses) for any purpose other than to satisfy its obligations to creditors and to make limited payments to stockholders in certain circumstances. Under the
terms of the Indenture, the Company is permitted to establish a cash reserve in an amount not to exceed certain defined criteria. Due to the Companys limited sources of liquidity, the estimation of cash reserves is critical to the overall
liquidity of the Company. Cash reserve estimations are subject to known and unknown risks, uncertainties and other factors that could materially impact the amounts determined. Failure to adequately estimate a cash reserve in one period could result
in insufficient liquidity to meet obligations in that period, or in a subsequent period, if actual cash requirements exceed the cash reserve estimates.



During the third quarter of 2004, the Company made a $326.4 million partial principal prepayment on the Senior Notes, which reduced the outstanding principal to $2.4 billion.
FINOVA announced two additional partial prepayments each in the amount of $118.7 million. The first payment was made in October, while the second payment is scheduled for November 15, 2004. Following these prepayments, cumulative principal
prepayments through November 15, 2004 will total $801.3 million or 27% of the $3.0 billion principal amount outstanding as of December 31, 2003.



In accordance with the terms of the Indenture, the Company is required to use any excess cash, as defined in the Indenture, to make semi-annual interest and principal payments on
the Senior Notes. Additionally, the Indenture permits voluntary prepayments at the Companys option. The Company believes principal prepayments may not continue at the same pace. The Companys asset pool continues to decline and generally
contains less desirable assets than previously collected or sold.



The Company does not
believe that it has sufficient assets to fully repay this debt, and the Indenture prohibits the Company from engaging in new business. Therefore, FINOVA intends to rely on the liquidation of its remaining assets as its only meaningful source of
liquidity. Following repayment of the Berkadia Loan in February 2004, the Senior Notes have a first priority security interest in substantially all of FINOVAs assets.



Stockholders should not expect any payments or distributions from FINOVA. The Indenture contemplates that as principal payments are made on the Senior
Notes, FINOVA stockholders will receive a distribution equal to 5.263% (i.e. 5%/95% as noted below) of each principal prepayment. Ninety-five percent (95%) of the remaining available cash after establishment of cash reserves as defined in the
Indenture will be used to make prepayments of principal on the Senior Notes and five percent (5%) is identified for distributions to and/or repurchases of stock from common stockholders. However, the Indenture prohibits FINOVA from making
distributions to and/or repurchases from stockholders if the payments would render the Company insolvent, would be a fraudulent conveyance or would not be permitted to be made under applicable law. Any such distribution and/or repurchase would be
considered an impermissible restricted payment under the Indenture. Given the Companys significant negative net worth and its belief that the Senior Notes will not be fully repaid, FINOVA is required to retain impermissible restricted payments
until such time, if ever, that it is no longer restricted from making a distribution to its stockholders or until it is required to use the cash to satisfy its debt obligations. In conjunction with the prepayments of Senior Notes noted above, the
Company will have retained a total of $42.2 million by November 15, 2004. Retained amounts are being segregated and reflected as restricted cash on the balance sheet.



The Company has a negative net worth of $571.9 million as of September 30, 2004 ($1.2 billion if the Senior Notes are considered at their principal
amount due). Based on the Companys current financial condition (including having only $811.1 million of net financial assets), it is highly unlikely there will be funds available to fully repay the outstanding principal on the Senior Notes at
maturity or make any 5% distribution to common stockholders. As a result, there would not be a return to the Companys stockholders. Consequently, investing in the Senior Notes and common stock involves a high level of risk.



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Obligations and Commitments



For a detailed listing of FINOVAs significant contractual obligations and contingent commitments, refer to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. Other than the first quarter full repayment of the Berkadia Loan and the partial prepayments of the Senior Notes noted above, there has not been any material changes during the nine months ended September 30, 2004, except that
unfunded customer commitments were substantially eliminated in conjunction with the second quarter resort portfolio sale and prepayments.



Collection of the Portfolio



As noted previously, the Companys current business activities are limited to maximizing the value of its portfolio through the orderly collection of its assets. These
activities include collection efforts pursuant to underlying contractual terms, negotiation of prepayments, sales of assets or collateral and may include efforts to retain certain customer relationships and restructure or terminate other
relationships. The Company has sold portions of asset portfolios and will consider future sales of any asset if buyers can be found at acceptable prices. Due to restrictions contained in the Indenture as well as its general inability to access
capital in the public and private markets, the Companys only viable source of cash flow is from the collection of its portfolio.



