SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR ~~15 (d)~~15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended September 30, ~~2001~~2002

Commission File Number 1-6512

AIRBORNE, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State of incorporation or organization)

91-2065027

(IRS Employer Identification No.)

3101 Western Avenue

P.O. Box 662

Seattle, Washington 98111-0662

(Address of Principal Executive Office)

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

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

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

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

	Common Stock, par value $1 per share

	Outstanding (net of ~~3,240,526~~3,234,526 treasury shares) as of September 30, ~~2001~~2002		~~48,103,545~~48,423,360 shares

FORWARD LOOKING STATEMENTS

Statements contained in this quarterly report on Form 10-Q that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in this report or in “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2001.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~NET EARNINGS~~
OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

Three Months Ended
Nine Months Ended
September 30
September 30
2001
2000
2001
2000

REVENUES:
  Domestic $ 682,522 $ 705,977 $ 2,132,856 $ 2,147,530
  International 90,266 98,552 275,678 280,490

772,788 804,529 2,408,534 2,428,020

OPERATING EXPENSES:
  Transportation purchased 254,080 262,718 787,204 765,345
  Station and ground operations 255,688 263,768 796,070 776,387
  Flight operations and maintenance 133,286 143,665 428,658 425,729
  General and administrative 62,767 64,312 200,427 191,309
  Sales and marketing 21,689 20,200 69,020 60,740
  Depreciation and amortization 51,655 52,892 156,977 152,768
  Federal legislation compensation (7,800 ) — (7,800 ) —

771,365 807,555 2,430,556 2,372,278

     EARNINGS(LOSS)FROM OPERATIONS 1,423 ) (3,026 ) (22,022 ) 55,742

OTHER INCOME (EXPENSE):
  Interest, net (4,924 ) (6,544 ) (13,875 ) (16,635 )
  Discount onsales of receivables (2,006 ) — (7,993 ) —
  Other 8,778 406 11,355 3,111

     EARNINGS(LOSS)BEFORE INCOME TAXES 3,271    (9,164 ) (32,535 ) 42,218
INCOME TAX BENEFIT(EXPENSE) 1,558 (3,655 ) (10,892 ) 16,070

     NET EARNINGS(LOSS) BEFORE
       CHANGE IN ACCOUNTING
1,713
$
(5,509
)
(21,643
)
26,148

CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING, NET OF TAX
—
—
—
14,206

     NET EARNINGS(LOSS) $ 1,713 $ (5,509 ) $ (21,643 ) $ 40,354

NET EARNINGS (LOSS) PER SHARE:
     BASIC
      Before change in accounting $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.54
      Cumulative effect of change in accounting — — — $ 0.29

      Net Earnings(Loss) $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.83

     DILUTED
      Before change in accounting $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.54
      Cumulative effect of change in accounting — — — 0.29

      Net Earnings(Loss) $ 0.04 $ (0.11 ) $ (0.45 ) $ 0.83

DIVIDENDS PER SHARE $ 0.04 $ 0.04 $ 0.12 $ 0.12

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
REVENUES:
Domestic	$	748,609		$	682,522		$	2,180,589		$	2,132,856
International		94,152			90,266			261,143			275,678

		842,761			772,788			2,441,732			2,408,534
OPERATING EXPENSES:
Transportation purchased		285,455			254,080			801,853			787,204
Station and ground operations		282,301			257,326			812,378			802,480
Flight operations and maintenance		134,886			133,286			392,783			428,658
General and administrative		64,326			61,129			192,977			194,017
Sales and marketing		22,862			21,689			68,630			69,020
Depreciation and amortization		49,547			51,655			145,399			156,977
Federal legislation compensation		—			(7,800	)		—			(7,800	)

		839,377			771,365			2,414,020			2,430,556

EARNINGS (LOSS) FROM OPERATIONS		3,384			1,423			27,712			(22,022	)
OTHER INCOME (EXPENSE):
Interest income		1,458			560			3,772			879
Interest expense		(9,108	)		(5,484	)		(25,778	)		(14,754	)
Discount on sales of receivables		(738	)		(2,007	)		(2,928	)		(7,993	)
Other		196			8,779			2,499			11,355

EARNINGS (LOSS) BEFORE INCOME TAXES		(4,808	)		3,271			5,277			(32,535	)
INCOME TAX EXPENSE (BENEFIT)		(1,750	)		1,558			2,610			(10,892	)

NET EARNINGS (LOSS)	$	(3,058	)	$	1,713		$	2,667		$	(21,643	)

NET EARNINGS (LOSS) PER SHARE:
BASIC	$	(0.06	)	$	0.04		$	0.06		$	(0.45	)

DILUTED	$	(0.06	)	$	0.04		$	0.05		$	(0.45	)

DIVIDENDS PER SHARE	$	0.04		$	0.04		$	0.12		$	0.12

See notes to consolidated financial statements.

