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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION      [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______________________ to ______________________  INTERNATIONAL LEASE FINANCE CORPORATION  California
(State or other jurisdiction of
incorporation or organization)
    
    22-3059110
(I.R.S. Employer
Identification No.)
 10250 Constellation Blvd., Los Angeles, California
(Address of principal executive offices)
    
    90067
(Zip Code)
 Registrants telephone number, including area code: (310) 788-1999 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]   No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [   ]   No [X] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. As of July 22, 2004, there were 42,198,119 shares of Common Stock, no par
value, outstanding.




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
June 30, 2004 and December 31,
2003
    
    
    3Condensed Consolidated Statements of Income
Three months Ended June 30, 2004 and
2003
    
    
    4Condensed Consolidated Statements of Income
Six months Ended June 30, 2004 and
2003
    
    
    4Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2004 and
2003
    
    
    5Condensed Consolidated Statements of Comprehensive Income
Six Months Ended June 30, 2004 and
2003
    
    
    5Condensed Consolidated Statements of Cash Flows
Six months Ended June 30, 2004 and
2003
    
    
    6Notes to Condensed Consolidated Financial
Statements
    
    
    8Cautionary Statement Regarding Forward Looking
Information
    
    
    9Item 2. Managements Discussion and Analysis of the Financial
Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market
Risk
    
    
    22Item 4. Controls and
Procedures
    
    
    23Part II. Other InformationItem 6. Exhibits and Reports on Form
8-K
    
    
    24Signatures
    
    
    25Agency Agreement dated May 28, 2004Aircraft Facility Agreement dated May 18, 2004Computation of Ratios of Earnings to Fixed ChargesCertification of Chairman of the Board and CEOCertification of Vice Chairman, CFO & CAOCertification under 18 U.S.C., Section 1350
  -2-




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except share and per share amounts)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCash, including interest bearing accounts
of $217,536 (2004) and $90,612 (2003)
    
    $
    220,758
    
    
    $
    90,780Notes receivable and net investment in finance leases
    
    
    501,909
    
    
    
    450,080Flight equipment under operating leases
    
    
    36,185,565
    
    
    
    34,034,724Less accumulated depreciation
    
    
    5,698,565
    
    
    
    5,370,70630,487,000
    
    
    
    28,664,018Deposits on flight equipment purchases
    
    
    1,096,428
    
    
    
    1,255,074Accrued interest, other receivables and other assets
    
    
    278,901
    
    
    
    233,125Derivative assets
    
    
    730,341
    
    
    
    746,013Investments
    
    
    48,652
    
    
    
    49,636Variable interest entities assets
    
    
    157,454
    
    
    
    164,481Deferred debt issue costs - less accumulated amortization of
$71,012 (2004) and $63,847 (2003)
    
    
    59,064
    
    
    
    51,865$
    33,580,507
    
    
    $
    31,705,072LIABILITIES AND SHAREHOLDERS EQUITYAccrued interest and other payables
    
    $
    290,994
    
    
    $
    243,989Current income taxes
    
    
    38,930
    
    
    
    5,038Debt financing, net of deferred debt discount of $26,352
(2004) and $24,321 (2003)
    
    
    22,830,075
    
    
    
    21,245,267Foreign currency adjustment related to foreign currency
denominated debt
    
    
    725,688
    
    
    
    697,435Derivative liabilities
    
    
    25,184
    
    
    
    57,187Capital lease obligations
    
    
    82,147
    
    
    
    143,254Synthetic lease obligations
    
    
    453,231
    
    
    
    464,222Security and other deposits on flight equipment
    
    
    862,008
    
    
    
    843,914Rentals received in advance
    
    
    157,426
    
    
    
    146,871Deferred income taxes
    
    
    2,623,225
    
    
    
    2,562,568Variable interest entities liabilities
    
    
    76,726
    
    
    
    79,211SHAREHOLDERS EQUITYMarket Auction Preferred Stock, $100,000 per share
liquidation value; Series A and B
each having 500 shares issued and outstanding
    
    
    100,000
    
    
    
    100,000Common stock-no par value; 100,000,000 authorized shares,
42,198,119 issued and outstanding
    
    
    653,582
    
    
    
    653,582Paid-in capital
    
    
    579,955
    
    
    
    579,955Accumulated other comprehensive (loss) income
    
    
    (34,025
    )
    
    
    5,442Retained earnings
    
    
    4,115,361
    
    
    
    3,877,137Total shareholders equity
    
    
    5,414,873
    
    
    
    5,216,116$
    33,580,507
    
    
    $
    31,705,072
 See notes to condensed consolidated financial statements. -3-




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
 (Dollars in thousands)
 2004
    
    2003(Unaudited)REVENUESRental of flight equipment
    
    $
    766,520
    
    
    $
    741,945Flight equipment marketing
    
    
    26,213
    
    
    
    6,957Interest and other
    
    
    17,757
    
    
    
    15,507810,490
    
    
    
    764,409EXPENSESInterest
    
    
    243,600
    
    
    
    236,989Depreciation of flight equipment
    
    
    313,400
    
    
    
    282,094Flight equipment rent
    
    
    
    
    
    
    13,302Provision for overhauls
    
    
    37,574
    
    
    
    26,390Selling, general and administrative
    
    
    30,489
    
    
    
    19,284625,063
    
    
    
    578,059INCOME BEFORE INCOME TAXES
    
    
    185,427
    
    
    
    186,350Provision for income taxes
    
    
    59,053
    
    
    
    63,402NET INCOME
    
    $
    126,374
    
    
    $
    122,948
 INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
 (Dollars in thousands)
 2004
    
    2003(Unaudited)REVENUESRental of flight equipment
    
    $
    1,489,458
    
    
    $
    1,443,440Flight equipment marketing
    
    
    36,163
    
    
    
    14,907Flight equipment marketing  securitization (Note C)
    
    
    25,402
    
    
    
    Interest and other
    
    
    39,295
    
    
    
    28,4061,590,318
    
    
    
    1,486,753EXPENSESInterest
    
    
    477,402
    
    
    
    456,100Depreciation of flight equipment
    
    
    609,009
    
    
    
    546,240Flight equipment rent
    
    
    
    
    
    
    26,784Provision for overhauls
    
    
    72,475
    
    
    
    54,614Selling, general and administrative
    
    
    56,113
    
    
    
    39,8601,214,999
    
    
    
    1,123,598INCOME BEFORE INCOME TAXES
    
    
    375,319
    
    
    
    363,155Provision for income taxes
    
    
    119,741
    
    
    
    120,906NET INCOME
    
    $
    255,578
    
    
    $
    242,249
 See notes to condensed consolidated financial statements. -4-




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
 (Dollars in thousands)
 2004
    
    2003(Unaudited)NET INCOME
    
    $
    126,374
    
    
    $
    122,948OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXNet changes in cash flow hedges
    
    
    (7,530
    )
    
    
    79,272Foreign currency adjustment
    
    
    66,525
    
    
    
    (67,958
    )58,995
    
    
    
    11,314COMPREHENSIVE INCOME
    
    $
    185,369
    
    
    $
    134,262
 INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
 (Dollars in thousands)
 2004
    