The following table presents the activity in total financial assets, net of the reserve for credit losses for the nine months ended September 30, 2004:



|                                               |  |   |           |  
|---------------------------------------------- |  | - | --------- | -
|(Dollars in thousands)                         |  |   |          
|Total financial assets at December 31, 2003    |  | $ | 1,531,156 |  
|                                               | 
|Cash activity:                                 |  |   |           |  
|Fundings under existing customer commitments   |  |   | 50,605    |  
|Collections and proceeds from financial assets |  |   | (874,845  | )
|                                               |  |   |           |  
|Net cash flows                                 |  |   | (824,240  | )
|                                               |  |   |           |  
|Non-cash activity:                             |  |   |           |  
|Reversal of provision for credit losses        |  |   | 102,611   |  
|Net charge-offs of financial assets            |  |   | (7,094    | )
|Other non-cash activity                        |  |   | 8,646     |  
|                                               |  |   |           |  
|Net non-cash activity                          |  |   | 104,163   |  
|                                               |  |   |           |  
|Total financial assets at September 30, 2004   |  | $ | 811,079   |  
|                                               |  |   |           |  



Total financial assets, net of the reserve for
credit losses, declined to $811.1 million at September 30, 2004, down from $1.5 billion at December 31, 2003. During 2004, net cash flows from the portfolio totaled $824.2 million, while non-cash activity resulted in a $104.2 million increase in net
financial assets. Components of net cash flow included $674.2 million of collections from financial assets (including recoveries) and $200.6 million from the sale of assets (excluding cash gains), offset by $50.6 million of fundings under existing
customer commitments. Collections from financial assets included a significant level of prepayments (customer payments in advance of scheduled due dates). Non-cash activity included a $102.6 million reversal of reserves and other non-cash activity
of $8.6 million, partially offset by a $7.1 million reduction related to markdowns of owned assets.



The resort portfolio, which had been the largest portfolio at December 31, 2003, declined to a carrying amount of $40.8 million or 4.3% of the Companys remaining financial assets. The remaining resort portfolio is
comprised of a small number of accounts that were excluded from the Companys second quarter portfolio sale because the Company was offered less than it believes could be realized from the disposition of the assets. The remaining assets in
certain instances have been marked down and/or reserved due to certain issues or uncertainties with the customers or the underlying properties. As a result, the remaining resort assets have a greater potential for recoveries in excess of their net
carrying amounts.



The specialty real estate portfolio declined to a carrying amount of
$257.7 million at September 30, 2004 as a result of asset sales (including one real estate leveraged lease property with a carrying value of $47.7 million), scheduled amortization and some prepayment activity. The specialty real estate portfolio,
which currently represents 27.0% of the Companys remaining financial assets, is expected to runoff somewhat faster than previously estimated due to additional prepayments and asset



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sales anticipated during 2004. The Company has been formally notified of certain customers intentions to prepay their
obligations as early as the fourth quarter of 2004. Additionally, the Company has entered into letters of intent to sell the majority of the remaining real estate leveraged lease portfolio, pending final due diligence. Sales of the real estate
leveraged lease portfolio are expected to close in the fourth quarter of 2004. The specialty real estate portfolio contains the lowest level of nonaccruing and impaired assets and represents approximately 89% of the Companys total unimpaired
and performing assets. As a result, these assets are generally recorded at a low discount to par and their liquidation is not expected to generate significant returns in excess of par or contractual amounts.



