Operating revenues for BCC were $994 million in 2002, compared with $815 million in 2001 and $545 million in 2000. A larger portfolio, resulting from new business volume and portfolio transfers from Boeing over the last two years, is primarily responsible for the increased revenues in 2002 and 2001.

Operating Earnings

Operating earnings for BCC were $482 million for the year ended December 31, 2002, compared with $562 million for the year ended December 31, 2001. This decrease was primarily attributable to the impairment and valuation allowance charges recognized in 2002, offset by additional income due to the growth in the portfolio. Operating earnings for 2001 were $562 million compared with $397 million in 2000. The growth in investment in financing assets was principally responsible for the increase. The increase was partially offset by higher provision for losses, and higher operating and other expenses.

During the year ended December 31, 2002, the Company recognized a pre-tax expense of $426 million primarily in recognition of the deterioration of aircraft values and customer credit ratings. Total impairment expense recognized in 2001 and 2000 was not significant.

A pre-tax expense of $180 million was recorded to increase the valuation allowance based on the Company’s assessment of the adequacy of customer financing reserves.

A specific pre-tax impairment of $79 million was recorded during the third quarter of 2002 related to a long-held investment in ETCs secured by aircraft on lease to United Airlines (“United”). The write-down was based on the decline in credit ratings of United, the long-term maturity of the investment and the decline in the underlying aircraft collateral valuations. The ultimate realization of this investment will depend upon legal developments in United’s bankruptcy proceedings and United’s ability to meet its related contractual obligations.

A specific pre-tax impairment of $48 million was recorded related to a joint venture investment that was established to lease and eventually convert 24 727 passenger aircraft to full cargo configuration. Based on the Company’s assessment of current market conditions and the average age of the aircraft (averaging over twenty years old), the Company recorded an impairment for its share of the adjustment to estimated fair market value for the joint venture’s 727 aircraft. The BCC portfolio does not include any 727 aircraft other than those held through this joint venture.

Other pre-tax charges of $119 million related to valuations of other assets in the portfolio during the year ended December 31, 2002. Included in this amount was a $66 million impairment charge recorded during the fourth quarter of 2002 on the return of 24 717s to the Company by AMR Corporation.

The total BCC portfolio was $11.8 billion as of December 31, 2002, compared with $9.2 billion as of December 31, 2001. At December 31, 2002, BCC’s debt-to-equity ratio was 5.7-to-1, compared with 5.3-to-1 at December 31, 2001.

Business Environment and Trends

BCC acts as a captive finance subsidiary for the Company and provides market-based lease and loan financing primarily to airlines that purchase or lease commercial aircraft manufactured by the Company or others. BCC competes for aircraft finance business with other finance companies, commercial banks, insurance companies and other financial institutions.

BCC also competes in the commercial equipment leasing and finance markets, primarily in the United States, against a number of large ticket competitors, mainly heavily capitalized leasing companies and relationship banks. Approximately 22% of BCC’s portfolio has been generated from commercial equipment leasing and financing activities. Commercial equipment consists of executive aircraft, machine tools and production equipment, containers and marine equipment, chemical, oil and gas equipment and other equipment. New business volume of BCC is funded with debt obtained in the capital markets, cash from operations, and contributions from the Company.

Published sources and recent market transactions indicate that values for various aircraft types used as collateral in BCC’s portfolio remained depressed. At the same time, the credit ratings of many airlines, particularly in the United States, have continued to deteriorate. A substantial portion of BCC’s portfolio is concentrated among commercial airline customers. Certain customers have filed for bankruptcy protection or requested lease or loan restructurings; these negotiations were in various stages as of December 31, 2002. These bankruptcies or restructurings could have a material adverse effect on the Company’s earnings, cash flows or financial position.

United filed for Chapter 11 bankruptcy protection on December 9, 2002. As of the filing date, the Company has not reached agreement with United on a restructuring of its various transactions. Future negotiations may result in changes to the agreements under which United has agreed to perform. So long as United remains in bankruptcy, United has the right to reject or abandon its transaction with the Company. In the event that future negotiations or proceedings result in the return of a substantial number of aircraft, there could be a material adverse effect on the Company’s earnings, cash flows or financial position at least until such time as the aircraft are sold or redeployed for adequate consideration.

As of December 31, 2002, there were $311 million of assets, principally commercial aircraft that were held for sale or re-lease at BCC, of which $308 million were not yet identified with a firm contract to sell or place on lease. Additionally, approximately $207 million of BCC’s assets are currently scheduled to come off lease in 2003. The inability of BCC to sell such assets or place such assets into revenue-generating service could pose a potential risk to results of operations should some of these assets be deemed to be impaired.