    2003(Unaudited)NET INCOME
    
    $
    255,578
    
    
    $
    242,249OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXNet changes in cash flow hedges
    
    
    65,378
    
    
    
    141,203Foreign currency adjustment
    
    
    (104,845
    )
    
    
    (110,311
    )(39,467
    )
    
    
    30,892COMPREHENSIVE INCOME
    
    $
    216,111
    
    
    $
    273,141SUPPLEMENTAL COMPREHENSIVE INCOME (LOSS) INFORMATIONCumulative foreign currency adjustment, net of tax
    
    $
    (466,498
    )
    
    $
    (282,484
    )Cumulative cash flow hedge loss adjustment, net of tax
    
    
    432,473
    
    
    
    174,755
 See notes to condensed consolidated financial statements -5-




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
 (Dollars in thousands)
 2004
    
    2003(Unaudited)OPERATING ACTIVITIESNet income
    
    $
    255,578
    
    
    $
    242,249Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation of flight equipment
    
    
    609,009
    
    
    
    546,240Deferred income taxes
    
    
    81,908
    
    
    
    255,421Foreign exchange adjustment
    
    
    
    
    
    
    6,719Change in derivative instruments
    
    
    (48,796
    )
    
    
    (9,378
    )Amortization of deferred debt issue costs
    
    
    12,455
    
    
    
    27,349Change in unamortized debt discount
    
    
    (2,031
    )
    
    
    4,222Other
    
    
    3,083
    
    
    
    478Changes in operating assets and liabilities:Decrease (increase) in accrued interest, other receivables and
other assets
    
    
    71,902
    
    
    
    (80,772
    )Increase in current income taxes payable
    
    
    33,892
    
    
    
    55,175Increase in accrued interest and other payables
    
    
    44,520
    
    
    
    40,342Increase in rentals received in advance
    
    
    10,555
    
    
    
    14,342Net cash provided by operating activities
    
    
    1,072,075
    
    
    
    1,102,387INVESTING ACTIVITIESAcquisition of flight equipment for operating leases
    
    
    (3,567,892
    )
    
    
    (3,589,924
    )Acquisition of flight equipment for finance leases
    
    
    (43,247
    )
    
    
    (165,202
    )Decrease in deposits and progress payments
    
    
    158,646
    
    
    
    125,329Proceeds from disposal of flight equipment  net of gain
    
    
    1,045,796
    
    
    
    Advances on notes receivable
    
    
    (65,492
    )
    
    
    (26,938
    )Collections
on notes receivable and finance leases
    
    
    33,660
    
    
    
    24,649Other
    
    
    604
    
    
    
    844Net cash used in investing activities
    
    
    (2,437,925
    )
    
    
    (3,631,242
    )FINANCING ACTIVITIESNet change in commercial paper
    
    
    801,619
    
    
    
    (891,756
    )Proceeds from debt financing
    
    
    2,907,308
    
    
    
    5,609,662Payments in reduction of debt financing, capital lease obligations and
synthetic lease obligations
    
    
    (2,194,185
    )
    
    
    (2,090,559
    )Debt issue costs
    
    
    (19,654
    )
    
    
    (36,969
    )Increase (decrease) in customer deposits
    
    
    18,094
    
    
    
    (37,378
    )Payment of common and preferred dividends
    
    
    (17,354
    )
    
    
    (33,056
    )Net cash provided by financing activities
    
    
    1,495,828
    
    
    
    2,519,944Increase (decrease) in cash
    
    
    129,978
    
    
    
    (8,911
    )Cash at beginning of period
    
    
    90,780
    
    
    
    66,049Cash at end of period
    
    $
    220,758
    
    
    $
    57,138
 (Table continued on following page) -6-




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Dollars in thousands) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 2004
    
    2003(Unaudited)Cash paid during the period for:Interest (net of amount
capitalized of $23,700
(2004) and $24,579
(2003))
    
    $
    472,559
    
    
    $
    406,193Income taxes, net
    
    
    3,941
    
    
    
    (189,690
    )
 2004 One aircraft was received in exchange for investment in finance leases in
the amount of $24,761. Notes in the amount of $2,910 were received as partial payment in exchange
for flight equipment sold with a net book value of $23,727. Other assets in the amount of $110,651 were received in exchange for
aircraft sold into a securitization, but not yet transferred, with a net
book value of $107,274. See notes to condensed consolidated financial statements. -7-




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INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2004
 (Unaudited)
  A.
    
    Basis of Preparation The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance 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 required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 2003 unaudited
condensed consolidated financial statements to conform to the 2004
presentation. Operating results for the six months ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. These statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in
International Lease Finance Corporations (the Company) annual report on
Form 10-K for the year ended December 31, 2003.  B.
    
    Hedging Activities The Company uses derivatives to manage exposures to interest rate and
foreign currency risks. During the six months ended June 30, 2004, the
Company recorded the following in earnings. Income (loss) related to derivative instruments:
    
    (Dollars in thousands)Fair value of non-hedging instruments
    
    $
    (4,698
    )Ineffectiveness related to cash flow hedges
    
    
    1,493$
    (3,205
    )
 During the six months ended June 30, 2004, $58.9 million (net) was
reclassified from accumulated other comprehensive income to interest expense
when interest was paid or received on the Companys cash flow hedges. The
Company estimates that within the next twelve months it will amortize into
earnings approximately $60.0 million of the pre-tax balance in other
comprehensive income under cash flow hedge accounting in connection with the
Companys program to convert debt from floating to fixed rates.  C.
    
    Flight Equipment Marketing  Securitization The Company sold 34 aircraft to a trust during the first quarter of
2004 for approximately $1.0 billion. The transaction was a securitization,
in which the trust acquired the aircraft based on values assigned by
independent appraisers. Thirty aircraft have been transferred as of June
30, 2004. The securitization requires the remaining four aircraft to be
transferred before October 14, 2004. Other assets include
$103.5 million net
receivable from the trust. The trust is included in the consolidated
financial statements of the Companys parent. The trust is not consolidated
by the Company. Further, an unaffiliated third party acted as capital
markets advisor. Gains in the amount of $25.4 million, net of fees and
expenses, related to the transaction are included in Flight Equipment
Marketing  Securitization for the period ended June 30, 2004. The Company
will continue to manage the aircraft sold to the trust for a fee. -8-