2

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

September 30
December 31

2001
2000

(Unaudited)
ASSETS

CURRENT ASSETS:
      Cash $ 139,107 $ 40,390
      Trade accounts receivable,
          less allowance of $11,528 and $10,290 123,768 218,685
      Spare parts and fuel inventory 41,487 43,231
      Refundable income taxes 23,943 21,595
      Deferred income tax assets 28,454 28,839
      Prepaid expenses and other 41,956 20,809

            TOTAL CURRENT ASSETS 398,715 373,549

PROPERTY AND EQUIPMENT, NET 1,269,380 1,324,345

EQUIPMENT DEPOSITS and OTHER ASSETS 42,904 48,025

TOTAL ASSETS $ 1,710,999 $ 1,745,919

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
      Accounts payable $ 128,207 $ 180,623
      Salaries, wages and related taxes 77,647 71,179
      Accrued expenses 135,930 83,518
      Current portion of debt 6,963 477

            TOTAL CURRENT LIABILITIES 348,747 335,797

LONG-TERM DEBT 318,506 322,230

DEFERRED INCOME TAX LIABILITIES 137,070 125,444

POSTRETIREMENT LIABILITIES 35,098 62,360

OTHER LIABILITIES 36,566 37,233

SHAREHOLDERS’ EQUITY:
      Preferred Stock, without par value -
        Authorized 5,200,000 shares, no shares issued
      Common stock, par value $1 per share -
        Authorized 120,000,000 shares
        Issued 51,363,241 and 51,279,651 shares 51,344 51,280
      Additional paid-in capital 304,603 303,885
      Retained earnings 540,284 567,700
      Accumulated other comprehensive income (1,351 ) (136 )

894,880 922,729
      Treasury stock, 3,240,526 and 3,244,526
        shares, at cost (59,868 ) (59,874 )

835,012 862,855

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,710,999 $ 1,745,919

	September 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	332,976		$	201,500
Trade accounts receivable, less allowance of $11,939 and $11,509		254,940			126,040
Spare parts and fuel inventory		36,972			38,413
Refundable income taxes		2,739			27,161
Deferred income tax assets		33,967			30,572
Prepaid expenses and other		31,262			28,021

TOTAL CURRENT ASSETS		692,856			451,707
PROPERTY AND EQUIPMENT, NET		1,186,703			1,247,373
EQUIPMENT DEPOSITS and OTHER ASSETS		39,950			47,764

TOTAL ASSETS	$	1,919,509		$	1,746,844

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	147,718		$	141,873
Salaries, wages and related taxes		93,141			75,458
Accrued expenses		133,737			145,997
Current portion of long-term obligations		109,691			107,410

TOTAL CURRENT LIABILITIES		484,287			470,738
LONG-TERM OBLIGATIONS		371,167			218,053
DEFERRED INCOME TAX LIABILITIES		146,555			143,526
POST RETIREMENT LIABILITIES		38,529			39,423
OTHER LIABILITIES		49,283			40,888
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Preferred stock, without par value—
Authorized 6,000,000 shares, no shares issued
Common stock, par value $1 per share—
Authorized 120,000,000 shares
Issued 51,657,886 and 51,375,711 shares		51,658			51,376
Additional paid-in capital		308,812			304,984
Retained earnings		537,169			540,544
Accumulated other comprehensive loss		(8,093	)		(2,820	)

		889,546			894,084
Treasury stock, 3,234,526 and 3,240,526 shares, at cost		(59,858	)		(59,868	)

		829,688			834,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,919,509		$	1,746,844

See notes to consolidated financial statements.

3

AIRBORNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

Nine Months Ended
September 30
2001
2000
OPERATING ACTIVITIES:
Net Earnings(Loss) $ (21,643 ) $ 40,354
Adjustments to reconcile net earnings(loss) to
net cash provided by operating activities:
     Cumulative effect of change in accounting — (14,206 )
     Depreciation and amortization    156,977           152,768
     Deferred income taxes 12,010 17,135
     Postretirement obligations (2,515 ) 7,584
     Other (527 ) 7,901
CASH PROVIDED BY OPERATIONS 144,302 211,536
Change in:
     Proceeds from receivable securitization facility    50,000    —
     Receivables 44,917 (14,337 )
     Inventories and prepaid expenses (19,403 ) (6,625 )
     Refundable income taxes (2,348 ) —
     Accounts payable (52,416 )    13,209
     Accrued expenses, salaries & taxes payable 34,132 10,074
NET CASH PROVIDED BY OPERATING ACTIVITIES    199,184 213,857
INVESTING ACTIVITIES:
Additions to property and equipment (99,455 ) (302,390 )
Dispositions of property and equipment 1,113 4,037
Other 2,391    (7,051 )
NET CASH USED BY INVESTING ACTIVITIES (95,951 ) (305,404 )
FINANCING ACTIVITIES:
Proceeds(repayments)from bank notes, net (103,000 ) 115,000
Principal payments on debt (902 ) (329 )
Issuance of debt 1,596 —
Proceeds on sale leaseback transactions, net 102,775 —
Repurchase of common stock — (20,662 )
Proceeds from common stock issuance 788       1,259
Dividends paid (5,773 ) (5,832 )
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (4,516 ) 89,436
NET (DECREASE) INCREASE IN CASH 98,717 (2,111 )
CASH AT JANUARY 1    40,390          28,678
CASH AT SEPTEMBER 30 $ 139,107 $ 26,567

