**United StatesSecurities and Exchange Commission**

 

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**Washington, D.C.  20549**

 

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# **Form 10-Q**

 

| ý                             |   | **Quarterly  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                      |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                              |
|                               |   | **For the quarterly period ended  September 30, 2003**                                                                                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                                                                                                              |
| **OR**                             |
|                               |   |                                                                                                                                                                                                                                                                                                                                                              |
| o                                  |   | **Transition Report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                                                                                                              |
|                               |   | **For the transition period from                              to                           ** |
|                               |   |                                                                                                                                                                                                                                                                                                                                                              |
| **Commission File Number 0-10795** |

 

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# **Boeing Capital Corporation**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **95-2564584**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**500 Naches Ave., SW, 3rdFloor ****•  Renton, Washington  98055**

(Address of principal executive offices)

 

**(425) 393-2914**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  ý

 

No common stock is held bynon-affiliates of the registrant. Common shares outstanding at October 29,2003:  50,000 shares

 

Registrant meets the conditionsset forth in General Instruction H(1)(a) and (b) of Form 10-Q and is thereforefiling this Form with the reduced disclosure format.

 

#  

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**Table of Contents**

#  

| **Part I**  | **Financial Information**                                                             |
|-------------|---------------------------------------------------------------------------------------|
|        |                                                                                  |
| Item 1.     | Financial Statements                                                                  |
|        | Consolidated Balance Sheets                                                           |
|        | Consolidated Statements of Operations                                                 |
|        | Consolidated Statements of Shareholder’s  Equity and Comprehensive Income (Loss) |
|        | Consolidated Statements of Cash Flows                                                 |
|        | Notes to Consolidated Financial Statements                                            |
|        |                                                                                  |
| Item 2.     | Management’s Narrative Analysis of Results  of Operations                        |
|        |                                                                                  |
| Item 4.     | Controls and Procedures                                                               |
|        |                                                                                  |
| **Part II** | **Other Information**                                                                 |
|        |                                                                                  |
| Item 1.     | Legal Proceedings                                                                     |
|        |                                                                                  |
| Item 5.     | Other Information                                                                     |
|        |                                                                                  |
| Item  6.    | Exhibits and Reports on Form 8-K                                                      |
|        |                                                                                  |
| Signatures  |

 

2

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# **Part I**

 

# **Item1.  Financial Statements**

**Boeing Capital Corporation and Subsidiaries**

## **ConsolidatedBalance Sheets**

(Unaudited)

 
| **(Dollars in millions, except par value)**                                                      |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| ASSETS                                                                                           |   |                         |   |                        |   |
| Cash and cash equivalents                                                                        |   | $                            | 748    |                        | $      | 686 |   |
| Receivables:                                                                                     |   |                         |   |                        |   |
| Financing leases                                                                                 |   | 4,301                        |   | 4,550                       |   |
| Notes and other receivables                                                                      |   | 3,297                        |   | 2,878                       |   |
|                                                                                             |   | 7,598                        |   | 7,428                       |   |
| Allowance for losses on receivables                                                              |   | (350                         | )      | (260                        | )      |
|                                                                                             |   | 7,248                        |   | 7,168                       |   |
|                                                                                             |   |                         |   |                        |   |
| Equipment under operating leases, net of  accumulated depreciation                               |   | 3,871                        |   | 3,506                       |   |
| Investments                                                                                      |   | 492                          |   | 517                         |   |
| Equipment held for sale or re-lease, net of  accumulated depreciation                            |   | 282                          |   | 311                         |   |
| Other assets                                                                                     |   | 331                          |   | 375                         |   |
|                                                                                             |   | $                            | 12,972 |                        | $      | 12,563 |   |
|                                                                                             |   |                         |   |                        |   |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                        |   |                         |   |                        |   |
| Liabilities:                                                                                     |   |                         |   |                        |   |
| Accounts payable and accrued expenses                                                            |   | $                            | 63     |                        | $      | 127 |   |
| Other liabilities                                                                                |   | 224                          |   | 220                         |   |
| Accounts due to Boeing and BCSC                                                                  |   | 74                           |   | 22                          |   |
| Deferred income taxes                                                                            |   | 1,203                        |   | 1,073                       |   |
| Debt:                                                                                            |   |                         |   |                        |   |
| Senior                                                                                           |   | 9,535                        |   | 9,441                       |   |
| Subordinated                                                                                     |   | 24                           |   | 24                          |   |
|                                                                                             |   | 11,123                       |   | 10,907                      |   |
|                                                                                             |   |                         |   |                        |   |
| Commitments and contingencies – Note 9                                                      |   |                         |   |                        |   |
|                                                                                             |   |                         |   |                        |   |
| Shareholder’s equity:                                                                       |   |                         |   |                        |   |
| Common Stock - $100 par value; authorized  100,000 shares;  issued and outstanding 50,000 shares |   | 5                            |   | 5                           |   |
| Capital in excess of par value                                                                   |   | 1,231                        |   | 1,090                       |   |
| Accumulated other comprehensive loss, net  of tax                                                |   | (12                          | )      | (17                         | )      |
| Income retained for growth                                                                       |   | 625                          |   | 578                         |   |
|                                                                                             |   | 1,849                        |   | 1,656                       |   |
|                                                                                             |   | $                            | 12,972 |                        | $      | 12,563 |   |

 

See Notes to Consolidated Financial Statements.

 

3

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# **Boeing Capital Corporation and Subsidiaries**

## **ConsolidatedStatements of Operations**

(Unaudited)

 
|                                                       |   | **Three  Months Ended   September 30,** |   | **Nine  Months Ended   September 30,** |   |
|------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
| **(Dollars  in millions)**                                 |   | **2003**                                     |   | **2002**                                    |   | **2003** |   | **2002** |   |
| REVENUES                                                   |   |                                         |   |                                        |   |   |   |   |   |
| Finance lease income                                       |   | $                                            | 70     |                                        | $      | 70 |   | $ | 221 |   | $ | 219 |   |
| Interest income on notes receivable                        |   | 62                                           |   | 62                                          |   | 167 |   | 165 |   |
| Operating lease income                                     |   | 124                                          |   | 109                                         |   | 376 |   | 302 |   |
| Investment income (loss)                                   |   | 13                                           |   | (4                                          | )      | 38 |   | 15 |   |
| Net gain on disposal                                       |   | 47                                           |   | —                                      |   | 49 |   | 7 |   |
| Other                                                      |   | 28                                           |   | (2                                          | )      | 63 |   | 10 |   |
|                                                       |   | 344                                          |   | 235                                         |   | 914 |   | 718 |   |
|                                                       |   |                                         |   |                                        |   |   |   |   |   |
| Equity in gain (loss) from joint venture                   |   | 1                                            |   | (43                                         | )      | — |   | (44 | ) |
|                                                       |   | 345                                          |   | 192                                         |   | 914 |   | 674 |   |
|                                                       |   |                                         |   |                                        |   |   |   |   |   |
| EXPENSES                                                   |   |                                         |   |                                        |   |   |   |   |   |
| Interest expense                                           |   | 110                                          |   | 108                                         |   | 332 |   | 297 |   |
| Depreciation expense                                       |   | 66                                           |   | 60                                          |   | 193 |   | 157 |   |
| Provision for losses                                       |   | 11                                           |   | 84                                          |   | 160 |   | 101 |   |
| Operating expenses                                         |   | 18                                           |   | 18                                          |   | 52 |   | 46 |   |
| Asset impairment expense                                   |   | 28                                           |   | 7                                           |   | 79 |   | 11 |   |
| Other                                                      |   | 5                                            |   | 8                                           |   | 32 |   | 16 |   |
|                                                       |   | 238                                          |   | 285                                         |   | 848 |   | 628 |   |
|                                                       |   |                                         |   |                                        |   |   |   |   |   |
| Income (loss) before provision (benefit)  for income taxes |   | 107                                          |   | (93                                         | )      | 66 |   | 46 |   |
| Provision (benefit) for income taxes                       |   | 43                                           |   | (36                                         | )      | 19 |   | 14 |   |
| Net income (loss)                                          |   | $                                            | 64     |                                        | $      | (57 | ) | $ | 47 |   | $ | 32 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

4

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**Boeing Capital****Corporation andSubsidiaries**

Consolidated Statements of Shareholder’sEquity and Comprehensive Income (Loss)

(Unaudited)

 
| **(Dollars in millions except stated value)**             |   | **Preferred   Stock(1)** |       | **Common   Stock** |   | **Capital in    Excess of   Par Value** |       | **Accumulated    Other Comprehensive   Income (Loss)** |      | **Income   Retained   for Growth** |   | **Comprehensive    Income (Loss)** |   |
|-----------------------------------------------------------|--------|--------------------------|------------|--------------------|--------|-----------------------------------------|------------|--------------------------------------------------------|-----------|------------------------------------|--------|------------------------------------|--------|
| **Balance at  December 31, 2001**                    |   | **$**                    | **50**     | ** **         | **$**  | **5**                                   | ** ** | **$**                                                  | **804**   | ** **                         | **$**  | **(19**                            | **)**  | **$** | **531** | ** ** | **$** | **133** | ** ** |
| Preferred stock redemption                                |   | (50                      | )          | —             |   | —                                  |       | —                                                 |      | —                             |   |                               |   |
| Capital contributions from Boeing and  BCSC(2)            |   | —                   |       | —             |   | 286                                     |       | —                                                 |      | —                             |   |                               |   |
| Net income                                                |   | —                   |       | —             |   | —                                  |       | —                                                 |      | 49                                 |   | $                                  | 49     |   |
| Cash dividend declared                                    |   | —                   |       | —             |   | —                                  |       | —                                                 |      | (2                                 | )      | —                             |   |
| Unrealized loss on derivative instruments,  net of tax    |   | —                   |       | —             |   | —                                  |       | (2                                                     | )         | —                             |   | (2                                 | )      |
| Unrealized gain on investments, net of tax  of $3 million |   | —                   |       | —             |   | —                                  |       | 4                                                      |      | —                             |   | 4                                  |   |
| **Balance at  December 31, 2002**                    |   | **$**                    | **—** | ** **         | **$**  | **5**                                   | ** ** | **$**                                                  | **1,090** | ** **                         | **$**  | **(17**                            | **)**  | **$** | **578** | ** ** | **$** | **51** | ** ** |
| Capital contributions from Boeing and  BCSC(3)            |   | —                   |       | —             |   | 141                                     |       | —                                                 |      | —                             |   |                               |   |
| Net income                                                |   | —                   |       | —             |   | —                                  |       | —                                                 |      | 47                                 |   | $                                  | 47     |   |
| Unrealized gain on derivative instruments,  net of tax    |   | —                   |       | —             |   | —                                  |       | 6                                                      |      | —                             |   | 6                                  |   |
| Unrealized loss on investments, net of tax                |   | —                   |       | —             |   | —                                  |       | (1                                                     | )         | —                             |   | (1                                 | )      |
| **Balance at  September 30, 2003**                   |   | **$**                    | **—** | ** **         | **$**  | **5**                                   | ** ** | **$**                                                  | **1,231** | ** **                         | **$**  | **(12**                            | **)**  | **$** | **625** | ** ** | **$** | **52** | ** ** |

 

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(1)          Preferred stock has no par value; 100,000shares authorized: Series A; $5,000 stated value; no shares issued andoutstanding at September 30, 2003 and December 31, 2002.

(2)          Balance represents $85 million of cash contributionsfrom Boeing and $201 million of non-cash contributions from Boeing and BCSC.

(3)          Balance represents $136 million of cashcontributions from Boeing and $5 million of non-cash contributions from Boeingand BCSC.

 

See Notes to Consolidated Financial Statements.

 

5

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**Boeing Capital****Corporation andSubsidiaries**

Consolidated Statements of Cash Flows

(Unaudited)

 
|                                                                               |   | **Nine Months Ended****September 30,** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
| **(Dollars in millions)**                                                          |   | **2003**                                    |   | **2002** |   |
| OPERATING ACTIVITIES                                                               |   |                                        |   |   |   |
| Net income                                                                         |   | $                                           | 47     |   | $ | 32 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                        |   |   |   |
| Non-cash items:                                                                    |   |                                        |   |   |   |
| Depreciation and amortization expense                                              |   | 198                                         |   | 161 |   |
| Net gain on disposal                                                               |   | (49                                         | )      | (7 | ) |
| Provision for losses                                                               |   | 160                                         |   | 101 |   |
| Asset impairment and other related charges                                         |   | 107                                         |   | 74 |   |
| Share-based plans expense                                                          |   | 5                                           |   | 5 |   |
| Deferred income taxes                                                              |   | 136                                         |   | 171 |   |
| Change in assets and liabilities:                                                  |   |                                        |   |   |   |
| Accrued interest                                                                   |   | (28                                         | )      | (49 | ) |
| Other assets                                                                       |   | 61                                          |   | (90 | ) |
| Accounts payable and accrued expenses                                              |   | (64                                         | )      | (50 | ) |
| Other liabilities                                                                  |   | (8                                          | )      | (17 | ) |
| Accounts with Boeing and BCSC                                                      |   | 52                                          |   | 141 |   |
| Other                                                                              |   | (44                                         | )      | (8 | ) |
|                                                                               |   | 573                                         |   | 464 |   |
| INVESTING ACTIVITIES                                                               |   |                                        |   |   |   |
| Net change in short-term leases, notes and  other receivables                      |   | 126                                         |   | 7 |   |
| Transfer of net assets from Boeing                                                 |   | —                                      |   | (186 | ) |
| Purchase of investments                                                            |   | (33                                         | )      | (427 | ) |
| Proceeds from available-for-sale  investments                                      |   | 29                                          |   | — |   |
| Proceeds from held-to-maturity investments                                         |   | 59                                          |   | 18 |   |
| Purchase of equipment for operating leases                                         |   | (509                                        | )      | (617 | ) |
| Proceeds from disposition of equipment and  receivables                            |   | 178                                         |   | 93 |   |
| Collection of leases, notes and other  receivables                                 |   | 595                                         |   | 637 |   |
| Origination of leases, notes and other  receivables                                |   | (1,143                                      | )      | (1,726 | ) |
|                                                                               |   | (698                                        | )      | (2,201 | ) |
| FINANCING ACTIVITIES                                                               |   |                                        |   |   |   |
| Net change in commercial paper and  short-term bank debt                           |   | (73                                         | )      | 586 |   |
| Proceeds from issuance of debt                                                     |   | 812                                         |   | 1,852 |   |
| Repayment of debt                                                                  |   | (688                                        | )      | (867 | ) |
| Payment of cash dividends                                                          |   | —                                      |   | (2 | ) |
| Capital contributions from Boeing                                                  |   | 136                                         |   | — |   |
|                                                                               |   | 187                                         |   | 1,569 |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 62                                          |   | (168 | ) |
| Cash and cash equivalents at beginning of  year                                    |   | 686                                         |   | 400 |   |
| Cash and cash equivalents at end of period                                         |   | $                                           | 748    |   | $ | 232 |   |

 

See Notes to Consolidated Financial Statements.