The carrying amount of the Companys transportation portfolio declined to $352.4 million at
September 30, 2004, which represents 36.8% of the Companys total financial assets. The transportation portfolio is primarily comprised of older vintage aircraft, often of class and configuration with limited demand in the aircraft market.
FINOVA has a significant number of aircraft that are off-lease and anticipates that additional aircraft will be returned to the Company as leases expire or operators are unable or unwilling to continue making payments. The Companys portfolio
of aircraft generally is not as desirable to commercial airlines and as a result, off-lease aircraft are primarily marketed in whole or part to carriers in developing countries. FINOVA continues to reassess the likelihood of certain off-lease assets
being re-leased or sold. The potential for substantial recoveries on these accounts continues to be hampered by the uncertainty in the industry. A market for many of these aircraft may never return, but the Company believes that the best hope for
recoveries is to patiently work these assets and wait for opportune moments to sell or lease assets, which have the potential to return to service, and scrap those assets that are not likely to return to service. In the second quarter of 2004, the
aircraft-financing market began showing some signs of improvement. This positive trend has continued and as a result, the Company has experienced a greater level of asset realization in excess of recorded carrying amounts from its transportation
portfolio during 2004. The Company has seen an increase in demand for certain types of aircraft; however, the Company is still cautious because of uncertainty in the airline industry. The uncertainty in the airline industry and our ability to
realize values centers around what might happen to lease rates and aircraft values if additional carriers go into liquidation and excess aircraft are parked and forced into the market, among other factors. Numerous reports suggest that most major
domestic carriers will post substantial losses during the third quarter due to high fuel costs, and if the high fuel costs continue for a lengthy period of time, many airlines, except some healthy low-cost carriers, will be put on bankruptcy watch
by the marketplace. During the third quarter, the Company experienced more activity within its transportation portfolio and realized $16.7 million of net gains from sales of aircraft and parts, and the forfeiture by aircraft operators of security
deposits and maintenance reserves. The Company is expected to realize another significant gain in the fourth quarter as a result of anticipated insurance proceeds equal to the contractual value of a financing lease related to an aircraft that was
destroyed in a crash. This financing lease had previously been written down to its estimated fair value.



All other portfolios (carrying amount of $305.5 million at September 30, 2004) is comprised of the remnants of former portfolios (commercial equipment, communications, corporate finance, franchise, healthcare, mezzanine, public
and rediscount) that for various reasons have not been sold or collected. The decline in the portfolio was primarily attributable to numerous prepayments and asset sales. This portfolio represents 31.9% of the Companys financial assets and
generally contains assets that are more work intensive to liquidate. Approximately 81% of these assets are impaired or nonaccruing. Many of the borrowers have missed payments, including balloon obligations, or are otherwise in default. Many of these
assets have been in difficult workouts for a number of years and the Company believes that a number of these workouts will be finalized during the year. As a result, the portfolio is anticipated to have significant runoff during 2004. Because this
portfolio has been significantly marked down and reserved, the potential exists for recoveries in excess of carrying amounts.



FINOVAs reserve for credit losses decreased to $145.4 million at September 30, 2004 from $274.8 million at December 31, 2003. At September 30, 2004, the total carrying amount
of impaired loans and leases was $555.6 million, of which $233.9 million were revenue accruing. The Company has established impairment reserves of $121.7 million related to $304.3 million of impaired assets. At December 31, 2003, the total carrying
amount of impaired loans and leases was $800.0 million, of which $220.7 million were revenue accruing. Impairment reserves at December 31, 2003 totaled $240.0 million related to $473.7 million of impaired assets.



Reserves on impaired assets decreased due to write-offs, an improvement in pay-off and collection
experience on certain assets previously reserved and the Companys application of cash received on nonaccruing assets, thus reducing the impairment reserves required on those assets. Partially offsetting these reductions were new impairment
reserves established for assets reclassified to impaired status during 2004 and additional reserves recorded on existing impaired assets.



Other reserves related to estimated inherent losses on unimpaired assets decreased as a result of collections, asset sales, changes in historical loss experience and the migration
of certain accounts to impaired assets.



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Accounts classified as nonaccruing were $324.8 million or 34.0% of total financial assets (before reserves) at September 30, 2004
as compared to $593.3 million or 32.9% at December 31, 2003. The decline in nonaccruing assets was attributed to collections and asset sales of $162.2 million and write-offs and net valuation markdowns of $55.1 million, partially offset by the
migration of certain previously accruing accounts to nonaccruing status. Also contributing to the decline was the return of certain assets to accruing status following demonstration of sustained performance and the classification of newly
repossessed aircraft as assets held for the production of income, which are excluded from nonaccruing assets. During 2004, the Company returned multiple accounts to accruing status. Certain of these accounts were previously restructured and the
Company was monitoring the accounts for demonstration of sustained performance under the restructured terms before they would be returned to accruing status.