	Nine Months Ended September 30,
	2002			2001
OPERATING ACTIVITIES:
Net earnings (loss)	$	2,667		$	(21,643	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		145,399			156,977
Deferred income taxes		(366	)		12,010
Postretirement obligations		(20,190	)		7,085
Other		6,752			(10,947	)

CASH PROVIDED BY OPERATIONS		134,262			143,482
Change in:
Receivable securitization facility		(100,000	)		50,000
Trade accounts receivable		(28,900	)		44,917
Inventories and prepaid expenses		(1,800	)		(19,403	)
Refundable income taxes		24,422			(2,348	)
Accounts payable		5,845			(52,416	)
Accrued expenses, salaries and taxes payable		24,718			24,532

NET CASH PROVIDED BY OPERATING ACTIVITIES		58,547			188,764

INVESTING ACTIVITIES:
Additions to property and equipment		(71,154	)		(98,342	)
Proceeds from sale of securities		3,778			2,117
Proceeds from sale of radio frequencies		5			8,303
Other		2,943			2,391

NET CASH USED BY INVESTING ACTIVITIES		(64,428	)		(85,531	)

FINANCING ACTIVITIES:
Issuance of convertible debt, net of issuance costs		145,125			1,596
Principal payments on debt		(5,846	)		(902	)
Dividends paid		(5,800	)		(5,773	)
Exercise of stock options		4,120			788
Shareholder rights redemption		(242	)		—
Payments on bank notes, net		—			(103,000	)
Issuance of aircraft loan		—			61,975
Proceeds on sale leaseback of aircraft		—			40,800

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		137,357			(4,516	)

NET INCREASE IN CASH		131,476			98,717

CASH AND CASH EQUIVALENTS AT JANUARY 1		201,500			40,390

CASH AND CASH EQUIVALENTS AT SEPTEMBER 30	$	332,976		$	139,107

See notes to consolidated financial statements.

4

AIRBORNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2001~~2002 (Unaudited)

NOTE A—SUMMARY OF FINANCIAL STATEMENT ~~PREPARATION:~~PREPARATION

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

Certain amounts for prior periods have been reclassified to conform to the ~~2001~~2002 presentation.

NOTE B—TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable exclude amounts sold under the Company’s accounts receivable securitization facility. As of September 30, 2002, the Company had $100 million of outstanding securitized accounts receivable as compared to $200 million securitized as of December 31, 2001. In May 2002, the Company reduced the amount of securitized receivables by $100 million. As of September 30, 2002, the Company had eligible receivables to support additional sales up to the full $250 million permitted under the facility.

NOTE C—LONG-TERM ~~DEBT:~~OBLIGATIONS

Long-term ~~debt consists~~obligations consist of the following:

September 30
December 31
2001
2000
(In thousands)
Senior debt:
Senior notes $ 200,000 $ 200,000
Aircraft Leases 102,837 —
Revenue bonds 13,200 13,200
Revolving bank credit — 75,000
Notes payable — 28,000
Other debt 9,432 6,507
325,469 322,707
Less current portion 6,963 477
$ 318,506 $ 322,230

	September 30, 2002			December 31, 2001
	(In thousands)
Senior notes, 8.875%, due December 2002	$	100,000		$	100,000
Senior notes, 7.35%, due September 2005		100,000			100,000
Convertible senior notes, 5.75%, due April 2007		150,000			—
Aircraft loan		58,609			61,651
Refunding revenue bonds, effective rate of 1.65% as of September 30, 2002, due June 2011		13,200			13,200
Other		6,994			7,542

Total long-term debt		428,803			282,393
Capital lease obligations		52,055			43,070

Total long-term obligations		480,858			325,463
Less current portion		(109,691	)		(107,410	)

Total long-term obligations, net	$	371,167		$	218,053

On March 25, 2002, the Company issued $150 million of 5.75% Convertible Senior Notes (“Notes”) due April 2007. The ~~Company has~~proceeds of the sale are intended, in part, to fund the repayment of $100 million of 8.875% senior notes due December 15, 2002 at their stated maturity. The Notes are convertible into shares of the Company’s common stock, at the option of the holder, at a conversion rate of 42.7599 shares per each $1,000 principal amount of Notes, subject to adjustment in certain circumstances. This is equivalent to a conversion price of $23.39 per share. At the current conversion price, a total of 6,413,985 shares are issuable upon full conversion of the Notes.