 

6

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|                                               |   | **Nine  Months Ended  September 30,** |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|
| **(Dollars  in millions)**                         |   | **2003**                                   |   | **2002** |   |
| NON-CASH INVESTING AND FINANCING  ACTIVITIES:      |   |                                       |   |   |   |
| Transfer of receivables                            |   | $                                          | — |   | $ | (110 | ) |
| Decrease to financing  leases                      |   | $                                          | 92     |   | $ | — |   |
| Decrease to allowance for losses on  receivables   |   | $                                          | (50    | ) | $ | — |   |
| Addition of equipment under operating  leases      |   | $                                          | (98    | ) | $ | — |   |
| Addition of equipment held for sale or  re-lease   |   | $                                          | (32    | ) | $ | — |   |
| Purchase of investment                             |   | $                                          | — |   | $ | (5 | ) |
| Decrease to investments                            |   | $                                          | 22     |   | $ | — |   |
| Assumption of debt                                 |   | $                                          | 42     |   | $ | 115 |   |
| Mark-to-market for derivatives on  underlying debt |   | $                                          | (1     | ) | $ | 162 |   |
| Change in other liabilities                        |   | $                                          | 21     |   | $ | — |   |
| Transfer of net assets from Boeing                 |   | $                                          | — |   | $ | (195 | ) |
| Capital contributions from Boeing and BCSC         |   | $                                          | 5      |   | $ | 254 |   |

 

For the nine monthsended September 30, 2003, the majority of the non-cash investing andfinancing activities related to the consolidation of BATA Leasing, LLC and acustomer restructuring, which are discussed further in Note 5 and Note 9,respectively.

 

The following tablerepresents the transfer of net assets from Boeing. For the nine months endedSeptember 30, 2002, transfer of net assets from Boeing is comprised ofcash transfers of $186 million and non-cash transfers of $195 million. Therewere no non-cash transfers of net assets from Boeing for the nine months endedSeptember 30, 2003.

 
| **(Dollars in millions)**                                        |   | **Nine  Months Ended  September 30, 2002** |   |
|------------------------------------------------------------------|--------|-------------------------------------------------|--------|
| SUPPLEMENTAL DISCLOSURE FOR TRANSFER OF NET  ASSETS FROM BOEING: |   |                                            |   |
| Financing assets                                                 |   | $                                               | (386   | ) |
| Allowance for losses on receivables                              |   | 2                                               |   |
| Accounts due from Boeing and BCSC                                |   | (9                                              | )      |
| Other liabilities                                                |   | 1                                               |   |
| Deferred income taxes                                            |   | 11                                              |   |
| Transfer of net assets from Boeing                               |   | $                                               | (381   | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

7

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**Boeing Capital****Corporation andSubsidiaries**

###### Notes to Consolidated Financial Statements

September 30, 2003

(Unaudited)

 

**Note1 – General**

 

Boeing Capital Corporation (together with its subsidiaries, referred toas “us”, “we”, “our” or the “Company”) is an indirect wholly owned subsidiaryof The Boeing Company (“Boeing”). We prepared the accompanying unauditedconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements. In our opinion, the accompanying consolidatedfinancial statements reflect all adjustments, consisting of normal recurringaccruals, that are necessary to present fairly the consolidated balance sheetsand the related consolidated statements of operations, shareholder’s equity andcomprehensive income (loss) and cash flows for the interim periods presented.Operating results for the nine-month period ended September 30, 2003, arenot necessarily indicative of the results that may be expected for the yearending December 31, 2003. The statements should be read in conjunctionwith the Notes to the Consolidated Financial Statements included in our Form10-K for the year ended December 31, 2002, which contains the latestavailable audited consolidated financial statements and notes.

 

We are a commercial financecompany. Our primary operations include two principal financial reportingsegments: Aircraft Financial Services and Commercial Financial Services. Ourportfolio consists of financing leases, notes and other receivables, equipmentunder operating leases (net of accumulated depreciation), investments andequipment held for sale or re-lease (net of accumulated depreciation).

 

Boeing Capital ServicesCorporation (“BCSC”) owns 100% of our stock and is an indirect wholly ownedsubsidiary of Boeing and a largely inactive holding company.

 

Certain reclassifications ofpreviously reported amounts have been made in the consolidated financialstatements to conform to the 2003 presentation.

 

**Note2 – Standards Issued and Not Yet Implemented**

 

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,”which clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” relating to consolidation of variableinterest entities (“VIEs”). The provisions of FIN 46 became immediatelyeffective for VIEs created after January 31, 2003. The provisions of FIN 46for VIEs created on or before January 31, 2003 were delayed untilDecember 31, 2003 by FASB Staff Position No. FIN 46-6, “EffectiveDate of FASB Interpretation No. 46, Consolidation of Variable InterestEntities,” issued in October 2003. Although we are continuing to assess theimpact of FIN 46, we currently believe that we will not be required toconsolidate any additional VIEs that are significant. However, our finalconclusions will be incorporated into the financial statements upon fulladoption of FIN 46 on December 31, 2003. Disclosures about oursignificant variable interests in VIEs are provided in Note 10.

 

8

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**Note3 – Portfolio Quality**

 
| **(Dollars in millions)**                                                         |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Receivables:                                                                      |   |                         |   |                        |   |
| Financing leases                                                                  |   | $                            | 4,301  |                        | $      | 4,550 |   |
| Notes and other receivables                                                       |   | 3,297                        |   | 2,878                       |   |
|                                                                              |   | 7,598                        |   | 7,428                       |   |
|                                                                              |   |                         |   |                        |   |
| Equipment under operating leases, net of  accumulated depreciation                |   | 3,871                        |   | 3,506                       |   |
| Investments                                                                       |   | 492                          |   | 517                         |   |
| Equipment held for sale or re-lease, net of  accumulated depreciation             |   | 282                          |   | 311                         |   |
| Total portfolio                                                                   |   | $                            | 12,243 |                        | $      | 11,762 |   |
|                                                                              |   |                         |   |                        |   |
| Non-performing assets:                                                            |   |                         |   |                        |   |
| Nonaccrual receivables                                                            |   | $                            | 567    |                        | $      | 171 |   |
| Non-performing equipment under operating  leases, net of accumulated depreciation |   | 90                           |   | 63                          |   |
| Equipment held for sale or re-lease, net of  accumulated depreciation             |   | 282                          |   | 311                         |   |
|                                                                              |   | $                            | 939    |                        | $      | 545 |   |
|                                                                              |   |                         |   |                        |   |
| Ratio of nonaccrual receivables to total  receivables                             |   | 7.5                          | %      | 2.3                         | %      |
| Ratio of total non-performing assets to  total portfolio                          |   | 7.7                          | %      | 4.6                         | %      |

 

The increasesin the above ratios are primarily due to the bankruptcy filing by HawaiianHolding, Inc. (“Hawaiian”), as discussed further in Note 9.

 

Incomerecognition on an accrual basis is generally suspended for leases and notes andother receivables at the date when a full recovery of income and principalbecomes doubtful. Income recognition is resumed when the lease or notes andother receivables become contractually current and performance is demonstratedto be resumed. Generally, to the extent that it is accruable under contractualterms, any cash received in the interim is recorded to income.

 

The followingtable summarizes our receivables and equipment under operating leases withamounts greater than 90 days past due with income still accruing:

 
| **(Dollars in millions)**        |   | **September 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Receivables                      |   | $                            | 22     |                        | $      | 2 |   |
| Equipment under operating leases |   | 2                            |   | 19                          |   |
|                             |   | $                            | 24     |                        | $      | 21 |   |

 

For the nine months ended September 30, 2003, we received $1million on these accounts.

 

9

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**Note4 – Allowance for Losses on Receivables**

 
| **(Dollars  in millions)**                                                                        |   | **September 30****,****2003** |   | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------|--------|
| Allowance for losses on receivables at beginning of  year                                         |   | $                                  | 260    |                        | $      | 140 |   |
| Provision for losses                                                                              |   | 160                                |   | 136                         |   |
| Write-offs, net of recoveries                                                                     |   | (70                                | )      | (18                         | )      |
| Allowance transferred from Boeing and BCSC                                                        |   | —                             |   | 2                           |   |
| Allowance for losses on receivables at end  of period                                             |   | $                                  | 350    |                        | $      | 260 |   |
|                                                                                              |   |                               |   |                        |   |
| Allowance as a percentage of total  receivables                                                   |   | 4.6                                | %      | 3.5                         | %      |
| Net write-offs as a percentage of average  receivables                                            |   | 0.9                                | %      | 0.3                         | %      |
|                                                                                              |   |                               |   |                        |   |
| More than 90 days delinquent:                                                                     |   |                               |   |                        |   |
| Amount of delinquent installments                                                                 |   | $                                  | 17     |                        | $      | 15 |   |
| Total receivable balance related to  delinquent installments                                      |   | $                                  | 358    |                        | $      | 50 |   |
| Total receivable balance related to  delinquent installments as a percentage of total receivables |   | 4.7                                | %      | 0.7                         | %      |
| Total of all receivables due from  delinquent obligors                                            |   | $                                  | 568    |                        | $      | 51 |   |
| Total of all receivables due from  delinquent obligors as a percentage of total receivables       |   | 7.5                                | %      | 0.7                         | %      |

 

At September 30, 2003, Hawaiian represented $465 million of ourtotal receivables portfolio. Of this amount, $257 million representedreceivables that had installments that were more than 90 days delinquent atSeptember 30, 2003. During the first nine months of 2003, we received cashof $29 million on the Hawaiian receivables, of which $15 million related toreceivables more than 90 days delinquent.

 

Our portfolio at the end of thethird quarter of 2003 totaled $12.2 billion, of which $9.2 billion was relatedto Boeing products, primarily commercial aircraft. The continuing effects ofthe current airline industry downturn have caused significant reductions incommercial aircraft values. Older and/or out-of-production aircraft types haveexperienced the most significant declines in value, while newer aircraft typeshave seen more moderate declines. Published sources and recent markettransactions indicate that values for various aircraft types used as collateralin our portfolio remain depressed. Aircraft valuations could decline materiallyif significant numbers of aircraft, particularly types with relatively fewoperators, are idled on account of further airline bankruptcies orrestructurings. At the same time, the credit ratings of many airlines,particularly in the United States, have remained at low levels. Each quarter,we review customer credit ratings, published historical credit default rates,Boeing and other guarantees (if applicable) and third-party aircraft valuationsas a basis to validate the reasonableness of the allowance for losses onreceivables. In light of deteriorating customer credit ratings and liquidity,as well as the decline in aircraft values, we determined that an additionalincrease to the allowance for losses on receivables of $130 million waswarranted at the end of the first quarter of 2003. The changes in customercredit ratings and aircraft values were not significant enough to warrant anadditional increase to the allowance for losses on receivables during thesecond or third quarter of 2003; however, there can be no assurance thatconsideration of such factors in the future will not result in an increase tothe allowance for losses on receivables. The allowance at September 30,2003 increased to 4.6% of total receivables, up from 3.5% at December 31,2002, primarily due to the $130 million increase.

 

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In October 2003, Boeingannounced the decision to end production of the B-757 program in 2004. Theaircraft will continue to be supported by Boeing. There are currently over1,000 B-757 aircraft presently in service at approximately 125 operators.Closures of other aircraft programs in the past have not necessarily causedextraordinary declines in the secondary value of the aircraft involved. Due tothe impacts of September 11, 2001 and the downturn in the airlineindustry, B-757 values have already declined.