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Forward-Looking Statements This quarterly report on Form 10-Q contains or incorporates statements
that constitute forward-looking statements. Those statements appear in a
number of places in this Form 10-Q and include statements regarding, among
other matters, the state of the airline industry, the Companys access to
the capital markets, the Companys ability to restructure leases and
repossess aircraft, the structure of the Companys leases, regulatory
matters pertaining to compliance with governmental regulations and other
factors affecting the Companys financial condition or results of
operations. Words such as expects, anticipates, intends, plans,
believes, seeks, estimates, and should and variations of these words
and similar expressions, are used in many cases to identify these
forward-looking statements. Any such forward-looking statements are not
guarantees of future performance and involve risks, uncertainties and other
factors that may cause actual results, performance or achievements of the
Company or industry results to vary materially from the Companys future
results, performance or achievements, or those of the industry, expressed or
implied in such forward-looking statements. Such factors include, among
others, general industry economic and business conditions, which will, among
other things, affect demand for aircraft, availability and creditworthiness
of current and prospective lessees, lease rates, availability and cost of
financing and operating expenses, governmental actions and initiatives and
environmental and safety requirements. The Company will not update any
forward-looking information to reflect actual results or changes in the
factors affecting the forward-looking information. -9-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview International Lease Finance Corporation (the Company, management,
we, our, us) primarily acquires new jet transport aircraft from Boeing
and Airbus and leases these aircraft to airlines throughout the world. In
addition to our leasing activity, we sell aircraft from our leased aircraft
fleet to other leasing companies, financial services companies and airlines.
In some cases, we provide fleet management services to companies with
aircraft portfolios for a management fee. From time to time we have provided
asset value guarantees and loan guarantees to the buyers of aircraft or to
financial institutions for a fee. We also remarket and sell aircraft owned
or managed by others for a fee. As of June 30, 2004, we owned 648 aircraft, had nine aircraft in the
fleet that were classified as finance leases, and provided fleet management
services for 101 aircraft. We have contracted with Airbus and Boeing to buy
373 new aircraft for delivery through 2010 with an estimated purchase price
of $22.4 billion, 19 of which will deliver during the remainder of 2004. Our primary source of revenue is from operating leases. One measure of
profitability we use is a ratio called Lease Margin (see Managements
Discussion and Analysis  Non-GAAP Financial Measures). Lease margins have
contracted over the last two years as a result of higher incidents of
restructurings of leases with troubled airlines, repossessions of aircraft
from lessees, and lower lease rates negotiated during the downturn of the
airline industry and still in effect at June 30, 2004. The market lease rate
for certain aircraft types decreased as excess aircraft were available from
airlines which reduced capacity, idled aircraft and airlines which ceased
operations over the past two years. The airline industry has been faced with
many challenges such as higher fuel costs, terrorism and Severe Acute
Respiratory Syndrome (SARS), among others. We believe the airline industry
trends are improving and lease rates will increase over a period of
prolonged economic recovery. Recent market trends indicate a modest increase
in lease rates for the most desirable Airbus and Boeing twin engine single
aisle and wide body aircraft for deliveries beginning in the second half of
2004 and beyond. Airline passenger and cargo traffic worldwide have
exhibited measured growth during the first half of 2004. If such traffic
growth can be sustained, it should benefit the economic recovery of the
commercial airline industry. We believe we are well positioned in the
current industry environment with signed lease agreements for all of our
2004 and 2005 deliveries of new aircraft. There is, however, a lag between
changes in market conditions and their impact on our results, as contracts
that are signed during times of lower lease rates are still in effect as the
market lease rates rise. Therefore, the improving trends in the lease rates
have yet to be completely reflected in our financial performance. Risk Factors Affecting International Lease Finance Corporation Our business is subject to numerous risks and uncertainties, as
described below and in the section titled Quantitative and Qualitative
Disclosures about Market Risk. We operate as a supplier and financier to airlines. The risks affecting our
airline customers are generally out of our control and impact our customers
to varying degrees. As a result, we are indirectly impacted by all the risks
facing airlines today. Our ability to succeed is dependent on the financial
strength of our customers. Our customers ability to compete effectively in
the market place and manage these risks has a direct impact on us and our
operating results. Risks directly or indirectly affecting our business
include:  
    
    Overall Airline Industry Risk Ø Demand for air travel
    
    Ø Insurance costsØ Competition between carriers
    
    Ø Security, terrorism and warØ Fuel prices and availability
    
    Ø Health concernsØ Labor costs and stoppages
    
    Ø Equity and borrowing capacityØ Maintenance costs
    
    Ø Environmental concernsØ Employee labor contracts
    
    Ø Government regulationØ Air traffic control infrastructure constraints
    
    Ø Interest rates
 -10-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)  
    
    Manufacturer Risk  
    
    Borrowing Risks Ø LiquidityØ Interest Rate
  
    
    Other Risks Ø Residual ValueØ ObsolescenceØ Key Personnel
 For a detailed discussion of risk factors affecting us, see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operationsin our Annual Report on Form 10-K for the year ended
December 31, 2003. Critical Accounting Policies and Estimates Managements discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires Management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate the estimates and judgments, including those related to
revenue, depreciation, overhaul reserves, and contingencies. The estimates
are based on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. The results form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions and conditions. We believe that the following critical accounting policies can
have a significant impact on our results of operations, financial
position and financial statement disclosures and require the most
difficult, subjective and complex estimates and judgments:  
    
    Lease Revenue
    
    Flight Equipment Marketing
    
    Flight Equipment
    
    Capitalized Interest
    
    Provision for Overhauls For a detailed discussion on the application of these accounting
policies, see Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operationsin our Annual Report on Form 10-K for
the year ended December 31, 2003. -11-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Financial Condition We borrow funds to purchase new and used flight equipment, including
funds for progress payments during the construction phase, and to pay off
maturing debt obligations. These funds are borrowed principally on an
unsecured basis from various sources. During the six months ended June 30,
2004, we borrowed $2,907.3 million (excluding commercial paper) and $1,072.1
million was provided by operating activities. As of June 30, 2004, we have
committed to purchase 373 new aircraft from Airbus and Boeing and 25 used
aircraft from airlines at an estimated aggregate purchase price of $22.7
billion for delivery through 2010. We also hold options to purchase 10
additional new aircraft at an estimated aggregate purchase price of
approximately $688.9 million. We currently expect to fund expenditures for
aircraft and to meet liquidity needs from a combination of available cash
balances, internally generated funds and financing arrangements. We have
modified our borrowing strategy with the goal that, over time, we will have
approximately 15% or less of our debt, excluding commercial paper, mature in
any one year. Management continues to explore new funding sources and ways
to diversify our investor base. Our debt financing and capital lease
obligations were comprised of the following at the following dates: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Public term debt with single maturities
    
    $
    11,926,025
    
    
    $
    10,663,275Public medium-term notes with varying maturities
    
    
    5,598,213
    
    
    
    5,960,236Capital lease obligations
    
    
    82,147
    
    
    
    143,254Synthetic lease obligations
    
    
    453,231
    
    
    
    464,222Bank and other term debt
    
    
    2,954,613
    
    
    
    3,070,120Total term debt, bank debt, and capital lease obligations
    
    
    21,014,229
    
    
    
    20,301,107Commercial paper
    
    
    2,377,576
    
    
    
    1,575,957Deferred debt discount
    
    
    (26,352
    )
    