The Company’s revolving bank credit agreement ~~providing~~provides for a total commitment of $275 ~~million. In~~million and expires in June ~~2001,~~2004. The agreement provides that the ~~agreement was amended to, among other requirements, provide certain~~Company pledge a substantial majority of its assets as collateral to secure the commitment, reduce available borrowing capacity by the amount of outstanding letters of credit ~~establish revised covenants~~ and ~~amend the expiration date to June 2004.~~maintain compliance with certain restrictive covenants. Capacity under the ~~facility~~agreement is dependent on a borrowing base determined by the amount of ~~collateral pledged, with a maximum commitment of $275 million.~~eligible collateral. At September 30, ~~2001~~2002, the Company had eligible collateral in the borrowing base to support $242 million of the $275 million commitment. The Company has the ability to increase the borrowing base by pledging additional eligible collateral. At September 30,

2002, available capacity under the agreement was $92 million, net of outstanding letters of credit and restrictive covenant limitations. At September 30, 2002, no borrowings were outstanding under the agreement and the Company was in compliance with all restrictive ~~covenants. With~~covenants including those relating to the ~~current level~~maintenance of ~~collateral pledged, available capacity under~~minimum levels of earnings before interest, taxes, depreciation and amortization (EBITDA), to leverage and debt service coverage ratios and to required levels of liquidity. The agreement also restricts the Company from declaring or paying dividends on its common stock during any calendar quarter in excess of $2 million plus up to an additional $300,000 of dividends on any common stock issued upon conversion of the Notes. The agreement also permitted a one-time payment of $242,000 ($.005 per share) made in May 2002 to shareholders upon redemption and termination of the Company’s shareholder rights plan.

The Company’s $200 million of outstanding non-convertible senior notes are also collateralized by assets of the Company.

The Company’s fixed charges exceeded earnings by $5.4 million for the quarter ended September 30, 2002. The ratio of earnings to fixed charges was 1.27 for the quarter ended September 30, 2001.

NOTE D—FUEL HEDGE

In September 2002, the Company entered into a call option contract on heating oil to hedge a significant portion of its jet fuel requirements for a six-month period beginning in October 2002. The derivative is accounted for as a hedge for accounting purposes with changes in fair value deferred until the hedged forecasted transaction occurs and is recognized in earnings. The fair value of the call option was $112,000 at September 30, 2002. The change in fair value during the third quarter of 2002 resulted in a $152,000 loss, net of ~~outstanding letters~~tax, being reported in accumulated other comprehensive loss on the consolidated balance sheet.

NOTE E—GOODWILL

Effective January 2002, The Company implemented the provision of ~~credit,~~Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. As required by provisions of the statement, the Company completed its transitional tests and determined no impairment adjustments were necessary. The total amount of goodwill recorded and included in equipment deposits and other assets on the consolidated balance sheet was ~~$43.6~~$2.8 million as of September 30, ~~2001. In June~~2002. Net earnings (loss) and basic and diluted earnings (loss) per share for the quarter and nine months ended September 30, 2002, excluding goodwill amortization expense, would not have materially differed from amounts reported. Goodwill expense for the third quarter and first nine months of 2001 ~~the outstanding senior notes of $200 million were secured in connection with the amended revolving credit agreement.~~

was $32,000 and $97,000, respectively.

NOTE C—F—EARNINGS PER ~~SHARE:~~SHARE

Basic earnings per share are based upon the weighted average number of common shares outstanding during the ~~interim~~ period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the interim period plus ~~dilutive~~ common equivalent shares applicable to the assumed exercise of outstanding dilutive stock ~~options.~~

5

~~Weighted~~options and, when dilutive, the assumed conversion of the convertible senior notes.

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

	Three Months Ended September 30					Nine Months Ended September 30
	2002			2001		2002		2001
NET EARNINGS (LOSS):	$	(3,058	)	$	1,713	$	2,667	$	(21,643	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average shares outstanding		48,408			48,104		48,340		48,082
Stock options		—			24		337		—

Diluted weighted average shares outstanding		48,408			48,128		48,677		48,082

EARNINGS (LOSS) PER SHARE:
Basic	$	(0.06	)	$	0.04	$	0.06	$	(0.45	)
Diluted		(0.06	)		0.04		0.05		(0.45	)

Three Months Ended
Nine Months Ended
September 30
September 30
2001
2000
2001
2000

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 48,103,545 48,034,899 48,081,524 48,516,263
Diluted 48,128,062 48,185,156 48,104,026 48,850,931

For the three and nine months ended September 30, 2002, there were 4,232,000 and 2,045,000, respectively, of common shares issuable under stock option plans that were excluded from the earnings per share calculation because they were anti-dilutive. For the three and nine months ended September 30, 2001, there were 2,844,000 and 3,792,000, respectively, shares underlying anti-dilutive options that were excluded from this calculation. Additionally, the 6,413,985 common shares issuable upon conversion of the Company’s convertible senior notes were excluded from diluted earnings per share calculations because they were anti-dilutive for the three and nine months ended September 30, 2002.