 

At September 30, 2003,$1.4 billion of our portfolio was collateralized by B-757 aircraft. This iscomprised of $1.1 billion of passenger aircraft (30 aircraft at 10 operators).At September 30, 2003, we were the beneficiary under $433 million ofguarantees from Boeing covering $500 million of this portion of our portfolio.The remainder of the portfolio is B-757 freighter conversions on long-termlease. While we continue to believe in the utility and marketability of theB-757, we are unable to predict how the end of B-757 production, as well asoverall market conditions, may impact B-757 collateral values and rental rates.Should the B-757 suffer a significant decline in utility and market acceptance,the aircraft collateral values may decline, which in turn could result in anincrease to the allowance for losses on receivables. Future declines in rentalrates could also result in additional impairment charges under SFASNo. 144 on operating lease aircraft. While we are unable to predict thelikelihood of these impacts occurring, such impacts could result in a potentialmaterial adverse effect on our earnings, cash flows or financial position.

 

Receivable Write-offs andRecoveries, by Segment:

 
| **(Dollars  in millions)**     |   | **Nine Months Ended September 30,  2003** |   | **Year Ended December 31,  2002** |   |
|--------------------------------|--------|------------------------------------------------|--------|----------------------------------------|--------|
| Aircraft  Financial Services:  |   |                                           |   |                                   |   |
| Write-offs                     |   | $                                              | 58     |                                   | $      | 7 |   |
| Recoveries                     |   | —                                         |   | —                                 |   |
|                           |   | 58                                             |   | 7                                      |   |
|                           |   |                                           |   |                                   |   |
| Commercial Financial Services: |   |                                           |   |                                   |   |
| Write-offs                     |   | 12                                             |   | 12                                     |   |
| Recoveries                     |   | —                                         |   | (1                                     | )      |
|                           |   | 12                                             |   | 11                                     |   |
|                           |   | $                                              | 70     |                                   | $      | 18 |   |

 

In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 114,“Accounting by Creditors for Impairment of a Loan,” we review a receivable forimpairment when, based on current information and events, it is probable thatwe will be unable to collect amounts due according to the original contractualterms of the receivable agreement, without regard to any subsequent restructurings.Factors considered in assessing uncollectibility include a customer’s extendeddelinquency, requests for restructuring and filings for bankruptcy. Wedetermine a specific impairment allowance based on the difference between thecarrying value of the receivable and the estimated fair value of the relatedcollateral.

 

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The carrying amounts of impaired receivables are as follows:

 
| **(Dollars in millions)**                                   |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Impaired receivables with specific  impairment allowance(1) |   | $                            | 515    |                        | $      | 146 |   |
| Impaired receivables with no specific  allowance(2)         |   | 1,166                        |   | 1,221                       |   |
|                                                        |   | $                            | 1,681  |                        | $      | 1,367 |   |

 

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(1)          At September 30, 2003 andDecember 31, 2002, impaired receivables of $515 million and $146 million,respectively, had a specific impairment allowance for losses on receivables of$108 million and $50 million, respectively.

(2)          Of the $1,166million and $1,221 million at September 30, 2003 and December 31,2002, respectively, $1,073 million and $1,097 million, respectively, relate tothe receivables from United secured by B-767s and B-777s. During the thirdquarter of 2003, we completed a restructuring of these receivables, asdiscussed further in Note 9. Although United is performing under the terms ofthe restructuring at September 30, 2003, according to the guidelines ofSFAS No. 114, any receivable not performing under the original contractterms, even though they are performing under the restructured agreement,continues to be deemed impaired.

 

The allocationof the allowance for losses on receivables between specific reserves andgeneral purposes is as follows:

 
| **(Dollars  in millions)**         |   | **September 30****,****2003** |   | **December 31,  2002** |   |
|------------------------------------|--------|------------------------------------|--------|-----------------------------|--------|
| Allocated to specific reserves     |   | $                                  | 108    |                        | 30.9   | % | $ | 50 |   | 19.2 | % |
| Allocated for general  purposes(1) |   | 242                                |   | 69.1                        |   | 210 |   | 80.8 |   |
|                               |   | $                                  | 350    |                        | 100.0  | % | $ | 260 |   | 100.0 | % |

 

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(1)          The allocation for general purposesrepresents our best estimate of losses in the remaining receivables consideringdelinquencies, loss experience, collateral, guarantees, risk of individualcredits, historical default rates, results of periodic credit reviews and thegeneral state of the economy and airline industry.

 

AtSeptember 30, 2003, we were the beneficiary under $2.6 billion ofguarantees, principally from Boeing, with respect to the portfolio relating totransactions totaling $4.4 billion (36.1% of our total portfolio), whichmitigates our risk.

 

Actual resultscould differ from estimates and values, and there can be no assurance that theallowance for losses will be sufficient to cover losses on receivables.

 

**Note 5 – Investments**

 

The following table shows theimpact of investments we accounted for under SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities.” We record available-for-salesecurities in investments at estimated fair value. Unrealized gains/losses ofavailable-for-sale securities are recorded in accumulated other comprehensiveincome/loss, net of tax; however, losses deemed other than temporary arerecorded as a reduction to investment income. We record held-to-maturitysecurities at amortized cost. The unrealized gains/losses of held-to-maturitysecurities are not recorded in the consolidated financial statements and areshown in the table below for informational purposes only; however, lossesdeemed other than temporary are recorded as a reduction to investment income.

 

12

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Fair valuesfor investment securities are based on quoted market prices, where available.If quoted market prices are not available, fair values are based on pricingmodels or quoted market prices of comparable instruments. The majority of oursecurities are illiquid non-traded securities; therefore, the fair values aregenerally based on pricing models. In order to use pricing models, we requestspread levels over certain benchmark interest rates from external sources touse for calculations in the pricing models. Those spread levels and certainbenchmark interest rates are selected using similar public securities, seniortranches in the transaction or other relevant pricing information asmarketplace proxies for our non-trading securities. Using this methodology, ourestimate of fair value for the enhanced equipment trust certificates (“EETCs”) maybe less than our estimate of the current value of the collateral supporting theEETCs.

 

Available-for-sale and held-to-maturity investments consisted of thefollowing:

 
| **(Dollars in millions)**    |   | **Amortized   Cost** |   | **Gross   Unrealized   Gain** |   | **Gross   Unrealized   Loss** |   | **Estimated  Fair   Value** |   |
|------------------------------|--------|----------------------|--------|-------------------------------|--------|-------------------------------|--------|-----------------------------|--------|
| **September 30,  2003** |   |                 |   |                          |   |                          |   |                        |   |
| Available-for-Sale:          |   |                 |   |                          |   |                          |   |                        |   |
| Debt                         |   | $                    | 31     |                          | $      | —                        |   | $                           | — |   | $ | 31 |   |
| Held-to-Maturity:            |   |                 |   |                          |   |                          |   |                        |   |
| Debt(1)                      |   | 460                  | (2)    | —                        |   | (62                           | )      | 398                         |   |
|                         |   | $                    | 491    |                          | $      | —                        |   | $                           | (62    | ) | $ | 429 |   |
|                         |   |                 |   |                          |   |                          |   |                        |   |
| **December 31, 2002**   |   |                 |   |                          |   |                          |   |                        |   |
| Available-for-Sale:          |   |                 |   |                          |   |                          |   |                        |   |
| Equity                       |   | $                    | 3      |                          | $      | —                        |   | $                           | — |   | $ | 3 |   |
| Debt                         |   | 4                    |   | —                        |   | —                        |   | 4                           |   |
| Held-to-Maturity:            |   |                 |   |                          |   |                          |   |                        |   |
| Debt(1)                      |   | 490                  |   | —                        |   | (239                          | )      | 251                         |   |
|                         |   | $                    | 497    |                          | $      | —                        |   | $                           | (239   | ) | $ | 258 |   |

 

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(1)          Primarily consists of pass-throughtrust certificates, commonly known as EETCs.

(2)          Related to the $460 million atSeptember 30, 2003, we had $10 million in guarantees from Boeing and $6million in guarantees from a third party.

 

AtSeptember 30, 2003 and December 31, 2002, available-for-sale and held-to-maturityinvestments totaled $491 million and $497 million, respectively, of which nonewere considered investment grade securities.

 

AtDecember 31, 2001, an available-for-sale security was transferred toheld-to-maturity at its fair value with $20 million of unrealized loss recordedas a component of accumulated other comprehensive income/loss, net of tax. Asof September 30, 2003, $3 million of that $20 million unrealized loss wasamortized from accumulated other comprehensive income/loss to investmentincome.

 

AtJuly 1, 2002, two available-for-sale securities were transferred toheld-to-maturity at their fair values with $6 million of net unrealized gainrecorded as a component of accumulated other comprehensive income/loss, net oftax. At September 30, 2003, $2 million of that $6 million net unrealizedgain was amortized from accumulated other comprehensive income/loss toinvestment income.

 

AtOctober 1, 2002, an available-for-sale security was transferred toheld-to-maturity at its fair value, which was equal to its amortized cost.

 

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AtSeptember 30, 2003, maturities of debt investments were as follows:

 
|                        |   | **Available-for-Sale** |   | **Held-to-Maturity**       |   |
|-----------------------------|--------|------------------------|--------|----------------------------|--------|
| **(Dollars in millions)**   |   | **Amortized   Cost**   |   | **Estimated   Fair Value** |   | **Amortized   Cost** |   | **Estimated   Fair Value** |   |
| Due from one to  five years |   | $                      | 31     |                       | $      | 31 |   | $ | 328 |   | $ | 284 |   |
| Due from six to ten years   |   | —                 |   | —                     |   | 61 |   | 49 |   |
| Due after ten years         |   | —                 |   | —                     |   | 71 |   | 65 |   |
|                        |   | $                      | 31     |                       | $      | 31 |   | $ | 460 |   | $ | 398 |   |

 

We also had a50% interest with ATA Holdings Corp. (“ATA”) in BATA Leasing, LLC (“BATA”)with a carrying value of $19 million at December 31, 2002. Our investmentin BATA was recorded in investments on the consolidated balance sheets andaccounted for under the equity method. In the third quarter of 2003, anamendment to the BATA, LLC agreement was finalized by ATA and us, whichgave us majority control in the management of the business and affairs of BATA.As a result, BATA is now consolidated. The purpose of BATA is to convert 23B-727 passenger aircraft to full cargo configuration and then re-lease suchaircraft.

 

**Note 6 – Impairment Review for EquipmentUnder Operating Leases and Held for Sale or Re-Lease**

 

We review these assets for potential impairment when events orcircumstances indicate that the carrying amount of these assets may not berecoverable. For the third quarter of 2003, we reviewed all aircraft andequipment held for sale or re-lease and under operating leases maturing withintwo years or where known events may indicate impairment. We consider assetsunder operating lease or held for re-lease impaired when the expectedundiscounted cash flow over the remaining useful life is less than the bookvalue. We use various assumptions when determining the expected undiscountedcash flow. These assumptions include expected future lease rates, lease terms,end of economic life value of the aircraft or equipment, periods in which theasset may be held in preparation for a follow-on lease, maintenance costs,remarketing costs and the remaining economic life of the asset. We state assetsheld for sale at the lower of carrying amount or fair value less costs to sell.

 

When we determine that impairment is indicated for an asset, the amountof the impairment loss is the excess of the book value less asset valueguarantees, if applicable, over the fair value of the asset. For aircraftassets, we use the average published value from multiple sources based on thetype and age of the asset to determine the fair value. However, if the featuresor utilization of the aircraft varies significantly from the generic aircraftattributes covered by outside publications, we apply judgment based on theattributes of the specific aircraft to determine fair value. For the ninemonths ended September 30, 2003 and 2002, we recorded pre-tax non-cashcharges totaling $79 million and $11 million, respectively, to recordimpairments of portfolio assets as a result of continued declines in marketvalues and projected future rents for aircraft and equipment.

 

See Note 4 for a discussion on the impact of the closure of the B-757program.

 

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**Note 7 – Debt and Credit Agreements**

 
| **(Dollars in millions)**                                                                                            |   | **September 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Senior debt:                                                                                                         |   |                         |   |                        |   |
| Commercial paper                                                                                                     |   | $                            | — |                        | $      | 73 |   |
| Variable rate (three-month LIBOR plus 0.6%)  note due 2012                                                           |   | 5                            |   | 5                           |   |
| 4.75% note due 2008                                                                                                  |   | 511                          |   | —                      |   |
| 5.65% note due 2006                                                                                                  |   | 1,038                        |   | 1,041                       |   |
| 5.75% note due 2007                                                                                                  |   | 749                          |   | 748                         |   |
| 5.80% note due 2013                                                                                                  |   | 615                          |   | 617                         |   |
| 6.10% note due 2011                                                                                                  |   | 779                          |   | 781                         |   |
| 6.50% note due 2012                                                                                                  |   | 764                          |   | 766                         |   |
| 7.10% note due 2005                                                                                                  |   | 499                          |   | 499                         |   |
| 7.375% note due 2010                                                                                                 |   | 548                          |   | 549                         |   |
| 2.02% - 3.41% Euro medium-term note due  2004                                                                        |   | 60                           |   | 51                          |   |
| Non-recourse variable rate (one-month LIBOR  plus 1.1%) note due 2012                                                |   | 43                           |   | 44                          |   |
| 13.84% - 14.28% non-recourse notes due  through 2003, including a premium based on an imputed interest rate of 6.10% |   | —                       |   | 6                           |   |
| Non-recourse 9.90% note due through 2010                                                                             |   | 42                           |   | —                      |   |
| 3.15% - 6.75% retail medium-term notes due  through 2017                                                             |   | 764                          |   | 487                         |   |
| 1.35% - 7.64% medium-term notes due through  2023                                                                    |   | 2,630                        |   | 3,113                       |   |
| 1.68% secured debt, proceeds of  securitization due through 2009                                                     |   | 180                          |   | 299                         |   |
| 1.50% - 7.35% capital lease obligations due  through 2008                                                            |   | 308                          |   | 362                         |   |
|                                                                                                                 |   | 9,535                        |   | 9,441                       |   |
|                                                                                                                 |   |                         |   |                        |   |
| Subordinated debt:                                                                                                   |   |                         |   |                        |   |
| 8.31% medium-term note due 2004                                                                                      |   | 20                           |   | 20                          |   |
| Non-recourse variable rate note due 2012  (one-month LIBOR plus 2.46%)                                               |   | 4                            |   | 4                           |   |
|                                                                                                                 |   | 24                           |   | 24                          |   |
|                                                                                                                 |   | $                            | 9,559  |                        | $      | 9,465 |   |

 

On February 16, 2001, wefiled a public shelf registration of $5 billion of debt securities with theSecurities and Exchange Commission (“SEC”), which was declared effective onFebruary 26, 2001. Effective October 31, 2001, we allocated $1billion to the Series XI medium-term note program. Effective June 20,2002, the remaining $750 million under the shelf registration was allocated tothis program. As of the filing date of this Report, an aggregate amount of $402million remains available under the Series XI medium-term program for potentialdebt issuance.