    
    (24,321
    )Total debt financing and capital lease obligations
    
    $
    23,365,453
    
    
    $
    21,852,743Selected interest rates and ratio:Composite interest rate
    
    
    4.15
    %
    
    
    4.53
    %Percentage of total debt at fixed rates
    
    
    69.90
    %
    
    
    77.07
    %Composite interest rate on fixed rate debt
    
    
    5.11
    %
    
    
    5.29
    %Bank prime rate
    
    
    4.25
    %
    
    
    4.00
    %
 The above amounts represent the anticipated settlement of our currently
outstanding debt obligations. Certain adjustments required to present
currently outstanding debt obligations have been recorded and presented
separately on the balance sheet, including adjustments related to foreign
currency and interest rate hedging activities. We have eliminated the
currency exposure arising from foreign currency denominated notes by either
hedging the notes through swaps or through the offset provided by operating
lease payments denominated in the related currency. Foreign currency
denominated debt is translated into US dollars using current exchange rates
as of each balance sheet date. The foreign exchange adjustment for the
foreign currency denominated debt was $725.7 million (2004) and $697.4
million (2003). Composite interest rates and percentages of total debt at
fixed rates reflect the effect of derivative instruments. -12-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Public Debt(Exclusive of the Commercial Paper Program) The interest on most of the public debt is effectively fixed for the
terms of the notes. We have the ability to borrow under various public debt
financing arrangements as follows: Maximum
    
    Sold as of
    
    Sold as of
    
    Sold as ofOffering
    
    December 31, 2003
    
    June 30, 2004
    
    July 22, 2004(Dollars in millions)Registration
statement
dated
December 20,
2002
(including
$2.88
billion
Medium-Term
Note program
and $1.0
billion
Retail
Medium-Term
Note
Program)
    
    $
    6,080
    (a)
    
    $
    5,437
    
    
    $
    5,493
    
    
    $
    5,510Registration
statement
dated July
1, 2003
(including
$1.5 billion
Medium Term
Note
program)
    
    
    5,000
    
    
    
    650
    
    
    
    2,555
    
    
    
    2,555Euro
Medium-Term
Note
Programme
dated
May 2004
(b)(c)
    
    
    7,000
    
    
    
    3,393
    
    
    
    4,306
    
    
    
    4,475
    (a)
    
    Includes $1.08 billion, which was incorporated into the
registration statement from a prior registration statement, increasing
the maximum offering from $5.0 billion to $6.08 billion.(b)
    
    The foreign currency risk of the notes is hedged through swaps or
operating lease payments denominated in Euros.(c)
    
    This is a perpetual program. As a bond issue matures, the amount
becomes available again under the program. Capital Lease Obligations We have Export Credit lease financings which provided ten-year
amortizing loans in the form of capital lease obligations. The interest rate
on 62.5% of the original financed amount is 6.55% and the interest rate on
22.5% of the original financed amount is fixed at rates varying between
6.18% and 6.89%. These two tranches are guaranteed by various European
Export Credit Agencies. The remaining 15% of the original financed amount
was prepaid by the Company. At June 30, 2004, $82.1 million was still outstanding. Synthetic Lease Obligations In 1995, 1996 and 1997, through subsidiaries, we entered into
sale-leaseback transactions providing proceeds in the amounts of $413.0
million, $507.6 million and $601.9 million, respectively, each relating to
seven aircraft. The transactions resulted in the sale and leaseback of these
aircraft under one-year operating leases, each with six one-year extension
options for a total of seven years for each aircraft. We did not record any
gains related to the transactions. We have the option to either buy back the
aircraft or redeliver the aircraft for a fee to the lessor at the end of any
lease period. The lease rates equate to fixed principal amortization and
floating interest payments based on LIBOR or commercial paper pricing. Three
aircraft were repurchased before the lease termination and sold to third
parties. The remaining eleven aircraft from the 1995 and 1996 sale-leaseback
transactions were repurchased when the leases expired in December 2002 and
September 2003, respectively. We will be required to borrow additional funds
to terminate the leases and reacquire the seven aircraft in the remaining
transaction as the leases expire in September 2004. The estimated remaining
minimum lease payments (exclusive of the interest component of rent),
assuming the current contractual end of the remaining transactions, are $5.4
million. Our implementation of FASB Interpretation No. 46 (FIN 46) at
December 31, 2003 resulted in the consolidation of the remaining aircraft
and related debt. At June 30, 2004, there was $453.2 million outstanding
under the remaining synthetic lease arrangements and we ceased to record
rent expense and began recording the payments as a reduction of principal
and a charge to interest expense starting January 1, 2004. -13-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Bank Term Debt In January 1999, we entered into an Export Credit Facility, for up to a
maximum of $4.3 billion, for aircraft delivered through 2001. The facility
was used to fund 85% of each aircrafts purchase price. This facility is
guaranteed by various European Export Credit Agencies. We financed 62
aircraft using $2.8 billion under this facility over ten years with interest
rates from 5.753% to 5.898%. We have collateralized the debt by a pledge of
the shares of a subsidiary which holds title to the aircraft financed under
the facility. At June 30, 2004, $1.7 billion was outstanding under the
facility and the net book value of the related aircraft was $2.9 billion. During 2003, we borrowed $1.3 billion under various bank financing
arrangements. The financings mature through 2009. One tranche of one of the
loans totaling $410 million was funded in Japanese yen and swapped to US
dollars. The interest rates are LIBOR based with spreads ranging from
0.375% to 1.625%. In May 2004, we entered into an Export Credit Facility for up to a
maximum of $2.64 billion, for Airbus aircraft to be delivered in 2004 and
2005. The facility will be used to fund 85% of each aircrafts purchase
price. This facility becomes available as the various European Export Credit
Agencies provide their guarantees for aircraft based on a six-month
forward-looking calendar. The financing is for a ten-year fully amortizing
loan per aircraft at an interest rate determined through a bid process. We
have collateralized the debt by a pledge of the shares of a subsidiary which
holds title to the aircraft financed under this facility. As of June 30,
2004, one aircraft was financed under this facility and prior to July 22,
2004, a second aircraft had been financed under this facility. Commercial Paper We currently have a $4.8 billion Commercial Paper Program. Under this
program, we may borrow in minimum increments of $100,000 for a period from
one day to 270 days. It is our intention to only sell commercial paper to a
maximum amount of 75% of the total amount of the backup facilities available
(see Bank Commitments). The weighted average interest rate of our commercial
paper outstanding was 1.18% at June 30, 2004 and 1.07% at December 31, 2003. Bank Commitments As of June 30, 2004, we had committed revolving loans and lines of
credit with 26 commercial banks totaling $4.2 billion. These revolving loans
and lines of credit provide for interest rates that vary according to the
pricing option in effect at the time of borrowing. Pricing options include
prime, a range from .25% to .50% over LIBOR based upon utilization, or a
rate determined by a competitive bid process with the banks. The revolving
loans and lines of credit are subject to facility fees of up to .10% of
amounts available. This financing is used as backup for our maturing debt
and other obligations. We had not drawn against its revolving loans and
lines of credit as of June 30, 2004. In March 2004, an indirect subsidiary of the Company entered into a
credit facility providing for an 18-month commitment for a $500 million
revolving loan. The loan backs up the subsidiarys $1.0 billion secured note
facility available to purchase new aircraft from Boeing and Airbus. We have
guaranteed the subsidiarys obligations under the credit facility and the
secured note facility. In order for us to borrow funds under the credit
facility, the subsidiary must not be able to sell notes under the secured
note facility on acceptable terms. The subsidiary had not drawn on the
credit facility or issued any notes under the secured note facility as of
June 30, 2004. Other Variable Interest Entities We have sold aircraft to entities owned by third parties and from time
to time we have issued asset value guarantees or loan guarantees related to
the aircraft sold. Management has determined nine such entities, each owning
one aircraft, are Variable Interest Entities (VIEs) in which we are a
primary beneficiary, as defined by FIN 46. As a result of our adopting FIN
46, we consolidated these entities at December 31, 2003. -14-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The assets and liabilities of these entities are presented separately on our
Balance Sheet. This classification is the result of us not controlling or
owning the assets. We have not established any other unconsolidated entities for the
purpose of facilitating off-balance sheet arrangements or for other
contractually narrow or limited purposes. We have, however, from time to
time established subsidiaries, entered into joint ventures or created other
partnership arrangements with the limited purpose of leasing aircraft or
facilitating borrowing arrangements. Derivatives In the normal course of business, we employ a variety of derivative
products to manage our exposure to changes in foreign currency and interest
rates. Our objective is to eliminate all foreign currency risk, lower our
overall borrowing cost and maintain an optimal mix of variable and fixed
rate interest obligations. We only enter into derivative transactions to
hedge interest rate risk and currency risk of our debt obligations and not
to speculate on interest rates or currency fluctuations. These derivative
products include interest rate swap agreements, currency swap agreements,
and interest rate floor agreements. The counterparty to our derivative instruments is AIG Financial
Products Corp. (AIGFP), a related party. AIGFP has the highest ratings
available from the credit rating agencies. The derivatives are subject to a
bilateral security agreement, which, in certain circumstances, may allow one
party to the agreement to require the second party to the agreement to
provide collateral. Failure of the instruments or counterparty to perform
under the derivative contracts could have a material impact on our results
of operations. Market Liquidity Risk We are in compliance with all covenants or other requirements set forth
in our credit agreements. Further, we do not have any rating downgrade
triggers that would automatically accelerate the maturity dates of any debt.
However, a downgrade in our credit rating could adversely affect our ability
to borrow on, renew existing, or obtain access to new financing arrangements
and would increase the cost of such financing arrangements. For example, a
downgrade in credit rating could preclude us from issuing commercial paper
under our current program. Turmoil in the airline industry and continued global political unrest
have led to increased uncertainty in the debt markets in which we borrow
funds. While we have been able to borrow the funds necessary to finance
operations in the current market environment, additional turmoil in the
airline industry or political environment could limit our ability to borrow
funds from our current funding sources. Should this occur we would seek
alternative sources of funding, including securitizations, manufacturers
financings, drawings upon our revolving loans and lines of credit facilities
or additional short-term borrowings. If we were unable to obtain sufficient
funding, we could negotiate with manufacturers to defer deliveries of
certain aircraft. -15-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following summarizes our contractual obligations at June 30, 2004,
and the possible effect of such obligations on our liquidity and cash flows
in future periods. Existing Commitments (Exclusive of Interest) Commitments Due by Fiscal YearTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter(Dollars in thousands)Public and Bank
Term Debt
(a)
    