NOTE D—G—SEGMENT INFORMATION

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

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

	Three Months Ended September 30					Nine Months Ended September 30
	2002			2001		2002			2001
SEGMENT REVENUES:
Domestic	$	748,609		$	682,522	$	2,180,589		$	2,132,856
International		94,152			90,266		261,143			275,678

	$	842,761		$	772,788	$	2,441,732		$	2,408,534


SEGMENT EARNINGS (LOSS) FROM OPERATIONS:
Domestic	$	4,151		$	920	$	30,579		$	(20,230	)
International		(767	)		503		(2,867	)		(1,792	)

	$	3,384		$	1,423	$	27,712		$	(22,022	)

Three Months Ended
Nine Months Ended

September 30
September 30

2001
2000
2001
2000

SEGMENT REVENUES:
      Domestic $ 682,522 705,997 $ 2,132,856 $ 2,147,530
      International 90,266 98,552 275,678 280,490

$ 772,788 $ 804,529 $ 2,408,534 $ 2,428,020

SEGMENT EARNINGS(Loss)
FROM OPERATIONS:
      Domestic $ 920 $ 55 $ (20,230 ) $ 61,786
      International 503 (3,081 ) (1,792 ) (6,044 )

$ 1,423 $ (3,026 ) $ (22,022 ) $ 55,742

NOTE E—H—OTHER COMPREHENSIVE ~~INCOME:~~LOSS

Other comprehensive income includes the following transactions and tax effects for the three and nine month ~~period~~periods ended September 30, 2002 and 2001, ~~and 2000~~respectively (in thousands):

Three Months Ended
Nine Months Ended

September 30, 2001
September 30, 2001

Before
Tax
Income Tax
(Expense)
or Benefit
Net of
Tax
Before
Tax
Income Tax
(Expense)
or Benefit
Net of
Tax

Unrealized securities losses
     arising during the period $ (1,724 ) $ 664 $ (1,060 ) $ (1,557 ) $ 599    $ (958 )
Less: Reclassification
     adjustment for gains
     realized in net income — — — (32 ) 12 (20 )

Net unrealized securities
     losses (1,724 ) 664 (1,060 ) (1,589 ) 611 (978 )
Foreign currency translation
      adjustments (41 ) 16 (25 ) (351 ) 114 (237 )

Other comprehensive
      income (loss) $ (1,765 ) $ 680 $ (1,085 ) $ (1,940 ) $ 725 $ (1,215 )

Three Months Ended
Nine Months Ended

September 30, 2000
September 30, 2000

Before
Tax
Income Tax
(Expense)
or Benefit
Net of
Tax
Before
Tax
Income Tax
(Expense)
or Benefit
Net of
Tax

Unrealized securities losses
     arising during the period $ 593 $ (228 ) $ 365 $ 1,043 $ (401 ) $ 642
Less: Reclassification
     adjustment for gains
     realized in net income (67 ) 26 (41 ) (588 ) 227 (361 )

Net unrealized securities
     losses 526 (202 ) 324 455 (174 ) 281
Foreign currency translation
      adjustments (16 ) 6 (10 ) (227 ) 87 (140 )

Other comprehensive
      income (loss) $ 510 $ (196 ) $ 314 $ 228 $ (87 ) $ 141

	Three Months Ended September 30, 2002									Nine Months Ended September 30, 2002
	Before Tax			Income Tax (Expense) or Benefit			Net of Tax			Before Tax			Income Tax (Expense) or Benefit			Net of Tax
2002
Unrealized securities losses arising during the period	$	(930	)	$	358		$	(572	)	$	(739	)	$	285		$	(454	)
Less: Reclassification adjustment for losses realized in net income		—			—			—			(1,655	)		637			(1,018	)

Net unrealized securities losses		(930	)		358			(572	)		(2,394	)	$	922		$	(1,472	)
Foreign currency translation adjustments		160			(61	)		99			290			(111	)		179
Unrealized loss on interest rate swap		(3,078	)		1,184			(1,894	)		(4,494	)		1,730			(2,764	)
Additional minimum pension liabilities		—			—			—			(1,729	)		665			(1,064	)
Fuel hedge option		(247	)		95			(152	)		(247	)		95			(152	)

Other comprehensive loss	$	(4,095	)	$	1,576		$	(2,519	)	$	(8,574	)	$	3,301		$	(5,273	)


	Three Months Ended September 30, 2001									Nine Months Ended September 30, 2001
	Before Tax			Income Tax Benefit			Net of Tax			Before Tax			Income Tax Benefit			Net of Tax
2001
Unrealized securities losses arising during the period	$	(1,724	)	$	664		$	(1,060	)	$	(1,557	)	$	599		$	(958	)
Less: Reclassification adjustment for losses realized in net income		—			—			—			(32	)		12			(20	)

Net unrealized securities losses		(1,724	)		664			(1,060	)		(1,589	)		611			(978	)
Foreign currency translation adjustments		(41	)		16			(25	)		(351	)		114			(237	)