 

On February 22, 2002,we filed a public shelf registration of $5 billion of debt securities with theSEC, which was declared effective on March 4, 2002. We allocated $1billion to establish a new retail medium-term note program involving the saleof notes with a minimum denomination of $1,000. As of the filing date of thisReport, an aggregate amount of $3.1 billion (which includes $173 million ofretail medium-term notes) remains available for potential debt issuance.

 

On June 6, 2002, weestablished a $1.5 billion Euro medium-term note program. As of the filing dateof this Report, an aggregate amount of $1.4 billion remains available forpotential debt issuance.

 

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The most restrictive provisionsof various debt agreements require us to (a) limit the payment of cashdividends to the extent that our consolidated assets would be less than 115% ofour consolidated liabilities (excluding deferred taxes) after dividend paymentsand (b) restrict the amount of liens on our property, other than liens specificallyexcluded, to secure indebtedness such that those restricted liens not exceed15% of consolidated assets. At September 30, 2003, as well as during theperiod, we were in compliance with these and all of our various other debtcovenants.

 

As of November 4, 2002,$500 million of Boeing’s five-year revolving credit line expiring in 2005 wasmade exclusively available to us. In addition, $1.5 billion of Boeing’s $3billion 364-day revolving credit line continues to be exclusively available tous. At September 30, 2003, there were no amounts outstanding under theseagreements.

 

**Note 8 – Derivative Financial Instruments**

 

We account for derivativespursuant to SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended. This standard requires that we recognize allderivative instruments in the financial statements and measure them at fairvalue regardless of the purpose or intent for holding them.

 

We are exposed to a variety ofmarket risks, including the effects of changes in interest rates and foreigncurrency exchange rates. We manage these exposures, in part, with the use ofderivatives. In particular, we enter into interest rate swap and cross currencyswap contracts with a number of major financial institutions. Since we believeit is unlikely that any of our counterparties will be unable to perform underthe terms of derivative financial instruments, we generally do not requirecollateral or other security supporting derivative contracts with ourcounterparties. The following is a summary of our risk management strategiesand the effect of these strategies on the consolidated financial statements.

 

*Fair Value Hedges*

 

Interest rate swaps, underwhich we agree to pay variable rates of interest, are designated as fair valuehedges of fixed-rate debt. During the first quarter of 2003, we also heldforward-starting interest rate swap agreements to fix the cost of funding afirmly committed lease for which payment terms are determined in advance offunding. This type of hedge relationship mitigates the changes in fair value ofthe hedged portion of the firm commitment caused by changes in interest rates.The net change in fair value of the swap and the hedged portion of the firmcommitment is reported in earnings. At the end of the first quarter of 2003,the forward-starting interest rate swaps no longer qualified for fair valuehedge accounting treatment and we recognized a pre-tax charge of $21 million.

 

For the nine months endedSeptember 30, 2003 and 2002, we recorded $9 million and $2 million,respectively, of gains related to the basis adjustment of certain terminatedinterest rate swaps in interest expense. For the nine months endedSeptember 30, 2003 and 2002, we recorded $1 million and $6 million,respectively, of losses related to ineffectiveness due to the forward-startinginterest rate swaps in interest expense. During the next twelve months, weexpect to amortize a $16 million gain from the amount recorded in the basisadjustment of certain terminated fair value hedge relationships to interestexpense.

 

16

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*Cash Flow Hedges*

 

The cash flow hedges we use include certain interest rate swaps andcross currency swaps. Interest rate swap contracts under which we agree to payfixed rates of interest are designated as cash flow hedges of variable-ratedebt obligations. In addition, cross currency swap contracts under which weagree to pay fixed functional currency rates of interest are designated as cashflow hedges of fixed non-functional currency debt obligations. As ofSeptember 30, 2003 and December 31, 2002, we recorded net unrealizedlosses of $4 million ($3 million net of tax) and $9 million ($6 million net oftax), respectively, in accumulated other comprehensive income/loss associatedwith our cash flow hedging transactions.

 

For the nine months endedSeptember 30, 2003 and 2002, unrealized gains (net of tax) of $0.3 millionand unrealized losses (net of tax) of $0.4 million, respectively, included inaccumulated other comprehensive income/loss were reclassified to interestexpense. During the next twelve months, we expect to reclassify to interestexpense a loss (net of tax) of $0.4 million from the amount recorded inaccumulated other comprehensive income/loss.

 

*Non-hedging Derivative Instruments*

 

We hold certain interest exchange agreements and related interest rateswaps. The intent of these interest rate swaps is to economically hedge theexposures created by the interest exchange agreements. However, since theexposures being hedged are derivative instruments, this relationship does notqualify for hedge accounting. As a result, changes in fair value of bothinstruments are immediately recognized in income. As of September 30, 2003and December 31, 2002, we recorded net losses of $2 million ($1 millionnet of tax) and $2 million ($1 million net of tax), respectively, inaccumulated other comprehensive income/loss associated with these interest rateswaps. For the nine months ended September 30, 2003 and 2002, the interestexchange agreements resulted in losses of $6 million and gains of $8 million,respectively, and the related interest rate swaps resulted in gains of $4million and losses of $10 million, respectively. For the nine months endedSeptember 30, 2003 and 2002, unrealized losses (net of tax) of $0.5million and $1 million, respectively, from accumulated other comprehensiveincome/loss and gains of $2 million and $3 million, respectively, from thebasis adjustment to underlying liabilities were amortized to interest expense.During the next twelve months, we expect to amortize to interest expense a $0.4million loss (net of tax) from the amount recorded in accumulated othercomprehensive income/loss and a $2 million gain from the basis adjustment tounderlying liabilities.

 

During 2001, we received warrants and a conversion option on notes inconnection with a certain financing transaction. In June 2003, the remainder ofthe conversion feature of the convertible notes was exercised in full and theshares realized were sold in the third quarter of 2003, along with two-thirdsof the warrants, resulting in gains of $9 million. As of December 31,2002, the conversion feature of the convertible notes was reflected in otherassets at a fair value of $1 million. As of September 30, 2003 andDecember 31, 2002, the remaining warrants for this and other transactionswere reflected in other assets at a fair value of $15 million and $4 million,respectively. We recorded the initial fair values of the warrants and conversionoption on notes as a discount to notes receivable of $20 million. For the ninemonths ended September 30, 2003 and 2002, the warrants and conversionfeature of the convertible notes recorded in other assets had changes in fairvalue, resulting in an addition to other income of $32 million and a reductionto other income of $8 million, respectively.

 

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**Note9 – Commitments and Contingencies**

 

*Litigation*

 

Various legal proceedings andclaims are pending or have been asserted against us, many of which are coveredby third parties, including insurance companies. We believe that the finaloutcome of such proceedings and claims will not have a material adverse effecton our earnings, cash flows or financial position.

 

*Significant Customer Contingencies*

 

United accounted for $1.2billion (9.5% and 10.1%) of our total portfolio at September 30, 2003 andDecember 31, 2002, respectively. At September 30, 2003, the Unitedportfolio was secured by security interests in two B-767s and 13 B-777s and byan ownership and security interest in five B-757s. As of September 30,2003, United was our second largest customer. United filed for Chapter 11bankruptcy protection on December 9, 2002. During the third quarter of2003, we completed a restructuring of United’s aircraft loans and leases. Thereceivables associated with a security interest in the two B-767s and 13 B-777swere restructured with terms that did not necessitate a troubled debtrestructuring charge to the allowance for losses on receivables. The leaseterms attributable to the five B-757s in which we hold an ownership andsecurity interest were revised in a manner that reclassified these leases asoperating leases. Additionally, we had previously assigned to a third party therights to a portion of the lease payments on these five B-757s. As a result ofthis lease restructuring, as of September 30, 2003, we recorded operatinglease equipment with a value of $84 million and non-recourse debt of $42million (representing the obligation attributable to the assignment of futurelease proceeds). As of September 30, 2003, United is current on all of itsobligations related to these 20 aircraft.

 

United retains certain rightsby virtue of operating under Chapter 11 bankruptcy protection, includingthe right to reject the restructuring terms with its creditors, which includesthe restructuring with us described above. However, this restructuring, whichwas approved by the federal bankruptcy court, sets forth the terms under whichall 20 aircraft financed by us are expected to remain in service upon United’semergence from Chapter 11 protection. If United exercises their right toreject the restructuring terms, the terms of their leases and loans revert tothe original terms.

 

ATA accounted for $718 millionand $611 million (5.9% and 5.2%) of our total portfolio at September 30,2003 and December 31, 2002, respectively. At September 30, 2003, theATA portfolio primarily consisted of 12 B-757s and an investment in ATA preferredstock with a face amount of $50 million. In November 2002, ATA received a loanof $168 million administered by the Airline Transportation Stabilization Board.In the third quarter of 2003, we agreed to restructure certain outstandingleases by extending their terms and deferring a portion of their rent paymentsfor a limited period of time. The terms of the restructured leases did notresult in a charge to the allowance for losses on receivables. ATA must meetcertain requirements for the terms of the restructured leases to remain ineffect. These requirements include completion of an exchange offering on itspublicly traded debt, which will result in a deferral of the principal debtmaturity date. If ATA fails to complete such requirements, the terms of theseleases revert to the original terms.

 

We continue to monitor thestatus of the ATA exchange offering. ATA expects that they will come to anagreement with their bondholders and that the ensuing debt exchange willaddress their liquidity issues. Should an exchange offering not be successfullycompleted, we believe it is possible that our investment in ATA preferred stockwould be subject to an assertion that we will be unable to realize all amountsdue according to the contractual terms, and that an other-than-temporaryimpairment could be recorded.

 

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Hawaiian accounted for $536 million and $479 million (4.4% and 4.1%) ofour total portfolio at September 30, 2003 and December 31, 2002,respectively. At September 30, 2003, the Hawaiian portfolio primarilyconsisted of 13 B-717s and three B-767s. Hawaiian filed for Chapter 11bankruptcy protection on March 21, 2003. With bankruptcy court approval,we have reached an agreement releasing Hawaiian from its obligation to takedelivery of a new B-767 that was scheduled for delivery to Hawaiian in April2003. This aircraft was sold to a third party in October 2003. Taking intoaccount the specific reserves allocated for the Hawaiian receivables, we do notexpect that our transactions with Hawaiian will have a material adverse effecton our earnings, cash flow or financial position. In the event that futurenegotiations or proceedings result in the return of a substantial number ofaircraft, there could be a material adverse effect on our earnings, cash flowsor financial position, at least until such time as the aircraft are sold orredeployed for adequate consideration. During the first nine months of 2003, wereceived cash of $32 million on the Hawaiian portfolio.

 

Viacao Aerea Rio-Grandense (“VARIG”) accounted for $433 million and$452 million (3.5% and 3.8%) of our total portfolio at September 30, 2003and December 31, 2002, respectively. At September 30, 2003, the VARIGportfolio consisted of two B-737s and nine MD-11s. In recent years, VARIG hasrepeatedly defaulted on its obligations under leases with us, which hasresulted in deferrals and restructurings some of which are still ongoing.Boeing has provided us with first loss deficiency and partial lease rentalguarantees covering approximately $323 million of the VARIG obligations. Takinginto account these guarantees, we do not expect the VARIG transactions,including the impact of any restructurings, to have a material adverse effecton our earnings, cash flows or financial position.****During the first nine months of 2003, we received cash of $38million on the VARIG portfolio.

 

We have reviewed our obligations due from our customers forcollectibility and have established specific or general allowances, as wedeemed necessary. In addition to the customers discussed above, some othercustomers have requested a restructuring of their transactions with us. We havenot reached agreement on any restructuring requests that we believe would havea material adverse effect on our earnings, cash flows or financial position.

 

*Outstanding Funding Commitments*

 

At September 30, 2003, wehad commitments to provide leasing and other financing totaling $123 million.Based on historical experience, we do not anticipate that all of these commitments will be utilized.However, if we were required to fund all unfunded commitments:

 

•      upto $123 million may be funded in less than one year.

 

Additionally, Boeing and BCSChad unfunded commercial aircraft financing commitments at September 30, 2003of $4.0 billion. Based on historical experience, we do not anticipate that we will fund all ofthese commitments. However, if we were required to fund all unfundedcommitments:

 

•      upto $1.0 billion may be funded in less than one year, and

•      anadditional $3.0 billion may be funded in one to three years.