    $
    20,932,083
    
    
    $
    2,042,447
    
    
    $
    3,546,584
    
    
    $
    3,651,999
    
    
    $
    3,529,369
    
    
    $
    3,718,293
    
    
    $
    4,443,391Capital Lease
Obligations
    
    
    82,147
    
    
    
    42,567
    
    
    
    39,580
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial Paper
    
    
    2,377,576
    
    
    
    2,377,576
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    110,773
    
    
    
    4,022
    
    
    
    8,225
    
    
    
    8,553
    
    
    
    8,895
    
    
    
    9,251
    
    
    
    71,827Purchase Commitments
    
    
    22,723,400
    
    
    
    1,282,400
    
    
    
    5,716,700
    
    
    
    5,030,700
    
    
    
    4,490,500
    
    
    
    3,789,400
    
    
    
    2,413,700Total
    
    $
    46,225,979
    
    
    $
    5,749,012
    
    
    $
    9,311,089
    
    
    $
    8,691,252
    
    
    $
    8,028,764
    
    
    $
    7,516,944
    
    
    $
    6,928,918
   (a) Includes synthetic lease obligations of seven aircraft. Contingent Commitments Contingency Expiration by Fiscal YearTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter(Dollars in thousands)Purchase Options on New Aircraft
    
    $
    688,900
    
    
    $
    
    
    
    $
    
    
    
    $
    266,800
    
    
    $
    275,500
    
    
    $
    146,600
    
    
    $
    Put Options (a)
    
    
    741,251
    
    
    
    
    
    
    
    302,756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438,495Asset Value Guarantees (a)
    
    
    66,189
    
    
    
    3,226
    
    
    
    12,041
    
    
    
    8,178
    
    
    
    
    
    
    
    
    
    
    
    42,744Loan Guarantees (a)
    
    
    147,819
    
    
    
    19,156
    
    
    
    
    
    
    
    79,423
    
    
    
    
    
    
    
    
    
    
    
    49,240Lines of Credit
    
    
    65,000
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Total
    
    $
    1,709,159
    
    
    $
    22,382
    
    
    $
    329,797
    
    
    $
    354,401
    
    
    $
    275,500
    
    
    $
    146,600
    
    
    $
    580,479
    (a)
    
    From time to time, we participate with airlines, banks and other
financial institutions to assist in financing aircraft by providing
asset guarantees, put options, or loan guarantees collateralized by
aircraft. As a result, should we be called upon to fulfill our
obligations, we would have recourse to the value of the underlying
aircraft. -16-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Industry Condition Our sources of revenue are principally from scheduled and charter
airlines and companies associated with the airline industry. Our revenues
and results of operation are therefore affected by how our customers cope
with the economic environment in which airlines operate. In the past few
years, the airline industry has been negatively affected by a number of
factors, including acts of terrorism and related lingering fears, the war in
Iraq, a sluggish worldwide economy, the cost of fuel, the cost of insurance
and the outbreak of Severe Acute Respiratory Syndrome (SARS). Our revenues
and results of operations have been negatively affected in 2004 and 2003 by
participation in customer restructurings, requirements to re-lease aircraft
repossessed from airlines that ceased operations, and from market lease rate
contractions during the economic downturn. Airline passenger and cargo
traffic worldwide have exhibited measured growth since late 2003. If such
traffic growth can be sustained, it should benefit the economic recovery of
the commercial airlines industry. Recent market trends indicate a modest
increase in lease rates for the most desirable Airbus and Boeing twin-engine
single aisle and wide body aircraft for placements beginning in the second
half of 2004 and beyond. However, lower lease rates will continue to affect
our revenue until leases negotiated during the economic downturn have
terminated. During the six months ended June 30, 2004, one of our customers,
Air Holland (one owned and one managed aircraft) filed for protection under
the Dutch bankruptcy law. At June 30, 2004, we had re-leased the aircraft to
a different airline. Approximately 20% of our revenues is generated from customers based in
Asia and the Pacific region, and we have numerous other customers who
operate flights to and from those areas. Travel between Asia and the rest of
the world was negatively impacted by the outbreak of SARS. Many airlines in
Asia and those traveling to Asia curtailed flights in response to the
reluctance of people to travel to Asia during the first six months of 2003.
Travel to Asia has, however, picked up sharply since the World Health
Organization lifted the warnings against visits to SARS affected countries
in the second quarter of 2003. Any new outbreak of SARS could again
negatively impact travel between Asia and the rest of the world. On October 16, 2003, Boeing announced that it had decided to complete
production of the 757 jetliner in late 2004. At June 30, 2004, we owned 55
757s, all of which were on lease to airlines. As a result of Boeings
announcement, management reviewed and reduced the residual values on the
Boeing 757 aircraft type, to an internally established value, to more
appropriately reflect our expectations of future values. We commenced
recording the change in estimate on January 1, 2004 and it had an immaterial
effect on our financial position and results of operations. We believe the
market place had already reflected the event in market lease rates and we
had already considered the event in its most recent impairment analysis. The
analysis did not result in an impairment charge. -17-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Non-GAAP Financial Measures Lease Margin Lease Margin is defined as Rental of flight equipment less total
expenses, adjusted for VIE expenses related to Other Variable Interest
Entities, divided by Rental of flight equipment. Lease Margin is a measure
by which we isolate and evaluate the overall profitability of our
contractual leasing operations, which constitute our primary revenue
generating activity. Beginning in 2004, to more accurately portray the trend
of our core leasing operations, we began to adjust total expenses in the
calculation of Lease Margin by excluding the above mentioned VIE expenses.
Related VIE revenues are included in Interest and other and are by
definition excluded from the calculation of Lease Margin. VIE revenues and
expenses are recorded in our 2004 net income as a result of our adoption of
FIN 46 beginning December 31, 2003. The most directly comparable GAAP
financial measure is Profit Margin. The following is a reconciliation of
Profit Margin to Lease Margin: Six Months
    