Other comprehensive loss	$	(1,765	)	$	680		$	(1,085	)	$	(1,940	)	$	725		$	(1,215	)

NOTE ~~F—OTHER INCOME:~~I—RESTRUCTURING CHARGE

In the second quarter of 2002, the Company announced it was taking steps to reduce costs through realignment of operations and reduction of personnel and overhead expenses both in the U.S. and overseas. The Company recorded a restructuring charge of $2.3 million in the second quarter of 2002 and $.9 million in the third quarter of 2002 in connection with such realignment. A total of approximately 230 employees located at the Company’s station operations were terminated and provided severance benefits totaling $2.0 million, of which $1.7 million had been paid at September 30, 2002. An additional $1.2 million was accrued for lease costs, net of estimated sublease income, for the closure of certain facilities, of which $0.2 million had been paid at September 30, 2002.

NOTE J—BUSINESS ACQUISITION

On June 19, 2002, the Company acquired 100% of the outstanding common stock of Pagtrans SA, a French international transportation services company providing air express, air freight, ocean freight, logistics and customs brokerage services. The acquisition is intended to provide the Company an improved presence in France and throughout the region. Since 1997, Pagtrans SA had been the Company’s independent service agent in France.

~~Other income includes~~

The acquisition price is estimated to be $670,000, including direct costs, of which $18,000 has been paid as of September 30, 2002. The final acquisition price is based on a final measurement of the ~~following transactions~~fair value of current assets and liabilities as of the purchase date that will be completed in late 2002.

The Company recorded assets and liabilities (primarily current assets and liabilities) of approximately $7.6 million and $7.5 million, respectively, as of the purchase date in connection with the transaction and goodwill of approximately $.6 million. The allocation of this excess purchase price has not been finalized and is subject to the ultimate determination of the purchase price and further review of the fair value of assets acquired and liabilities assumed. The operating results of Pagtrans have been included in the Company’s results of operations since the acquisition date. The proforma effects of this acquisition on the Company’s consolidated revenues and results of operations for the three and nine month ~~period~~periods ended September 30, 2002 and 2001, respectively, were immaterial.

NOTE K—NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 requires that only certain extinguishments of debt be classified as an extraordinary item. Further, this statement requires a capital lease that is modified so that the resulting lease agreement is classified as an operating lease to be accounted for under the sale-leaseback provisions of SFAS No. 98. The provisions of the statement pertaining to debt extinguishments are effective for companies with fiscal years beginning after May 15, 2002. The provisions of the statement pertaining to lease modifications are effective for transactions consummated after May 15, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

NOTE L—SUPPLEMENTAL GUARANTOR INFORMATION—SENIOR NOTES

In connection with the issuance of $200 million of Senior Notes (“Notes”) by Airborne Express, Inc. (“AEI”), certain subsidiaries (collectively, “Guarantors”) of the Company have fully and unconditionally guaranteed, on a joint and several basis, the obligations to pay principal, premium, if any, and interest with respect to the Notes. The Guarantors are ABX Air Inc. (“ABX”) and Sky Courier, Inc. (“SKY”), which are wholly-owned subsidiaries of the Company, and Airborne FTZ Inc. (“FTZ”) and Wilmington Air Park Inc. (“WAP”), which are wholly-owned subsidiaries of ABX.

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

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

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

Further, the agreement governing the Company’s accounts receivable securitization facility prohibits Airborne Credit, Inc. (“ACI”), the subsidiary of the Company that sells accounts receivable under that facility, from making any loans. The agreement generally allows ACI to pay dividends to the Company, so long as ACI maintains a net worth of at least $19.2 million.

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

The following are consolidating condensed statements of operations of the Company for the three month and nine month periods ended September 30, 2002 and 2001, the consolidating condensed balance sheets of the Company as of September 30, 2002 and December 31, 2001, and ~~2000 (in thousands):~~the consolidating condensed statements of cash flows for the nine month periods ended September 30, 2002 and 2001:

Statement of Operations Information:

	Three months ended September 30, 2002															Nine months ended September 30, 2002
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)															(in thousands)
Revenues	$	827,553		$	—		$	15,208		$	—		$	842,761		$	2,395,372		$	—		$	46,360		$	—		$	2,441,732
Operating expenses:
Transportation purchased		495,504			—			(210,049	)		—			285,455			1,445,117			—			(643,264	)		—			801,853
Station and ground operations		237,746			—			44,555			—			282,301			686,045			—			126,333			—			812,378
Flight operations and maintenance		(92	)		—			135,576			(598	)		134,886			(1,416	)		—			396,000			(1,801	)		392,783
General and administrative		48,815			252			15,209			50			64,326			140,107			1,041			51,700			129			192,977
Sales and marketing		22,659			—			203			—			22,862			67,996			—			634			—			68,630
Depreciation and amortization		10,442			—			39,023			82			49,547			33,181			—			111,971			247			145,399