The Company continues to be concerned regarding its ability to fully collect principal and interest on certain nonaccruing assets that have significant balloon payments or residual
values due to FINOVA at maturity, because those customers may not have the ability to obtain refinancing at maturity for the full amount of these residual/balloon payments. FINOVAs ability or willingness to continue to extend credit to these
borrowers may be affected by its own capital resources and its assessment of the costs and benefits of doing so. In certain of these cases, FINOVA has classified transactions as nonaccruing even though principal and interest payments are current. If
necessary, impairment reserves on these transactions are established in accordance with SFAS No. 114.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



Certain
statements in this report are forward-looking, in that they do not discuss historical fact, but instead reflect future expectations, projections, intentions or other items. Forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include assumptions, estimates and valuations implicit in the financial statements and related notes as well as matters discussed throughout this
report including sections captioned Item 1. Business, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7a. Quantitative and Qualitative Disclosure About Market
Risk. They are also made in documents incorporated in this report by reference, or in which this report may be incorporated.



Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this report, the words
estimate, expects, anticipates, believes, plans, intends and similar expressions are intended to identify forward-looking statements that involve known and unknown risks and
uncertainties. Risks, uncertainties and other factors may cause FINOVAs actual results or performance to differ materially from those contemplated by the forward-looking statements. Many of these factors are discussed in this report and
include, but are not limited to:



| | The extent to which FINOVA is successful in implementing its business strategy, including the efforts to maximize the value of its portfolio through orderly collection or sales of assets. The
carrying amounts and impairment of FINOVAs portfolio are based on estimates of asset value and the estimation and timing of future cash flows. Actual results may differ from the estimated amounts. Failure to fully implement its business
strategy might result in adverse effects, impair the Companys ability to repay outstanding debt and other obligations and have a materially adverse impact on its financial position and results of operations.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The effect of economic conditions and the performance of FINOVAs borrowers. Economic conditions in general or in particular market segments could impair the ability of FINOVAs
borrowers to operate or expand their businesses, which might result in decreased performance, adversely affecting their ability to repay their obligations. The rate of borrower defaults or bankruptcies may increase. Changing economic conditions
could adversely affect FINOVAs ability to realize estimated cash flows. Conversely, economic conditions and borrower performance could improve, resulting in better results than anticipated in the Companys cash flow estimates.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The cash interest cost of FINOVAs debt exceeds the cash yield of its asset portfolio and the face amount of interest bearing debt exceeds the amount of earning assets in the portfolio.
Failure to comply with its credit obligations could result in additional charges or impact its ability to continue to liquidate its portfolio over time. In addition, changes in interest rate indices may impact interest margin due to lack of matched
funding of the Companys assets and liabilities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Loss of employees. FINOVA must retain a sufficient number of employees with relevant knowledge and skills to continue to monitor, collect and sell its portfolio. Failure to do so could result
in additional losses. Retention incentives intended to retain that employee base may not be successful in the future. In addition, as staff is reduced, internal controls and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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procedures must be readjusted to help assure proper handling and reporting of financial and other matters. Doing so
becomes more difficult as staff is reduced, and the loss of key personnel could have a significant impact on the ability to monitor, collect and manage the portfolio.



| | Conditions affecting the Companys aircraft portfolio, including changes in Federal Aviation Administration directives and conditions affecting the demand for used aircraft and the
demand for aircraft spare parts. FINOVAs aircraft are often of older vintage and contain configurations of engines, avionics, fuel tanks and other components that may not be as high in demand as other available aircraft in that class. Future
demand for those aircraft may decrease further as newer or more desirable aircraft and components become available.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Changes in government regulations, tax rates and similar matters. The Company has not recorded a benefit in its financial statements for its existing tax attributes and estimated future tax
deductions since it does not expect to generate the future taxable income needed to use those tax benefits. The Company may never be able to use those tax attributes, including most of its net operating loss carryforwards.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Potential liabilities associated with dispositions of assets.
|- | -------------------------------------------------------------