 

We expect to ultimately fund aportion of these unfunded commitments. The portion that we fund may requirecredit enhancements or other guarantee support from Boeing as necessary for usto meet our underwriting and investment criteria.

 

19

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At September 30, 2003, wewere subject to maximum guarantor obligations of $154 million; however, $7million of such amount has been indemnified by Boeing and is included in theamounts guaranteed by Boeing. Guarantor obligations are primarily comprised ofresidual value and other guarantees provided by us. Losses, if any, related tosuch exposure, net of collateral, are not expected to have a material adverseeffect on our earnings, cash flows or financial position.

 

**Note 10****– Off-BalanceSheet Arrangements**

 

We are a party to certain off-balance sheet arrangements, includingcertain guarantor obligations and variable interests in unconsolidatedentities.

 

*Guarantor Obligations*

 

The following table provides quantitative data regarding our thirdparty guarantees. The maximum potential payment amounts represent a “worst-casescenario,” and do not necessarily reflect results expected by us. Estimatedproceeds from collateral and recourse represent the anticipated values ofassets we could liquidate or receive from other parties to offset our paymentsunder guarantees. The carrying amount of liabilities recorded on theconsolidated balance sheets reflects our best estimate of future payments wemay be required to make as part of fulfilling our guarantor obligations.

 
| **(Dollars  in millions)**   |   | **Maximum  Potential  Payments** |   | **Estimated  Proceeds   From  Collateral/Recourse** |   | **Carrying   Amount of  Liabilities(2)** |   |
|------------------------------|--------|----------------------------------|--------|-----------------------------------------------------|--------|------------------------------------------|--------|
| **September 30,  2003** |   |                             |   |                                                |   |                                     |   |
| Residual value guarantees    |   | $                                | 122    |                                                | $      | 121                                      |   | $ | 4 |   |
| Credit guarantees            |   | 25                               |   | 25                                                  |   | —                                   |   |
| Deficiency guarantees(1)     |   | 7                                |   | —                                              |   | —                                   |   |
|                         |   | $                                | 154    |                                                | $      | 146                                      |   | $ | 4 |   |
|                         |   |                             |   |                                                |   |                                     |   |
| **December 31,  2002**  |   |                             |   |                                                |   |                                     |   |
| Residual value guarantees    |   | $                                | 90     |                                                | $      | 90                                       |   | $ | 1 |   |
| Credit guarantees            |   | 25                               |   | 25                                                  |   | —                                   |   |
| Deficiency guarantees(1)     |   | 7                                |   | —                                              |   | —                                   |   |
|                         |   | $                                | 122    |                                                | $      | 115                                      |   | $ | 1 |   |

 

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(1)          This amount is indemnified by Boeing.

(2)          Amounts included in other liabilities.

 

We have issued various residual value guarantees. Under thesearrangements, we are obligated to make payments to a guaranteed party in theevent the related aircraft or equipment fair values fall below a specifiedamount at a future point in time. These obligations are collateralizedprincipally by commercial aircraft, and expire within the next 13 years.

 

We have issued credit and deficiency guarantees. Under thesearrangements, we are obligated to make payments to a guaranteed party in theevent that payments are not made by the original debtor or lessee. Currentoutstanding credit and deficiency guarantees expire within the next nine years.

 

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*Material Variable Interests in Unconsolidated Entities*

 

Airlines regularly utilize a special purpose entity (“SPE”) called aPass Through Trust to finance aircraft. The Pass Through Trust 

enables the airline to aggregate a large number of aircraft securednotes into one trust vehicle, facilitating the issuance of larger bonds calledpass-through certificates. The most common forms of pass-through certificatesissued by airlines are equipment trust certificates (“ETCs”) and EETCs. ETCsand EETCs provide investors with tranched rights to cash flows from a financialinstrument, as well as a collateral position in the related asset. While theunderlying classes of equipment notes vary by maturity and/or coupon dependingupon tenor or level of subordination of the specific equipment notes and theircorresponding claim on the aircraft, the basic function of the Pass ThroughTrust in an ETC or EETC remains to passively hold separate debt investments toenhance liquidity for investors, who in turn pass this liquidity benefitdirectly to the airline in the form of a lower coupon and/or greater debtcapacity. We participate in several ETCs and EETCs as an investor. We are alsoan investor in entities engaged in financing arrangements with third partiesand are accounting for these investments under the equity method.

 

We are a subordinated lender to certain SPEs that are utilized by theairlines, lenders and loan guarantors including, for example, the Export-ImportBank of the United States. We also utilize other SPEs that are fullyconsolidated in our financial statements. Both SPE arrangements are utilized toisolate individual transactions for legal liability or tax purposes, or toperfect security interests from our perspective as well as, in some cases, thatof a third-party lender in certain leveraged lease transactions.

 

Due to the deferral of FIN 46 adoption date to December 31,2003, we did not consolidate the particular SPE that we expected to consolidateas of July 1, 2003. In September 2003, we sold a majority of ourinvestment in this SPE, resulting in a gain of $45 million. The reduction ofour investment was sufficient to cause us to no longer be identified as theconsolidator of this SPE pursuant to the rules of FIN 46.

 

Our receivables from these SPEs and investment in ETCs and EETCsaggregated $666 million at September 30, 2003, which represents ourmaximum exposure to economic loss. During the nine months endedSeptember 30, 2003, we recorded revenues of $41 million and had cashinflows of $108 million relating to these investments. At September 30,2003, the VIEs in which we have invested had total assets of approximately $6.3billion and related debt (which is non-recourse to us) of approximately $5.6billion.

 

Included in the portfoliobalances are $178 million and $378 million at September 30, 2003 andDecember 31, 2002, respectively, of investments in entities engaged infinancing accounted for under the equity method.

 

**Note 11 – Segment Information**

 

Our primary operations atSeptember 30, 2003 included two principal financial reporting segments:Aircraft Financial Services and Commercial Financial Services. Currently,Aircraft Financial Services is active in providing lease and debt financing todomestic and international airlines. Commercial Financial Services provideslease and loan financing to a broad range of commercial and industrialcustomers. Other is comprised of Space and Defense Financial Services.

 

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We evaluate the performance ofour reporting segments based on results of operations. Information about ouroperations in our financial reporting segments is summarized as follows:

 
|                                      |   | **Nine Months  Ended  September 30,** |   |
|-------------------------------------------|--------|--------------------------------------------|--------|
| **(Dollars in millions)**                 |   | **2003**                                   |   | **2002** | ** ** |
| Revenues:                                 |   |                                       |   |   |   |
| Aircraft Financial Services               |   | $                                          | 731    |   | $ | 539 |   |
| Commercial Financial Services             |   | 171                                        |   | 174 |   |
| Other                                     |   | 12                                         |   | 5 |   |
|                                      |   | $                                          | 914    |   | $ | 718 |   |
|                                      |   |                                       |   |   |   |
| Interest expense (allocated):             |   |                                       |   |   |   |
| Aircraft Financial Services               |   | $                                          | 265    |   | $ | 227 |   |
| Commercial Financial Services             |   | 63                                         |   | 68 |   |
| Other                                     |   | 4                                          |   | 2 |   |
|                                      |   | $                                          | 332    |   | $ | 297 |   |
|                                      |   |                                       |   |   |   |
| Depreciation expense:                     |   |                                       |   |   |   |
| Aircraft Financial Services               |   | $                                          | 153    |   | $ | 121 |   |
| Commercial Financial Services             |   | 36                                         |   | 35 |   |
| Other                                     |   | 4                                          |   | 1 |   |
|                                      |   | $                                          | 193    |   | $ | 157 |   |
|                                      |   |                                       |   |   |   |
| Income before provision for income taxes: |   |                                       |   |   |   |
| Aircraft Financial Services               |   | $                                          | 25     |   | $ | 17 |   |
| Commercial Financial Services             |   | 38                                         |   | 29 |   |
| Other                                     |   | 3                                          |   | — |   |
|                                      |   | $                                          | 66     |   | $ | 46 |   |

 

The portfolio assets by segmentwere as follows:

 
| **(Dollars  in millions)**                                            |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Aircraft Financial Services:                                          |   |                         |   |                        |   |
| Financing leases                                                      |   | $                            | 3,575  |                        | $      | 3,670 |   |
| Notes and other receivables                                           |   | 2,469                        |   | 1,964                       |   |
| Equipment under operating leases, net of  accumulated depreciation    |   | 2,973                        |   | 2,672                       |   |
| Investments                                                           |   | 492                          |   | 517                         |   |
| Equipment held for sale or re-lease, net of  accumulated depreciation |   | 236                          |   | 288                         |   |
|                                                                  |   | 9,745                        |   | 9,111                       |   |
|                                                                  |   |                         |   |                        |   |
| Commercial  Financial Services:                                       |   |                         |   |                        |   |
| Financing leases                                                      |   | 726                          |   | 880                         |   |
| Notes and other receivables                                           |   | 792                          |   | 875                         |   |
| Equipment under operating leases, net of  accumulated depreciation    |   | 754                          |   | 760                         |   |
| Equipment held for sale or re-lease, net of  accumulated depreciation |   | 46                           |   | 23                          |   |
|                                                                  |   | 2,318                        |   | 2,538                       |   |
| Other                                                                 |   | 180                          |   | 113                         |   |
|                                                                  |   | $                            | 12,243 |                        | $      | 11,762 |   |

 

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The total assets by segment were as follows:

 
| **(Dollars in millions)**      |   | **September 30,2003** |   | **December 31,2002** |   |
|--------------------------------|--------|----------------------------|--------|---------------------------|--------|
| Aircraft Financial Services    |   | $                          | 10,284 |                      | $      | 9,761 |   |
| Commercial Financial  Services |   | 2,482                      |   | 2,678                     |   |
| Other                          |   | 206                        |   | 124                       |   |
|                           |   | $                          | 12,972 |                      | $      | 12,563 |   |

 

**Note12 – Transactions with Boeing**

 

We entered into certaintransactions with Boeing in the form of intercompany guarantees and othersubsidies.

 

Intercompany guaranteesprimarily relate to residual value guarantees, first loss deficiency guaranteesand rental guarantees. At September 30, 2003, we were the beneficiaryunder $2.6 billion of guarantees from Boeing. We recorded the followingactivity under the intercompany guarantee agreements:

 
|                                                                      |   | **Nine  Months Ended****September 30,** |   |
|---------------------------------------------------------------------------|--------|----------------------------------------------|--------|
| **(Dollars in millions)**                                                 |   | **2003**                                     |   | **2002** |   |
| Guarantee payments applied to income                                      |   | $                                            | 29     |   | $ | 42 |   |
| Guarantee payments applied to reduce net asset value of  related aircraft |   | 23                                           |   | 6 |   |
|                                                                      |   | 52                                           |   | 48 |   |
| Fees                                                                      |   | (3                                           | )      | (2 | ) |
| Net guarantee payments received                                           |   | $                                            | 49     |   | $ | 46 |   |

 

For a period of time, Boeing has also agreed to provide interest ratesubsidies, non-guarantee concessions and rental payments on restructured thirdparty leases. For the nine months ended September 30, 2003 and 2002, werecognized income of $38 million and $34 million, respectively, under suchsubsidies.

 

Additionally, as provided for under the terms of the intercompanyguarantee agreements, Boeing recorded charges of $66 million and $123 million,respectively, for the nine months ended September 30, 2003 and 2002, relatedto asset impairments, accrued expenses and adjustments to its allowance forlosses on receivables in our portfolio.

 

For the nine months ended September 30, 2003 and 2002, we recordedrevenues from Boeing, exclusive of guarantees and subsidies, of $33 million and$22 million, respectively.

 

We recognized new business volume of $1.4 billion and $2.2 billion forthe nine months ended September 30, 2003 and 2002, respectively, relatedto our purchase of aircraft and equipment from Boeing.

 

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**Item2.  Management’s Narrative Analysis ofResults of Operations**

 

Forward-Looking Information Is Subject to Risk and Uncertainty

 

From time to time, we may makestatements that contain projections or “forward-looking” information (asdefined in the Private Securities Litigation Reform Act of 1995) that involverisk and uncertainty. The words “aim”, “plan”, “likely”, “believe”, “expect”,“anticipate”, “intend”, “estimate”, “will”, “should”, “could”, “may”, and otherexpressions that indicate future events and trends identify forward-lookingstatements. These statements are not guaranties of future performance andinvolve risks, uncertainties and assumptions that are difficult to predict.Forward-looking statements are based upon assumptions as to future events thatmay not prove to be accurate. Actual outcomes and results may differ materiallyfrom what we express or forecast in these forward-looking statements. As aresult, these statements speak only as of the date they were made and weundertake no obligation to publicly update or revise any forward-lookingstatements. Certain statements in this Form 10-Q, and particularly in the Notesto Consolidated Financial Statements in Item 1 of Part I, Item 2 of Part I,Item 1 of Part II, and Item 5 of Part II may contain forward-lookinginformation. The subject matter of such statements may include, but not belimited to wars, the effects of the September 11, 2001 terrorist attacksor future terrorist threats or attacks, the impact on us of strategic decisionsof Boeing, the level of new financing opportunities made available to us byBoeing, future earnings, business volume, costs, expenditures, losses,liquidity, residual values and various business environment trends including thestate of the economy, in general, and the airline industry, in particular. Inaddition to those contained herein, forward-looking statements and projectionsmay be made by us orally or in writing including, but not limited to, varioussections of our filings with the Securities and Exchange Commission under theSecurities Act of 1933 and the Securities Exchange Act of 1934.