    Three Months(Dollars in millions)2004
    
    2003
    
    2004
    
    2003Total revenues
(A)
    
    $
    1,590.3
    
    
    $
    1,486.8
    
    
    $
    810.5
    
    
    $
    764.4Flight equipment
marketing
    
    
    (61.6
    )
    
    
    (14.9
    )
    
    
    (26.2
    )
    
    
    (7.0
    )Interest and
other
    
    
    (39.3
    )
    
    
    (28.4
    )
    
    
    (17.8
    )
    
    
    (15.5
    )Rental of flight
equipment
(B)
    
    
    1,489.4
    
    
    
    1,443.5
    
    
    
    766.5
    
    
    
    741.9Total expenses
(C)
    
    
    1,215.0
    
    
    
    1,123.6
    
    
    
    625.1
    
    
    
    578.1VIE expenses
    
    
    (10.7
    )
    
    
    
    
    
    
    (7.1
    )
    
    
    Adjusted total
expenses
(D)
    
    
    1,204.3
    
    
    
    1,123.6
    
    
    
    618.0
    
    
    
    578.1Profit margin (A) 
(C) =
(E)
    
    $
    375.3
    
    
    $
    363.2
    
    
    $
    185.4
    
    
    $
    186.3Lease margin (B) 
(D) =
(F)
    
    $
    285.1
    
    
    $
    319.9
    
    
    $
    148.5
    
    
    $
    163.8Profit margin % (E)
divided by
(A)
    
    
    23.6
    %
    
    
    24.4
    %
    
    
    22.9
    %
    
    
    24.4
    %Lease margin % (F)
divided by
(B)
    
    
    19.1
    %
    
    
    22.2
    %
    
    
    19.4
    %
    
    
    22.1
    %
 Results of Operations- Three months ended June 30, 2004 versus 2003. Revenues from the rental of flight equipment increased 3.3% to $766.5
million in 2004 compared to $741.9 million in 2003, due to an increase in
the number of aircraft available for operating lease (648 at June 30, 2004
compared to 618 at June 30, 2003), partially offset by aircraft being
reconfigured and redelivered and therefore not earning revenue for the
entire period. All aircraft in our fleet were subject to a signed lease
agreement or a signed letter of intent at June 30, 2004. However, three
aircraft in our fleet are leased to Aero Continente, a Peruvian airline
which temporarily suspended operations as of July 12, 2004. We are in the
process of securing these planes for re-lease as soon as the appropriate
documentation is completed. Revenues in 2004 compared to 2003 were
negatively impacted by lower lease rates and restructured rents as a result
of the slowdown and turmoil of the airline industry. Lease Margin for the
period decreased to 19.4% in 2004 compared to 22.1% for the same period in
2003. Profit Margin decreased to 22.9% compared to 24.4% for the same
periods. However, Lease Margin for the three months ended June 30, 2004
increased slightly from 18.9% for the three months ended March 31, 2004.
Management expects factors described in Industry Conditionsto continue to
negatively impact revenues in 2004 and beyond, even as we see slight
increases in the Lease Margins going forward, as some airlines continue to
experience financial difficulties and before improving trends in lease rates
are completely reflected in our lease revenues. At June 30, 2004, our fleet, on which we earn rental revenue, consisted
of 648 aircraft compared to a fleet of 618 aircraft at June 30, 2003. The
cost of the leased fleet, which includes aircraft subject to sale-lease back
transactions from which rental income is earned, increased to $36.1 billion
at June 30, 2004 compared to $34.3 billion at June 30, 2003. In addition to leasing operations, we engage in the marketing of flight
equipment throughout the lease term, as well as the sale of third party
owned flight equipment on a principal and commission basis. Revenues from
flight equipment marketing increased to $26.2 million in 2004 compared to
$7.0 million in 2003. We sold five aircraft and five engines during the
second quarter of 2004. We sold no owned equipment but earned third-party
fees and commissions during the same period in 2003. -18-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest and other revenue increased to $17.8 million in 2004 compared
to $15.5 million in 2003 primarily due to an increase in management fees,
resulting from an increase in the managed fleet, and revenues from VIEs due
to our adoption of FIN 46 at December 31, 2003. Interest expense increased to $243.6 million in 2004 compared to $237.0
million in 2003 as a result of an increase in average debt outstanding,
borrowed to finance aircraft acquisitions (excluding the effect of debt
discount and foreign exchange adjustments), to $22.9 billion in 2004
compared to $21.0 billion in 2003. This increase was partially offset by a
decrease in the average composite borrowing rate to 4.25% in 2004 compared
to 4.54% in 2003. Our composite borrowing rate decreased as follows: 2004
    