		815,074			252			24,517			(466	)		839,377			2,371,030			1,041			43,374			(1,425	)		2,414,020

Earnings (loss) from operations		12,479			(252	)		(9,309	)		466			3,384			24,342			(1,041	)		2,986			1,425			27,712
Other income (expense):
Interest income		1,458			—			—			—			1,458			3,772			—			—			—			3,772
Interest expense		(7,154	)		—			(1,954	)		—			(9,108	)		(20,108	)		—			(5,670	)		—			(25,778	)
Discount on sales of receivables		(990	)		—			1			251			(738	)		(2,956	)		—			—			28			(2,928	)
Other		196			—			—			—			196			2,499			—			—			—			2,499

Earnings (loss) before income taxes		5,989			(252	)		(11,262	)		717			(4,808	)		7,549			(1,041	)		(2,684	)		1,453			5,277
Income tax expense (benefit)		2,141			(88	)		(3,727	)		(76	)		(1,750	)		3,053			(364	)		410			(489	)		2,610

Net earnings (loss)	$	3,848		$	(164	)	$	(7,535	)	$	793		$	(3,058	)	$	4,496		$	(677	)	$	(3,094	)	$	1,942		$	2,667

Three Months Ended
Nine Months Ended

September 30
September 30

2001
2000
2001
2000

OTHER INCOME:
Gain on sales of radio frequencies $ 6,232 $ — $ 8,303 $ —
Gain on sale of securities 2,117 — 2,117 1,913
Other 429 406 935 1,198

$ 8,778 $ 406 $ 11,355 $ 3,111

Statement of Operations Information:

	Three months ended September 30, 2001															Nine months ended September 30, 2001
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated			Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)															(in thousands)
Revenues	$	752,512		$	—		$	20,276		$	—		$	772,788		$	2,350,127		$	—		$	58,407		$	—		$	2,408,534
Operating expenses:
Transportation purchased		486,300			—			(232,220	)		—			254,080			1,506,245			—			(719,041	)		—			787,204
Station and ground operations		224,817			—			32,509			—			257,326			685,803			—			116,677			—			802,480
Flight operations and maintenance		45			—			133,757			(516	)		133,286			(117	)		—			430,590			(1,815	)		428,658
General and administrative		39,325			125			21,640			39			61,129			140,106			572			53,221			118			194,017
Sales and marketing		21,378			—			311			—			21,689			68,017			—			1,003			—			69,020
Depreciation and amortization		12,449			7			39,115			84			51,655			36,979			157			119,592			249			156,977
Federal legislation compensation		(7,800	)		—			—			—			(7,800	)		(7,800	)		—			—			—			(7,800	)

		776,514			132			(4,888	)		(393	)		771,365			2,429,233			729			2,042			(1,448	)		2,430,556

Earnings (loss) from operations		(24,002	)		(132	)		25,164			393			1,423			(79,106	)		(729	)		56,365			1,448			(22,022	)
Other income (expense):
Interest income		560			—			—			—			560			879			—			—			—			879
Interest expense		322			—			(5,806	)		—			(5,484	)		2,356			(1,576	)		(15,534	)		—			(14,754	)
Dividend income		—			—			—			—			—			—			20,000			(20,000	)		—			—
Discount on sales of receivables		(2,537	)		—			—			530			(2,007	)		(10,050	)		—			—			2,057			(7,993	)
Other		8,779			—			—			—			8,779			11,355			—						—			11,355

Earnings (loss) before income taxes		(16,878	)		(132	)		19,358			923			3,271			(74,566	)		17,695			20,831			3,505			(32,535	)
Income tax expense (benefit)		(5,675	)		(46	)		7,231			48			1,558	��		(26,185	)		(807	)		15,887			213			(10,892	)

Net earnings (loss)	$	(11,203	)	$	(86	)	$	12,127		$	875		$	1,713		$	(48,381	)	$	18,502		$	4,944		$	3,292		$	(21,643	)

Balance Sheet Information:

September 30, 2002	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non-guarantors			Elimination			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	330,387		$	—		$	89		$	2,500		$	—		$	332,976
Trade accounts receivable, less allowance		20,110			—			9,661			225,169			—			254,940
Spare parts and fuel inventory		—			—			34,003			2,969			—			36,972
Refundable income taxes		2,739			—			—			—			—			2,739
Deferred income tax assets		33,967			—			—			—			—			33,967
Prepaid expenses and other		17,136			—			13,782			344			—			31,262

Total current assets		404,339			—			57,535			230,982			—			692,856
Property and equipment, net		98,679			—			1,084,008			4,016			—			1,186,703
Intercompany advances		88,211			234,387			(91,266	)		(8,554	)		(222,778	)		—	��
Equipment deposits and other assets		20,311			225,742			8,998			10			(215,111	)		39,950

Total assets	$	611,540		$	460,129		$	1,059,275		$	226,454		$	(437,889	)	$	1,919,509