 

Our actual results and futuretrends may differ materially from our forward-lookingstatements depending on a variety of factors including our relationshipwith Boeing, as well as strategic decisions of Boeing relating to us, theeffects of the September 11, 2001 terrorist attacks or future terroristthreats or attacks and their continuing impact on the airline industry, wars, SevereAcute Respiratory Syndrome (“SARS”), the capital equipment requirements ofUnited States domestic and foreign businesses, general economic conditions, andin particular, economic conditions in the airline industry and the continuedoperation, viability and growth of major airline customers, capitalavailability and cost, changes in laws and tax benefits, the tax position ofBoeing (including the applicability of the alternative minimum tax),competition from other financial institutions, our successful execution ofinternal operating plans, defaults or bankruptcies by customers (especiallyairlines), adverse developments in the value of collateral or owned assets(especially aircraft), termination of aircraft manufacturing programs,regulatory uncertainties, legal proceedings and an adverse development inrating agency credit ratings or assessments.

 

**ConsolidatedResults of Operations**

 

Overview

 

Our net income was $47 millionfor the nine months ended September 30, 2003 compared with $32 million forthe same period in 2002, an increase of $15 million (46.9%). The increase innet income is primarily attributable to an 8.9% increase in financingreceivables and equipment under operating leases, higher gains from asset salesand revaluation of warrants and convertible securities in the portfolio,partially offset by an increase in interest expense due to a 4.6% growth indebt and higher provision for losses and impairment expense.

 

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The net income for the nine monthsended September 30, 2003 included pre-tax charges of $230 million ($193million of which was recognized in the first quarter of 2003), compared with$149 million for the same period in 2002 (all of which was recognized in thethird quarter of 2002). These charges were recognized in response to themuch-publicized deterioration in the credit worthiness of our airlinecustomers, airline bankruptcy filings and the continued decline in commercialaircraft and general equipment asset value. Excluding these charges, net incomefor the nine months ended September 30, 2003 would have been $211 million(an increase of $164 million) and the net income for the nine months endedSeptember 30, 2002 would have been $136 million (an increase of $104million), an increase of $75 million (55.4%) between the two periods.

 

Our portfolio atSeptember 30, 2003 totaled $12.2 billion compared with $11.8 billion atDecember 31, 2002 and $11.5 billion at September 30, 2002. Our 2003new business volume is significantly less than that recorded in 2002 primarilyas a result of reduced demand for commercial aircraft financings. We are alsolowering the outlook for portfolio growth to reflect lower demand forcommercial aircraft financings and accelerated portfolio run-off. We now expectour portfolio to grow approximately $0.5 billion in 2003 and approximately $1.0billion in 2004. Our previous portfolio growth guidance was between $1.0billion and $1.5 billion in 2003, and between $1.5 billion and $2.0 billion in2004. As a result, our revenue growth outlook will moderate. We are alsorevising our 2003 outlook for return on assets from approximately breakeven toapproximately 0.5%. In 2004, our expected return on assets remains unchanged atapproximately 1%.

 

Results of Operations

 

*Financing revenues*(revenue from financingleases, notes and other receivables and equipment under operating leases) wereas follows:

 
|                                |   | **Nine  Months Ended   September 30,** |   |
|-------------------------------------|--------|---------------------------------------------|--------|
| **(Dollars in millions)**           |   | **2003**                                    |   | **2002** |   |
| Finance lease income                |   | $                                           | 221    |   | $ | 219 |   |
| Interest income on notes receivable |   | 167                                         |   | 165 |   |
| Operating lease income              |   | 376                                         |   | 302 |   |
|                                |   | $                                           | 764    |   | $ | 686 |   |

 

Financing revenues**for the nine months endedSeptember 30, 2003 were $764 million compared with $686 million for thesame period in 2002, an increase of $78 million (11.4%). New business volumeand portfolio transfers from Boeing were primarily responsible for the increasein revenue.

 

*Investment income*for the nine months endedSeptember 30, 2003 was $38 million compared with $15 million for the sameperiod in 2002, an increase of $23 million. The comparable 2002 resultsincluded impairment charges of $16 million related to a long-held investment inETCs securitized by aircraft on lease to United and a common stock investment.Excluding the impairment charges, investment income would have increased by $7million, which is primarily due to a gain of $6 million on the sale of commonstock that was received as a result of a financing transaction.

 

*Net gain on disposal* for the nine months endedSeptember 30, 2003 was $49 million compared with $7 million for the sameperiod in 2002, an increase of $42 million. A $45 million gain on sale of amajority of our investment in a particular SPE within the Aircraft FinancialServices portfolio in the third quarter of 2003 was primarily responsible forthe increase. These gains are sporadic in nature and depend in part on marketconditions at the time of disposal and our decision to sell or re-lease whenequipment are returned. There can be no assurance that we will recognize suchgains in the future.

 

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*Other income* for the nine months endedSeptember 30, 2003 was $63 million compared with $10 million for the sameperiod in 2002, an increase of $53 million. Higher recognized gains onrevaluation of derivatives and warrant sales totaling $40 million, interestincome on short-term investments of $5 million and miscellaneous and fee incomeof $8 million were primarily responsible for the increase in 2003.

 

*Equity in gain (loss) from joint venture* for the nine months ended September 30, 2003was nil compared with a loss of $44 million for the same period in 2002. The2002 loss consisted of impairment charges on long-lived assets and net lossfrom operations in our interest in the BATA joint venture, which we previouslyaccounted for under the equity method. In the third quarter of 2003, anamendment to the BATA agreement was finalized by ATA and us, which gave usmajority control in the management of the business and affairs of BATA. As aresult, BATA is now consolidated.

 

*Interest expense* for the nine months ended September 30, 2003 was $332 millioncompared with $297 million for the same period in 2002, an increase of $35million (11.8%). Higher debt associated with the growth in the portfolio,partially offset by lower leverage and effective interest rates, was primarilyresponsible for the increase.

 

*Depreciation expense* (on equipment under operating leases andequipment held for re-lease) for the nine months ended September 30, 2003was $193 million compared with $157 million for the same period in 2002, anincrease of $36 million (22.9%). Growth in equipment under operating leases wasprimarily responsible for the increase.

 

*Provision for losses* for the nine months ended September 30,2003 was $160 million compared with $101 million for the same period in 2002,an increase of $59 million (58.4%). The provision for losses is comprised of ageneral provision and an additional provision. The general provision, whichprimarily relates to the growth in the receivables portfolio, was $30 millionfor the nine months ended September 30, 2003 compared with $26 million forthe same period in 2002. The additional provision was $130 million and wasrecorded at the end of the first quarter of 2003 compared with $75 millionrecorded in the third quarter of 2002. The additional provision was inrecognition of the deterioration in the credit worthiness of our airlinecustomers, airline bankruptcy filings and the continued decline in commercialaircraft and general equipment asset values. The provision for losses maintainsthe allowance for losses on receivables at a level we deem to be adequate tocover anticipated losses.

 

*Operating expenses*, which consists of general and administrative expenses, for the ninemonths ended September 30, 2003 was $52 million compared with $46 millionfor the same period in 2002, an increase of $6 million (13.0%). Higheradministrative and staffing costs and professional services fees were primarilyresponsible for the increase in operating expenses.

 

*Asset impairment expense* for the nine months ended September 30,2003 was $79 million compared with $11 million for the same period in 2002, anincrease of $68 million. The $79 million impairment losses for the nine monthsended September 30, 2003 resulted from reduced projected cash flows anddeteriorated aircraft values for operating lease assets.

 

*Other expenses* for the nine months ended September 30, 2003 were $32 millioncompared with $16 million for the same period in 2002, an increase of $16million. The increase was primarily attributable to a $21 million write-off inthe first quarter of 2003 of forward-starting interest rate swaps thatno longer qualified for fair value hedge accounting treatment, which was slightly offset by a decrease of $5million in aircraft maintenance and storage and other expenses.

 

*Provision for income taxes* for the nine months ended September 30,2003 was $19 million compared with $14 million for the same period in 2002, achange of $5 million (35.7%). The higher pre-tax income recorded for the ninemonths ended September 30, 2003 compared to the same period in 2002 wasprincipally responsible for the increase in the provision for income taxes.

 

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**BusinessEnvironment and Trends**

 

Thecommercial aviation market downturn remains severe, particularly in key U.S.domestic, transatlantic and transpacific markets, with trends varying betweencarriers and regions. Air travel volumes in all areas of the world are belowthe volumes carried by the airlines in 2000. The downturn is impacting demandacross aircraft types. Economic growth has been slow to recover due toworldwide industrial over-capacity and poor demand. The world’s largest andmost developed economies are all facing varying degrees of this problem despitestimulative fiscal and monetary policies. This economic sluggishness combinedwith increased air travel security costs, SARS, and ongoing airlinerestructuring has put severe downward pressure on airline revenues, earningsand growth. We continue to carefully monitor the commercial aviation marketconditions.

 

Thedownturn in the airline industry and the resulting decline in the collateralvalues of aircraft and airline credit ratings, as well as additional bankruptcyfilings by certain airline customers included in our portfolio were primarilyresponsible for our recognition of non-cash charges in the first quarter of2003 to strengthen the allowance for losses on receivables and recognize impairmentson certain assets. Any additional impacts may be dependent upon the duration ofthe current economic and airline industry decline, or any significant defaults,repossessions or restructurings at a time when depressed aircraft values andlease rates make it difficult to sell or redeploy such aircraft. Aircraftvaluations could decline materially if significant numbers of aircraft,particularly types with relatively few operators, are idled on account offurther airline bankruptcies or restructurings.

 

In October 2003, Boeing announced the decision to end production of theB-757 program in 2004. The aircraft will continue to be supported by Boeing.There are currently over 1,000 B-757 aircraft presently in service atapproximately 125 operators. Closures of other aircraft programs in the pasthave not necessarily caused extraordinary declines in the secondary value ofthe aircraft involved. Due to the impacts of September 11, 2001 and thedownturn in the airline industry, B-757 values have already declined.

 

At September 30, 2003, $1.4 billion of our portfolio wascollateralized by B-757 aircraft. This is comprised of $1.1 billion ofpassenger aircraft (30 aircraft at 10 operators). At September 30, 2003,we were the beneficiary under $433 million of guarantees from Boeing covering$500 million of this portion of our portfolio. The remainder of the portfoliois B-757 freighter conversions on long-term lease. While we continue to believein the utility and marketability of the B-757, we are unable to predict how theend of B-757 production, as well as overall market conditions, may impact B-757collateral values and rental rates. Should the B-757 suffer a significantdecline in utility and market acceptance, the aircraft collateral values maydecline, which in turn could also result in an increase to the allowance forlosses on receivables. Future declines in rental rates could result inadditional impairment charges under SFAS No. 144 on operating leaseaircraft. While we are unable to predict the likelihood of these impactsoccurring, we do not expect such impacts to result in a potential materialadverse effect on our earnings, cash flows or financial position.

 

AtSeptember 30, 2003, we had $282 million of assets that were held for saleor re-lease, of which $22 million were identified with a firm contract to sellor place on lease. Additionally, approximately $376 million of our portfolio iscurrently scheduled to come off lease during the next twelve months and becomesubject to replacement into the market. The inability to place or sell suchassets of the portfolio into revenue-generating service could pose a potentialrisk to results of operations.

 

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**Liquidityand Capital Resources**

 

We have significant liquidity requirements, primarily to fund ongoingfinancing commitments, satisfy debt payments and to fund our operatingexpenses. We can satisfy these liquidity needs from the following sources:

 

•      cashfrom operations and other receipts from our portfolio,

•      issuance of commercial paper and otherdebt,

•      securitization program, and

•      borrowings under committed creditfacilities.

 

We attempt to schedule our debt payments to correspond to our scheduledreceipts from our portfolio. We satisfy a significant portion of our cashrequirements from diversified global funding sources and do not depend on anyone lender. We believe that we have adequate liquidity sources and access tothe capital markets to allow us to fulfill our current commitments.

 

Risks that could affect our sources of liquidity include among others:

 

•     a severe or prolonged downturn in theeconomy,

•     additional restructurings, defaults orbankruptcies by airlines, and

•     a decrease in our credit ratings.

 

During the first nine months of 2003, we issued $853 million in newsenior debt, primarily to finance new business. At times, we also rely on theissuance of commercial paper as a short-term funding source. During the firstnine months of 2003, our outstanding commercial paper balances ranged from zeroto $73 million, with a weighted average effective interest rate of 1.63% and adaily average outstanding balance for the period of $4 million. We had nocommercial paper borrowings outstanding at September 30, 2003.

 

Our assets and liabilities expose us to interestrate risk to the extent that those assets and liabilities are not exactlymatched according to currency or maturity and repricing characteristics. Thetypes and terms of borrowing and hedging instruments that are available to usin the market and possible changes in asset terms limit our ability to matchassets and liabilities. We attempt to keep this mismatch risk small, partlythrough the use of interest rate and currency swaps, and we do not believe weare materially exposed to gains or losses due to interest rate or currencychanges.

 

Financing-relatedinterest expense for the nine months ended September 30, 2003 was $332million, compared with $297 million for the same period in 2002. Leverage(debt-to-equity ratio) at September 30, 2003 was 5.2-to-1, as comparedwith 5.7-to-1 at both the end of 2002 and at September 30, 2002.

 

**CreditRatings**

 

Ouraccess to capital at rates that allow for a reasonable return on new businesscan be affected by credit rating agencies’ ratings of our debt. Our creditratings have been closely tied to those of Boeing.