    2003
    
    DecreaseBeginning of Quarter
    
    
    4.34
    %
    
    
    4.57
    %
    
    
    0.23
    %End of Quarter
    
    
    4.15
    %
    
    
    4.50
    %
    
    
    0.35
    %Average
    
    
    4.25
    %
    
    
    4.54
    %
    
    
    0.29
    %
 Interest expense for the three months ended June 30, 2004 includes $3.0
million related to derivative ineffectiveness and mark-to-market of
derivatives not considered a hedge under FAS 133. Depreciation of flight equipment increased 11.1% to $313.4 million in
2004 compared to $282.1 million in 2003 due to the increased cost of the
fleet. In prior periods we entered into sale-leaseback transactions.
Currently seven aircraft are accounted for under these transactions. We
ceased to record rent expense for these transactions as a result of our
adoption of FIN 46 on December 31, 2003 (see Financial Condition: Synthetic
Lease Obligationsfor more information). Provision for overhauls increased to $37.6 million in 2004 compared to
$26.4 million in 2003 due to an increase in the aggregate number of hours
flown on which we collect overhaul revenue and against which the provision
is computed. Selling, general and administrative expenses increased to $30.5 million
in 2004 compared to $19.3 million in 2003 primarily due to expenses related
to our interest in VIEs in the amount of $7.0 million as a result of the
Companys adoption of FIN 46 at December 31, 2003 and higher expenses
required to support our larger fleet. We typically contract to re-lease aircraft before the end of the
existing lease term. For aircraft returned before the end of the lease
term, we have generally been able to re-lease aircraft within two to six
months of its return. We have not recognized any impairment charges related
to our fleet, as the existing service potential of the aircraft in our
portfolio has not been diminished. Further, we have been able to re-lease
aircraft without diminution in lease rates to an extent that would warrant
an impairment write down. -19-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of Operations- Six months ended June 30, 2004 versus 2003. Revenues from the rental of flight equipment increased 3.2% to $1,489.4
million in 2004 compared to $1,443.4 million in 2003, due to an increase in
the number of aircraft available for operating lease (648 at June 30, 2004
compared to 618 at June 30, 2003), partially offset by aircraft being
reconfigured and redelivered and therefore not earning revenue for the
entire period. All aircraft in our fleet were subject to a signed lease
agreement or a signed letter of intent at June 30, 2004. However, three
aircraft in our fleet are leased to Aero Continente, a Peruvian airline
which temporarily suspended operations as of July 12, 2004. We are in the
process of securing these planes for re-lease as soon as the appropriate
documentation is completed. Revenues in 2004 compared to 2003 were
negatively impacted by lower lease rates and restructured rents as a result
of the slowdown and turmoil of the airline industry. Lease Margin for the
period decreased to 19.1% in 2004 compared to 22.2% for the same period in
2003. Profit Margin decreased to 23.6% compared to 24.4% for the same
periods. Management expects factors described in Industry Conditionsto
continue to negatively impact revenues in 2004 and beyond, even as we see
slight increases in the Lease Margins going forward, as some airlines
continue to experience financial difficulties and before improving trends in
lease rates are completely reflected in our lease revenues. At June 30, 2004, our fleet, on which we earn rental revenue, consisted
of 648 aircraft compared to a fleet of 618 aircraft at June 30, 2003. The
cost of the leased fleet, which includes aircraft subject to sale-lease back
transactions from which rental income is earned, increased to $36.1 billion
at June 30, 2004 compared to $34.3 billion at June 30, 2003. In addition to leasing operations, we engage in the marketing of flight
equipment throughout the lease term, as well as the sale of third party
owned flight equipment on a principal and commission basis. Revenues from
flight equipment marketing increased to $36.2 million in 2004 compared to
$14.9 million in 2003. We sold eight aircraft and five engines during the
first six months of 2004. Further, in the first quarter, we sold 34 aircraft
to a trust included in the consolidated financial statements of the
Companys parent (see Note C of Notes to Condensed Consolidated Financial
Statements). The gain, net of expenses, related to the transaction is
included in Flight Equipment Marketing  Securitization. We did not sell any
owned flight equipment but earned third-party fees and commission during the
same period in 2003. Interest and other revenue increased to $39.3 million in 2004 compared
to $28.4 million in 2003 primarily due to an increase in management fees,
resulting from an increase in the managed fleet, and revenues from VIEs in
the amount of $7.5 million due to our adoption of FIN 46 at December 31,
2003. Interest expense increased to $477.4 million in 2004 compared to $456.1
million in 2003 as a result of an increase in average debt outstanding,
borrowed to finance aircraft acquisitions (excluding the effect of debt
discount and foreign exchange adjustments), to $22.6 billion in 2004
compared to $20.3 billion in 2003. This increase was partially offset by a
decrease in the average composite borrowing rate to 4.34% in 2004 compared
to 4.62% in 2003. Our composite borrowing rate decreased as follows: 2004
    
    2003
    
    DecreaseBeginning of Six Months
    
    
    4.53
    %
    
    
    4.73
    %
    
    
    0.20
    %End of Six Months
    
    
    4.15
    %
    
    
    4.50
    %
    
    
    0.35
    %Average
    
    
    4.34
    %
    
    
    4.62
    %
    
    
    0.28
    %
 Interest expense for the six months ended June 30, 2004 includes $3.2
million related to derivative ineffectiveness and mark-to-market of
derivatives not considered a hedge under FAS 133. Depreciation of flight equipment increased 11.5% to $609.0 million in
2004 compared to $546.2 million in 2003 due to the increased cost of the
fleet. In prior periods, we entered into sale-leaseback transactions.
Currently seven aircraft are accounted for under these transactions. We
ceased to record rent expense for these transactions as a result of our
adoption of FIN 46 on December 31, 2003 (see Financial Condition: Synthetic
Lease Obligationsfor more information). Provision for overhauls increased to $72.5 million in 2004 compared to
$54.6 million in 2003 due to an increase in the aggregate number of hours
flown on which we collect overhaul revenue and against which the provision
is computed. Selling, general and administrative expenses increased to $56.1 million
in 2004 compared to $39.9 million in 2003 primarily due to expenses related
to interest in VIEs in the amount of $10.7 million as a result of our
adoption of FIN 46 at December 31, 2003 and higher expenses required to
support our larger fleet. -20-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) We typically contract to re-lease aircraft before the end of the
existing lease term. For aircraft returned before the end of the lease
term, we have generally been able to re-lease aircraft within two to six
months of its return. We have not recognized any impairment charges related
to our fleet, as the existing service potential of the aircraft in our
portfolio has not been diminished. Further, we have been able to re-lease
aircraft without diminution in lease rates to an extent that would warrant
an impairment write down. -21-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK Value at Risk Measuring potential losses in fair values has recently become the focus
of risk management efforts by many companies. Such measurements are
performed through the application of various statistical techniques. One
such technique is Value at Risk (VaR), a summary statistical measure that
uses historical interest rates, foreign currency exchange rates and equity
prices and which estimates the volatility and correlation of these rates and
prices to calculate the maximum loss that could occur over a defined period
of time given a certain probability. The Company believes that statistical models alone do not provide a
reliable method of monitoring and controlling market risk. While VaR models
are relatively sophisticated, the quantitative market risk information
generated is limited by the assumptions and parameters established in
creating the related models. Therefore, such models are tools and do not
substitute for the experience or judgment of senior management. The Company is exposed to market risk and the risk of loss of fair
value and possible liquidity strain resulting from adverse fluctuations in
interest rates and foreign exchange prices. The Company statistically
measures the loss of fair value through the application of a VaR model on a
quarterly basis. In this analysis the net fair value of the Company is
determined using the financial instrument and other assets. This includes
tax adjusted future flight equipment lease revenues, and financial
instrument liabilities, which includes future servicing of current debt. The
estimated impact of current derivative positions is also taken into account. The Company calculates the VaR with respect to the net fair value by
using historical scenarios. This methodology entails re-pricing all assets
and liabilities under explicit changes in market rates within a specific
historical time period. In this case, the most recent three years of
historical information for interest rates and foreign exchange rates were
used to construct the historical scenarios at June 30, 2004 and December 31,
2003, respectively. For each scenario, each financial instrument is
re-priced. Scenario values for the Company are then calculated by netting
the values of all the underlying assets and liabilities. The final VaR
number represents the maximum adverse deviation in fair market value
incurred under these scenarios with 95% confidence (i.e. only 5% of
historical scenarios show losses greater than the VaR figure). A one month
holding period is assumed in computing the VaR figure. The following table
presents the average, high and low VaRs for the Company with respect to its
fair value for the periods ended June 30, 2004 and December 31, 2003: ILFC Market Risk Six months Ended
    