| | The accuracy of information relied upon by FINOVA, which includes information supplied by its borrowers or prepared by third parties, such as appraisers. Inaccuracies in that information
could lead to inaccuracies in the estimates.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As the portfolio declines, increasing concentrations of financial assets in certain industries such as real estate and transportation could make the overall portfolio more subject to changes
in performance in those industries. Additionally, the Company previously completed multiple financial transactions with individual borrowers and their affiliates, resulting in a greater total exposure to those borrowers beyond the typical
transaction size and increased concentration risk to economic events affecting the industries (including transportation) of such borrowers and their affiliates.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Risks of litigation. See Part II Item 1. Legal Proceedings, for a further discussion.
|- | ---------------------------------------------------------------------------------------



| | Other risks detailed in this and FINOVAs other SEC reports or filings.
|- | -----------------------------------------------------------------------



| | The process of selling aircraft parts inherently has more control risks than selling whole aircraft. The Company must maintain an adequate control environment for inventory, which includes
having knowledgeable personnel and systems to monitor, collect and manage that process. Failure to maintain adequate controls can result in the loss of inventory or failure to maximize the value of those assets.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



FINOVA does not intend to update forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements. FINOVA cannot predict the risk from reliance on forward-looking statements in light of the many factors that could affect their accuracy.



Item 3. Quantitative and Qualitative Disclosure About Market Risk



There were no material changes from the information provided in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



Item 4. Controls and Procedures



|(a) | The Companys management evaluated, with the participation of the Companys principal executive and principal financial officer, the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of September 30, 2004. Based on their evaluation, the Companys principal
executive and principal financial officer concluded that the Companys disclosure controls and procedures were effective as of September 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(b) | There has been no change in the Companys internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
Companys fiscal quarter ended September 30, 2004, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued
thereunder, the Company is scheduled to include in its Annual Report on Form 10-K for the year ending December 31, 2005 a report on managements assessment of the effectiveness of the Companys internal controls over financial reporting.
The Companys independent registered public accountants will also be required to attest to and report on managements assessment.



The process of complying with these requirements includes a comprehensive evaluation and documentation of the Companys internal controls over financial
reporting. In this regard, management must dedicate internal resources, engage outside consultants and adopt a detailed plan to (i) document the Companys internal controls over financial reporting, (ii) assess the adequacy of the
Companys internal controls over financial reporting, (iii) take steps to improve control processes where appropriate and (iv) validate through testing that controls are functioning as documented. There can be no assurance that deficiencies or
weaknesses in the design or operation of internal controls over financial reporting will not be found and, if found, that the Company will have sufficient time to remediate any such deficiencies or weaknesses and perform testing procedures before
the end of 2005.



The Company believes that any system of internal
accounting controls, no matter how well designed and operated, can provide only reasonable (and not absolute) assurance that all of its objectives will be met, including the detection of fraud. Furthermore, no evaluation of internal accounting
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.



The Company continues to reduce its workforce, consolidate its operations and outsource certain functions. Accordingly, responsibility for administration,
management and review of many of the Companys assets has transitioned among FINOVAs remaining personnel. Management has supervised these transitions and has implemented procedures it believes provide effective disclosure and internal
controls over financial reporting. The Company is assessing the efficacy of these procedures and will continue to do so in subsequent periods.



PART II OTHER INFORMATION



Item 1. Legal Proceedings



See Part I, Item 1, Note I
Litigation and Claims for a discussion of certain legal proceedings.



Item 6. Exhibits



|a) | Exhibits
|-- | --------



|     |  |                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.         
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.         
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18. U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18. U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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THE FINOVA GROUP INC.



Signatures



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



|                         |  |                       |  |                                                                               
|------------------------ |  | --------------------- |  | ------------------------------------------------------------------------------
|                         |  | THE FINOVA GROUP INC.
|                         |  | (Registrant)         
|                         |  |                      
|Dated: November 10, 2004 |  | By:                   |  | /s/ Richard A. Ross                                                           
|                         |  |                       |  | Richard A. Ross, Senior Vice President - Chief Financial Officer and Treasurer
|                         |  |                       |  | (principal financial officer)                                                 



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EXHIBIT INDEX



|              |  |                                                                                                                                            
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.         
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.         
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to 18. U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18. U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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