 

##### **We have the following creditratings as of the filing date:**

 

| **Debt**     |   | **Standard &   Poor’s** |   | **Moody’s** |   | **Fitch Ratings** |   |
|--------------|--------|----------------------------------|--------|------------------|--------|-------------------|--------|
| Short-term   |   | A-1                              |   | P-2              |   | F-1               |   |
| Senior       |   | A                                |   | A3               |   | A+                |   |
| Subordinated |   | A                                |   | Baa1             |   | A                 |   |

 

28

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On July 15, 2003, Moody’sInvestors Service (“Moody’s”) placed Boeing’s and our senior and subordinatedcredit ratings on negative watch for possible downgrade. This action primarilyrelates to the placement of Boeing’s ratings under review for possibledowngrade by Moody’s as a result of certain second quarter 2003 chargesrecognized by Boeing.

 

Although credit ratings mayimpact the rate at which we can borrow funds, a credit rating is not arecommendation to buy, sell or hold securities. In addition, a credit rating issubject to revision or withdrawal at any time by the assigning ratingorganization.

 

**SegmentOperations**

 

We provide financial servicesthrough two primary reporting segments: Aircraft Financial Services andCommercial Financial Services. Other is comprised of Space and DefenseFinancial Services. The determination of segments is based upon our internalorganization and operational and financial measurement practices. We evaluatethe performance of our reporting segments based on results of operations.

 

Aircraft Financial Services provides financing to buy or leasecommercial airplanes and represented 79.6% of our total portfolio atSeptember 30, 2003. Services provided by Aircraft Financial Servicesextend to new and used Boeing and non-Boeing aircraft. Aircraft FinancialServices also assists Boeing commercial aircraft customers to structure andarrange for loan and lease products. At September 30, 2003, we owned 334commercial aircraft and had partial ownership or security interest in anadditional 227 aircraft, including those owned in joint ventures, EETC andother investment transactions.

 

Commercial Financial Services’ portfolio encompasses multipleindustries and a wide range of equipment, including corporate aircraft,ocean-going vessels, machine tools, shipping containers, printing presses,paper and cardboard manufacturing equipment and a wide variety of otherindustrial and manufacturing equipment. Commercial Financial Services represented18.9% of our total portfolio at September 30, 2003.

 

Space and Defense Financial Services provides lease and loan financingand advisory services primarily for Boeing military-related products andcommercial space systems. This portfolio represented 1.5% of our totalportfolio at September 30, 2003.

 

*Aircraft Financial Services*

 

*Revenues* for thenine months ended September 30, 2003 were $731 million compared with $539million for the same period in 2002, an increase of $192 million (35.6%). A larger portfolio, resulting from newbusiness volume and portfolio transfers from Boeing, an increase in gains onderivatives, gains on disposal of assets, investment income and fee income wereprimarily responsible for the increased revenues.

 

*Interest expense* (allocated)for the nine months ended September 30, 2003 was $265 million comparedwith $227 million for the same period in 2002, an increase of $38 million(16.7%). Higher debt (allocated) associated with the growth in the portfolio,offset by lower leverage and effective interest rates, was primarilyresponsible for the increase.

 

# *Depreciation expense* for the nine months endedSeptember 30, 2003 was $153 million compared with $121 million for thesame period in 2002, an increase of $32 million (26.4%). Growth in equipmentunder operating leases was responsible for the increase.

#  

29

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*Income before provision for income taxes*for the nine months ended September 30, 2003 was $25 million compared with$17 million for the same period in 2002, an increase of $8 million (47.1%). Thenet income for the nine months ended September 30, 2003 included pre-taxcharges of $227 million ($191 million of which was recognized in the firstquarter of 2003), compared with $135 million for the same period in 2002 (allof which was recognized in the third quarter of 2002). Substantially all ofthese charges were recognized in response to the much-publicized deteriorationin the credit worthiness of our airline customers, airline bankruptcy filingsand the continued decline in commercial aircraft asset value. Excluding thesecharges, income before provision for income taxes for the nine months endedSeptember 30, 2003 would have been $252 million compared to $152 millionfor the same period in 2002, an increase of $100 million (65.7%). The neteffect of changes in revenues, interest expense and depreciation expensediscussed above was primarily responsible for the increase in income before provision for income taxes**.**

#  

*Commercial FinancialServices*

 

*Revenues* for the nine months ended September 30, 2003, was $171 millioncompared with $174 million for the same period in 2002, a decrease of $3million (1.7%). The decrease was primarily due to a smaller portfolio, whichresulted from portfolio run off and decreased new business volume, partiallyoffset by gains on disposal of assets and increases in fee and miscellaneousincome.

 

*Interest expense* (allocated) for the ninemonths ended September 30, 2003 was $63 million compared with $68 millionfor the same period in 2002, a decrease of $5 million (7.4%). The decrease isprimarily attributable to lower debt (allocated) associated with the smallerportfolio, lower effective interest rates and leverage.

 

*Income before provision for income taxes* forthe nine months ended September 30, 2003 was $38 million compared with $29million for the same period in 2002, an increase of $9 million (31.0%). The increase in income before provision forincome taxes reflects the net effect of changes in revenues, interest expenseand an $8 million decrease in provision for losses.

 

During the third quarter of 2003, it became evident that our newbusiness volume in commercial financial services would likely be significantlylower in 2003 compared to 2002. We believe this lower volume was caused by avariety of factors, notably including reduced capital expenditures as a resultof the prolonged economic sluggishness.

 

**Standards Issued and Not YetImplemented**

 

In January 2003, the FASB issued FIN 46, “Consolidation of VariableInterest Entities,” which clarifies theapplication of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” relating to consolidation of variable interest entities(“VIEs”). The provisions of FIN 46 became immediately effective for VIEscreated after January 31, 2003. The provisions of FIN 46 forVIEs created on or before January 31, 2003 were delayed untilDecember 31, 2003 by FASB Staff Position No. FIN 46-6, “EffectiveDate of FASB Interpretation No. 46, Consolidation of Variable InterestEntities,” issued in October 2003. Although we are continuing to assess theimpact of FIN 46, we currently believe that we will not be required toconsolidate any additional VIEs that are significant. However, our finalconclusions will be incorporated into the financial statements upon fulladoption of FIN 46 on December 31, 2003.

 

30

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**Item 4. Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our principal executive officerand principal financial officer, based on their evaluation of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a -15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form10-Q, have concluded that our disclosure controls and procedures are adequateand effective for the purposes set forth in the definition in Exchange Actrules.

 

**Changesin Internal Controls**

 

There were nosignificant changes in our internal controls or in other factors that couldsignificantly affect our internal controls subsequent to the date of theirevaluation.

 

# **Part II**

#  

**Item1.  Legal Proceedings**

 

Various legal proceedings and claims are pending or have been assertedagainst us, many of which are covered by third parties, including insurancecompanies. We believe that the final outcome of such proceedings and claimswill not have a material adverse effect on our earnings, cash flows orfinancial position.

 

**Item5.  Other Information**

 

**NewBusiness Volume****(1)**

 

New business volume issummarized as follows:

 
|                           |   | **Nine Months Ended****September 30,** |       |
|--------------------------------|--------|---------------------------------------------|------------|
| **(Dollars in millions)**      |   | **2003**                                    | ** ** | **2002** | ** ** |
| Aircraft Financial Services    |   | $                                           | 1,408      |   | $ | 2,215 |   |
| Commercial  Financial Services |   | 182                                         |       | 475 |   |
| Other                          |   | 95                                          |       | 86 |   |
|                           |   | $                                           | 1,685      |   | $ | 2,776 |   |

 

----

(1)   Excludes transfersfrom Boeing, unless new financing occurred in current year.

 

Portfolio balances are summarized as follows:

 
| **(Dollars in millions)**     |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Aircraft Financial Services   |   | $                            | 9,745  |                        | $      | 9,111 |   |
| Commercial Financial Services |   | 2,318                        |   | 2,538                       |   |
| Other                         |   | 180                          |   | 113                         |   |
|                          |   | $                            | 12,243 |                        | $      | 11,762 |   |

 

31

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The following table summarizesthe net change in our total portfolio:

 
| **(Dollars in millions)**                   |   | **Nine Months Ended  September 30,  2003** |   | **Year Ended   December 31,  2002** |   |
|---------------------------------------------|--------|-------------------------------------------------|--------|------------------------------------------|--------|
| New  business volume                        |   | $                                               | 1,685  |                                     | $      | 3,415 |   |
| Financing  assets transferred from Boeing   |   | —                                          |   | 386                                      |   |
| Non-cash  consolidation of BATA             |   | 21                                              |   | —                                   |   |
| Non-cash  items from customer restructuring |   | (8                                              | )      | —                                   |   |
| Portfolio  impairment                       |   | (86                                             | )      | (100                                     | )      |
| Asset  run-off                              |   | (938                                            | )      | (913                                     | )      |
| Depreciation  expense                       |   | (193                                            | )      | (223                                     | )      |
| Net  change in portfolio balance            |   | $                                               | 481    |                                     | $      | 2,565 |   |

 

**SignificantConcentrations**

 

The following table includes our five largest customers atSeptember 30, 2003, with their related portfolio balances atDecember 31, 2002:

 
|                      |   | **September 30, 2003** |   | **December 31, 2002** |   |
|---------------------------|--------|-----------------------------|--------|----------------------------|--------|
| **(Dollars in millions)** |   | **Net Asset Value**         |   | **% of Total  Portfolio**  |   | **Net Asset Value** |   | **% of Total  Portfolio** |   |
| AirTran                   |   | $                           | 1,446  |                       | 11.8   | % | $ | 1,069 |   | 9.1 | % |
| United                    |   | 1,157                       |   | 9.5                        |   | 1,190 |   | 10.1 |   |
| American                  |   | 910                         |   | 7.4                        |   | 381 |   | 3.2 |   |
| ATA                       |   | 718                         |   | 5.9                        |   | 611 |   | 5.2 |   |
| Hawaiian                  |   | 536                         |   | 4.4                        |   | 479 |   | 4.1 |   |
|                      |   | $                           | 4,767  |                       |   |   | $ | 3,730 |   |   |   |

 

Our largest customer, AirTranHoldings, Inc. (“AirTran”), accounted for $1.4 billion and $1.1 billion of ourtotal portfolio at September 30, 2003 and December 31, 2002,respectively. Our AirTran portfolio includes investments in AirTran EETCstotaling $37 million at both September 30, 2003 and December 31,2002. At September 30, 2003, the AirTran portfolio primarily consisted of58 B-717s and the above-mentioned investments. On October 23, 2002, Boeingannounced that AirTran signed an agreement with us to lease 22 of the 24 B-717aircraft returned by American. The B-717 aircraft are scheduled for deliverythroughout 2003, 17 of which were delivered during the first nine months of2003.

 

Our second largest customer,United, accounted for $1.2 billion of our total portfolio at bothSeptember 30, 2003 and December 31, 2002. At September 30, 2003,the United portfolio was secured by security interests in two B-767s and 13B-777s and by an ownership and security interest in five B-757s. United filedfor Chapter 11 bankruptcy protection on December 9, 2002. During thethird quarter of 2003, we completed a restructuring of United’s aircraft loansand leases. The receivables associated with a security interest in the twoB-767s and 13 B-777s were restructured with terms that did not necessitate atroubled debt restructuring charge to the allowance for losses on receivables.The lease terms attributable to the five B-757s in which we hold an ownershipand security interest were revised in a manner that reclassified these leasesas operating leases. Additionally, we had previously assigned to a third partythe rights to a portion of the lease payments on these five B-757s. As a resultof this lease restructuring, as of September 30, 2003, we recordedoperating lease equipment with a value of $84 million and non-recourse debt of$42 million (representing the obligation attributable to the assignment offuture lease proceeds). As of September 30, 2003, United is current on allof its obligations related to these 20 aircraft.

 

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United retains certain rightsby virtue of operating under Chapter 11 bankruptcy protection, includingthe right to reject the restructuring terms with its creditors, which includesthe restructuring with us described above. However, this restructuring, whichwas approved by the federal bankruptcy court, sets forth the terms under whichall 20 aircraft financed by us are expected to remain in service upon United’semergence from Chapter 11 protection. If United exercises their right toreject the restructuring terms, the terms of their leases and loans revert to theoriginal terms.

 

Our third largest customer,American, accounted for $910 million and $381 million of our total portfolio atSeptember 30, 2003 and December 31, 2002, respectively. AtSeptember 30, 2003, the American portfolio consisted of leases and loanson two B-757s, nine B-767s, two B-777s, 39 MD-83s, four MD-82s and subordinateddebt in one B-777. We financed final delivery payments then due on nine B-767sand two B-777s during the first nine months of 2003. We believe that all suchdelivery payment loans are adequately collateralized.

 

Our fourth largest customer,ATA, accounted for $718 million and $611 million of our total portfolio atSeptember 30, 2003 and December 31, 2002, respectively. AtSeptember 30, 2003, the ATA portfolio primarily consisted of 12 B-757s andan investment in ATA preferred stock with a face amount of $50 million. InNovember 2002, ATA received a loan of $168 million administered by the AirlineTransportation Stabilization Board. In the third quarter of 2003, we agreed torestructure certain outstanding leases by extending their terms and deferring aportion of their rent payments for a limited period of time. The terms of therestructured leases did not result in a charge to the allowance for losses onreceivables. ATA must meet certain requirements for the terms of therestructured leases to remain in effect. These requirements include completionof an exchange offering on its publicly traded debt, which will result in adeferral of the principal debt maturity date. If ATA fails to complete suchrequirements, the terms of these leases revert to the original terms.