    Year EndedJune 30, 2004
    
    December 31, 2003(Dollars in millions)Average
    
    High
    
    Low
    
    Average
    
    High
    
    LowCombined
    
    $
    50.3
    
    
    $
    86.3
    
    
    $
    7.8
    
    
    $
    37.7
    
    
    $
    78.1
    
    
    $
    7.8Interest Rate
    
    
    50.4
    
    
    
    86.4
    
    
    
    7.9
    
    
    
    37.8
    
    
    
    78.1
    
    
    
    7.8Currency
    
    
    0.6
    
    
    
    1.3
    
    
    
    0.2
    
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.2
 -22-




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##### Table of Contents



ITEM 4. CONTROLS AND
PROCEDURES  (a)
    
    The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in
its filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the periods specified in
the rules and forms of the Securities and Exchange Commission. Such
information is accumulated and communicated to management of the
Company, including the Chairman of the Board and Chief Executive
Officer and the Vice Chairman, Chief Financial Officer and Chief
Accounting Officer (collectively the Certifying Officers), as
appropriate, to allow timely decisions regarding required
disclosure. The management of the Company, including the Certifying
Officers, recognizes that any set of controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.(b)
    
    As of the end of the period covered by this Quarterly Report
on Form 10-Q, the Company has carried out an evaluation, under the
supervision and with the participation of management, including the
Certifying Officers, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. Based
upon that evaluation, the Certifying Officers concluded that
disclosure controls and procedures provide reasonable assurance that
the information required to be disclosed is recorded, processed,
summarized, and reported within the periods specified by the
Securities and Exchange Commission.Variable Interest EntitiesThe Companys consolidated financial statements include assets in the
amount of $157.5 million, liabilities in the amount of $76.7 million
and a net loss of $3.3 million related to Variable Interest Entities.
Management has been unable to assess the effectiveness of internal
control at those entities due to the fact that the Company does not
have the ability to dictate or modify the controls of those entities,
nor does the Company have the ability, in practice, to assess those
controls.(c)
    
    There have been no changes in the Companys internal controls
over financial reporting identified in connection with the
evaluation referred to above that occurred during the Companys
first six months that has materially affected, or is reasonably
likely to materially affect, the Companys internal controls over
financial reporting. -23-




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##### Table of Contents



PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES Not Applicable 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  a)
    
    Exhibits 3.1
    
    Restated Articles of Incorporation of the
Company, as amended through December 9, 1992, filed
November 3, 1993 (filed as an exhibit to Registration
Statement No. 33-50913 and incorporated herein by
reference).3.2
    
    Certificate of Determination of
Preferences of Series A Market Auction Preferred Stock
(filed December 9, 1992 as an exhibit to Registration
Statement No. 33-54294 and incorporated herein by
reference).3.3
    
    Certificate of Determination of
Preferences of Series B Market Auction Preferred Stock
(filed December 9, 1992 as an exhibit to Registration
Statement 33-54294 and incorporated herein by reference).3.4
    
    Certificate of Determination of
Preferences of Series C Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).3.5
    
    Certificate of Determination of
Preferences of Series D Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).3.6
    
    Certificate of Determination of
Preferences of Series E Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).3.7
    
    Certificate of Determination of
Preferences of Series F Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).3.8
    
    Certificate of Determination of
Preferences of Series G Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).3.9
    
    Certificate of Determination of
Preferences of Series H Market Auction Preferred Stock
(filed as an exhibit to Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference).3.10
    
    Certificate of Determination of
Preferences of Preferred Stock of the Company (filed as an
exhibit to Form 10-K for the year ended December 31, 2001
and incorporated herein by reference).3.11
    
    By-Laws of the Company, including
amendment thereto dated August 31, 1990 (filed as an
exhibit to Form 10-K for the year ended December 31, 2003
and incorporated herein by reference).3.12
    
    Unanimous Written Consent of Sole
Stockholder of the Company, dated January 2, 2002,
amending the Bylaws of the Company (filed as an exhibit to
Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference).4.
    
    Agency Agreement (amended and restated),
dated as of May 28, 2004, between the Company, Citibank,
N.A., and Dexia Banque Internationale a Luxembourg,
Societe Anonyme.10.
    
    Aircraft Facility Agreement, dated as of
May 18, 2004, among Whitney Leasing Limited, as borrower,
the Company, as guarantor and the Bank of Scotland and the
other banks listed therein providing up to $2,643,660,000
(plus related premiums) for the financing of aircraft.12.
    
    Computation of Ratios of Earnings to
Fixed Charges and Preferred Stock Dividends31.1
    
    Certification of Chairman of the Board
and Chief Executive Officer31.2
    
    Certification of Vice Chairman, Chief
Financial Officer and Chief Accounting Officer32.1
    
    Certification under 18 U.S.C., Section 1350
  b)
    
    Reports on Form 8-K:  Form 8-K, event date April 23, 2004 (Item 7)Form 8-K, event date June 15, 2004 (Item 7) -24-




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. INTERNATIONAL LEASE FINANCE CORPORATION July 27, 2004
    /S/ Steven F. Udvar-HazySTEVEN F. UDVAR-HAZY
Chairman of the Board and
Chief Executive Officer July 27, 2004
    /S/ Alan H. LundALAN H. LUND
Vice Chairman,
Chief Financial Officer
and Chief Accounting Officer




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##### Table of Contents



INTERNATIONAL LEASE FINANCE CORPORATION AND SUBSIDIARIES 
 INDEX TO EXHIBITS Exhibit No.4.
    
    Agency Agreement (amended and restated),
dated as of May 28, 2004, between the Company, Citibank,
N.A., and Dexia Banque Internationale a Luxembourg,
Societe Anonyme.10.
    
    Aircraft Facility Agreement, dated as of
May 18, 2004, among Whitney Leasing Limited, as borrower,
the Company, as guarantor and the Bank of Scotland and the
other banks listed therein providing up to $2,643,660,000
(plus related premiums) for the financing of aircraft.12.
    
    Computation of Ratios of Earnings to
Fixed Charges and Preferred Stock Dividends31.1
    
    Certification of Chairman of the Board
and Chief Executive Officer31.2
    
    Certification of Vice Chairman, Chief
Financial Officer and Chief Accounting Officer32.1
    
    Certification under 18 U.S.C., Section
1350
 -26-