 

We continue to monitor thestatus of the ATA exchange offering. ATA expects that they will come to anagreement with their bondholders and that the ensuing debt exchange willaddress their liquidity issues. Should an exchange offering not be successfullycompleted, we believe it is possible that our investment in ATA preferred stockwould be subject to an assertion that we will be unable to realize all amountsdue according to the contractual terms, and that an other-than-temporaryimpairment could be recorded.

 

Our fifth largest customer,Hawaiian, accounted for $536 million and $479 million of our total portfolio atSeptember 30, 2003 and December 31, 2002, respectively. AtSeptember 30, 2003, the Hawaiian portfolio primarily consisted of 13B-717s and three B-767s. Hawaiian filed for Chapter 11 bankruptcyprotection on March 21, 2003. With bankruptcy court approval, we havereached an agreement releasing Hawaiian from its obligation to take delivery ofa new B-767 that was scheduled for delivery to Hawaiian in April 2003. Thisaircraft was sold to a third party in October 2003. Taking into account thespecific reserves allocated for the Hawaiian receivables, we do not expect thatour transactions with Hawaiian will have a material adverse effect on ourearnings, cash flow or financial position. In the event that futurenegotiations or proceedings result in the return of a substantial number ofaircraft, there could be a material adverse effect on our earnings, cash flowsor financial position, at least until such time as the aircraft are sold orredeployed for adequate consideration. During the first nine months of 2003, wereceived cash of $32 million on the Hawaiian portfolio.

 

33

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**AircraftFinancial Services Portfolio**

 

The Aircraft Financial Servicesportfolio consisted of the following commercial aircraft types(1):

 
| **(Dollars  in millions)**       |   | **Receivables(2)** |   | **Operating  Leases(2)** |   | **Investments(5)** |   | **Held for  Sale or  Re-Lease** |   | **Total** |   |
|----------------------------------|--------|--------------------|--------|--------------------------|--------|--------------------|--------|---------------------------------|--------|-----------|--------|
| **September 30, 2003**      |   |               |   |                     |   |               |   |                            |   |      |   |
| B-717                            |   | $                  | 1,821  |                     | $      | 320                |   | $                               | — |      | $      | — |   | $ | 2,141 |   |
| B-727                            |   | —             |   | 14                       |   | —             |   | 35                              |   | 49        |   |
| B-737                            |   | 78                 |   | 672                      |   | —             |   | 19                              |   | 769       |   |
| B-747                            |   | 221                |   | 239                      |   | —             |   | —                          |   | 460       |   |
| B-757                            |   | 880                |   | 473                      |   | —             |   | 22                              |   | 1,375     |   |
| B-767                            |   | 753                |   | 368                      |   | —             |   | 15                              |   | 1,136     |   |
| B-777                            |   | 1,186              |   | —                   |   | —             |   | —                          |   | 1,186     |   |
| DC-9(3)                          |   | 3                  |   | 2                        |   | —             |   | 1                               |   | 6         |   |
| MD-80(3)                         |   | 363                |   | 103                      |   | —             |   | 15                              |   | 481       |   |
| MD-90(3)                         |   | 85                 |   | —                   |   | —             |   | 50                              |   | 135       |   |
| DC-10(3)                         |   | 53                 |   | 38                       |   | —             |   | —                          |   | 91        |   |
| MD-11(3)                         |   | 167                |   | 689                      |   | —             |   | 73                              |   | 929       |   |
| Other  Aircraft and Equipment(4) |   | 434                |   | 55                       |   | —             |   | 6                               |   | 495       |   |
| Asset  Pools(6)                  |   | —             |   | —                   |   | 451                |   | —                          |   | 451       |   |
| Other(7)                         |   | —             |   | —                   |   | 41                 |   | —                          |   | 41        |   |
|                             |   | $                  | 6,044  |                     | $      | 2,973              |   | $                               | 492    |      | $      | 236 |   | $ | 9,745 |   |
|                             |   |               |   |                     |   |               |   |                            |   |      |   |
| **December 31, 2002**       |   |               |   |                     |   |               |   |                            |   |      |   |
| B-717                            |   | $                  | 1,838  |                     | $      | 122                |   | $                               | — |      | $      | — |   | $ | 1,960 |   |
| B-737                            |   | 81                 |   | 705                      |   | —             |   | 19                              |   | 805       |   |
| B-747                            |   | 240                |   | 247                      |   | —             |   | —                          |   | 487       |   |
| B-757                            |   | 820                |   | 333                      |   | —             |   | 23                              |   | 1,176     |   |
| B-767                            |   | 319                |   | 309                      |   | —             |   | 26                              |   | 654       |   |
| B-777                            |   | 1,076              |   | —                   |   | —             |   | —                          |   | 1,076     |   |
| DC-9(3)                          |   | 95                 |   | 6                        |   | —             |   | —                          |   | 101       |   |
| MD-80(3)                         |   | 391                |   | 118                      |   | —             |   | 18                              |   | 527       |   |
| MD-90(3)                         |   | 119                |   | —                   |   | —             |   | 36                              |   | 155       |   |
| DC-10(3)                         |   | 62                 |   | 57                       |   | —             |   | 4                               |   | 123       |   |
| MD-11(3)                         |   | 175                |   | 717                      |   | —             |   | 152                             |   | 1,044     |   |
| Other  Aircraft and Equipment(4) |   | 418                |   | 58                       |   | —             |   | 10                              |   | 486       |   |
| Asset  Pools(6)                  |   | —             |   | —                   |   | 474                |   | —                          |   | 474       |   |
| Other(7)                         |   | —             |   | —                   |   | 43                 |   | —                          |   | 43        |   |
|                             |   | $                  | 5,634  |                     | $      | 2,672              |   | $                               | 517    |      | $      | 288 |   | $ | 9,111 |   |

 

----

(1)   Excludes corporate aircraft of $888 million and $950million at September 30, 2003 and December 31, 2002, respectively,which are included in the Commercial Financial Services portfolio.

(2)   Includes owned aircraft and aircraft collateralizingreceivables, some of which are subordinated.

(3)   Out of production, but currently supported by Boeingwith respect to parts and other services.

(4)   Some of these aircraft are out of production, butare supported by the manufacturer or other third party part and serviceproviders.

(5)   Represents aircraft and equipment collateralizingEETCs, ETCs and other trust-related interests and other investments held by us.

 

34

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(6)   Investments are supported by asset pools secured byvarious commercial aircraft types.

(7)   Represents investments in mandatorily redeemablepreferred stock, common stock and bonds.

 

At September 30,2003, we owned 334 commercial aircraft and had partial ownership or securityinterest in an additional 227 aircraft, including those owned in jointventures, EETC and other investment transactions.

 

AtSeptember 30, 2003, $8.7 billion (94.6%) of the Aircraft FinancialServices portfolio, excluding investments, was collateralized by Boeingproducts.

 

At September 30, 2003, theAircraft Financial Services portfolio (excluding investments) was comprised ofthe following aircraft vintages:

 

| 2003 – 1999                               |   | 63.2  | %      |
|------------------------------------------------|--------|-------|--------|
| 1998 – 1994                               |   | 13.6  |   |
| 1993 – 1989                               |   | 13.9  |   |
| 1988 – 1984                               |   | 4.2   |   |
| 1983 and older                                 |   | 2.4   |   |
| Secured by pooled assets  and other collateral |   | 2.7   |   |
|                                           |   | 100.0 | %      |

 

**Guarantees**

 

At September 30, 2003, wewere the beneficiary under $2.6 billion of guarantees with respect to ourportfolio relating to transactions totaling $4.4 billion. Any guarantee call byus would be net of realization of underlying residual values, partial rentpayments, re-lease rental payments or other mitigating value received.

 

The guarantees in our favor areeither full or partial in nature and include, but are not limited to, residualvalue guarantees, first loss deficiency guarantees and rental guarantees.Residual value guarantees provide a specified asset value at the end of a leaseagreement in the event of a decline in market value of the financed aircraft.First loss deficiency guarantees cover a specified portion of our losses onaircraft financed by us in the event of a loss upon disposition of the aircraftfollowing a default by the lessee. Rental guarantees are whole or partialguarantees covering us against the lessee’s failure to pay rent under the leaseagreement or our inability to re-lease these aircraft at or above a specifiedrent level.

 

The following table summarizessuch guarantees:

 
| **(Dollars in millions)** |   | **Domestic  Airlines** |   | **Foreign  Airlines** |   | **Domestic Equipment** |   | **Total** |   |
|---------------------------|--------|------------------------|--------|-----------------------|--------|------------------------|--------|-----------|--------|
| Amounts  guaranteed by:   |   |                   |   |                  |   |                   |   |      |   |
| Boeing  and subsidiaries  |   | $                      | 2,083  |                  | $      | 430                    |   | $         | 58     |   | $ | 2,571 |   |
| Other(1)                  |   | 14                     |   | —                |   | —                 |   | 14        |   |
|                      |   | $                      | 2,097  |                  | $      | 430                    |   | $         | 58     |   | $ | 2,585 |   |

 

----

(1)   Excludes guarantees made by entitiesaffiliated with the primary obligor.

 

35

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Guarantee amounts by aircrafttype or equipment at September 30, 2003 are summarized as follows:

 
| **(Dollars in millions)**                |   | **Guarantee** |   | **Net Asset Value** |   |
|------------------------------------------|--------|---------------|--------|---------------------|--------|
| B-717                                    |   | $             | 1,403  |                | $      | 2,078 |   |
| B-757                                    |   | 433           |   | 500                 |   |
| Out of  production twin-aisle aircraft   |   | 368           |   | 556                 |   |
| Out of  production single-aisle aircraft |   | 92            |   | 126                 |   |
| Other  Boeing and regional aircraft      |   | 231           |   | 1,032               |   |
| Other  equipment                         |   | 58            |   | 58                  |   |
|                                     |   | $             | 2,585  |                | $      | 4,350 |   |

 

During the nine months endedSeptember 30, 2003, we recognized income of $29 million under theseguarantees, all of which were from Boeing.

 

**Portfolioby Region**

 

At September 30, 2003, portfolio netasset values were represented in the following regions:

 
| **(Dollars in millions)** |   | **Aircraft  Financial  Services** |   | **Commercial  Financial  Services** |   | **Other** |   | **Total** |   | **% of Total  Portfolio** |   |
|---------------------------|--------|-----------------------------------|--------|-------------------------------------|--------|-----------|--------|-----------|--------|---------------------------|--------|
| **Region**                |   |                              |   |                                |   |      |   |      |   |                      |   |
| United  States            |   | $                                 | 6,971  |                                | $      | 1,857     |   | $         | 180    |                      | $      | 9,008 |   | 73.6 | % |
| Europe                    |   | 1,084                             |   | 83                                  |   | —    |   | 1,167     |   | 9.5                       |   |
| Latin  America            |   | 703                               |   | 204                                 |   | —    |   | 907       |   | 7.4                       |   |
| Asia                      |   | 824                               |   | 74                                  |   | —    |   | 898       |   | 7.3                       |   |
| Africa                    |   | 57                                |   | 54                                  |   | —    |   | 111       |   | 0.9                       |   |
| Australia                 |   | 63                                |   | —                              |   | —    |   | 63        |   | 0.5                       |   |
| Canada                    |   | 41                                |   | 15                                  |   | —    |   | 56        |   | 0.5                       |   |
| Caribbean                 |   | 2                                 |   | 31                                  |   | —    |   | 33        |   | 0.3                       |   |
|                      |   | $                                 | 9,745  |                                | $      | 2,318     |   | $         | 180    |                      | $      | 12,243 |   | 100.0 | % |

 

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

 

A.    Exhibits

 
| Exhibit 12   |   | Computation of Ratio of Income to Fixed Charges.                                                                                                                                                                                                                                     |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                 |
| Exhibit 31.1 |   | Certification of President pursuant to Rules 13a-15(e) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                 |
| Exhibit 31.2 |   | Certification of Chief Financial Officer pursuant to Rules 13a-15(e)  of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                 |
| Exhibit 32.1 |   | Certification of President pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This  document is being furnished in accordance with Securities and Exchange  Commission Release Nos. 33-8212 and 34-47551.               |
|         |   |                                                                                                                                                                                                                                                                                 |
| Exhibit 32.2 |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. This document is being furnished in accordance with Securities and  Exchange Commission Release Nos. 33-8212 and 34-47551. |

 

36

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B.    Reports on Form 8-K

 

1.     Form 8-K dated July 23, 2003,to release earnings for the quarter ended June 30, 2003.

 

37

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**Signatures**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, its principal financial officerand by its principal accounting officer, thereunto duly authorized.

 
|                   | **Boeing Capital Corporation**                                                                                      |
|------------------------|---------------------------------------------------------------------------------------------------------------------|
|                   |                                                                                                                |
| October 29,  2003 | /S/ STEVEN W. VOGEDING                                                                                              |   |
|                   | Steven W. Vogeding                                                                                                  |
|                   | Vice President and Chief Financial  Officer (Principal Financial Officer) and  Registrant’s Authorized Officer |
|                   |                                                                                                                |
|                   |                                                                                                                |
|                   | /S/ JILL C. RICHLING                                                                                                |   |
|                   | Jill C. Richling                                                                                                    |
|                   | Controller (Principal Accounting Officer)                                                                           |

 

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