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	102,061		$	—		$	43,019		$	2,818		$	(180	)	$	147,718
Salaries, wages and related taxes		53,104			—			40,037			—			—			93,141
Accrued expenses		123,635			4,479			5,301			322			—			133,737
Current portion of long-term obligations		102,763			—			6,928			—			—			109,691

Total current liabilities		381,563			4,479			95,285			3,140			(180	)		484,287
Long-term obligations		112,273			150,000			108,894			—			—			371,167
Intercompany liabilities		—			—			222,597			—			(222,597	)		—
Deferred income tax liabilities		(3,945	)		—			149,968			532			—			146,555
Post retirement liabilities		14,414			—			24,115			—			—			38,529
Other liabilities		49,283			—			—			—			—			49,283
Shareholders’ equity:
Common stock		1			51,658			(9	)		120			(112	)		51,658
Additional paid-in capital		—			308,812			(753	)		215,753			(215,000	)		308,812
Retained earnings		66,044			5,038			459,178			6,909			—			537,169
Accumulated other comprehensive loss		(8,093	)		—			—			—			—			(8,093	)
Treasury stock		—			(59,858	)		—			—			—			(59,858	)

Total shareholders’ equity		57,952			305,650			458,416			222,782			(215,112	)		829,688

Total liabilities and shareholders’ equity	$	611,540		$	460,129		$	1,059,275		$	226,454		$	(437,889	)	$	1,919,509

Balance Sheet Information:

December 31, 2001	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors		Elimination			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	191,629		$	—		$	607		$	9,264	$	—		$	201,500
Trade accounts receivable, less allowance		18,706			—			10,113			97,289		(68	)		126,040
Spare parts and fuel inventory		—			—			36,272			2,141		—			38,413
Refundable income taxes		27,161			—			—			—		—			27,161
Deferred income tax assets		30,572			—			—			—		—			30,572
Prepaid expenses and other		13,918			—			13,627			476		—			28,021

Total current assets		281,986			—			60,619			109,170		(68	)		451,707
Property and equipment, net		109,622			—			1,133,490			4,261		—			1,247,373
Intercompany advances		157,681			302,279			(102,051	)		12,884		(370,793	)		—
Equipment deposits and other assets		31,078			5,963			125,824			10		(115,111	)		47,764

Total assets	$	580,367		$	308,242		$	1,217,882		$	126,325	$	(485,972	)	$	1,746,844


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	84,867		$	—		$	53,146		$	4,552	$	(692	)	$	141,873
Salaries, wages and related taxes		46,976			—			28,482			—		—			75,458
Accrued expenses		139,132			—			6,261			604		—			145,997
Current portion of long-term obligations		100,877			—			6,533			—		—			107,410

Total current liabilities		371,852			—			94,422			5,156		(692	)		470,738
Long-term obligations		103,951			—			114,102			—		—			218,053
Intercompany liabilities		—			—			370,168			—		(370,168	)		—
Deferred income tax liabilities		(6,967	)		—			150,164			329		—			143,526
Post retirement liabilities		11,905			—			27,518			—		—			39,423
Other liabilities		40,888			—			—			—		—			40,888
Shareholders’ equity:
Common stock		1			51,376			(9	)		120		(112	)		51,376
Additional paid-in capital		8			304,976			(753	)		115,753		(115,000	)		304,984
Retained earnings		61,549			11,758			462,270			4,967		—			540,544
Accumulated other comprehensive loss		(2,820	)		—			—			—		—			(2,820	)
Treasury stock		—			(59,868	)		—			—		—			(59,868	)

Total shareholders’ equity		58,738			308,242			461,508			120,840		(115,112	)		834,216

Total liabilities and shareholders’ equity	$	580,367		$	308,242		$	1,217,882		$	126,325	$	(485,972	)	$	1,746,844

Statement of Cash Flows Information:

	Nine months ended September 30, 2002
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
Net earnings (loss)	$	4,496		$	(677	)	$	(3,094	)	$	1,942		$	2,667
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		140,810			(219,779	)		110,806			99,758			131,595
Change in current assets and liabilities		940			72,736			(40,929	)		(108,462	)		(75,715	)

Net cash provided (used) by operating activities		146,246			(147,720	)		66,783			(6,762	)		58,547
INVESTING ACTIVITIES:
Net cash provided (used) by investing activities		(1,937	)		—			(62,489	)		(2	)		(64,428	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(5,551	)		147,720			(4,812	)		—			137,357

Net increase (decrease) in cash		138,758			—			(518	)		(6,764	)		131,476
Cash and cash equivalents at beginning of period		191,629			—			607			9,264			201,500

Cash and cash equivalents at September 30, 2002	$	330,387		$	—		$	89		$	2,500		$	332,976


	Nine months ended September 30, 2001
	Airborne Express, Inc.			Airborne Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	(48,381	)	$	18,502		$	4,944		$	3,292		$	(21,643	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		(3,216	)		176			158,995			(430	)		155,525
Change in current assets and liabilities		186,246			60,351			(188,582	)		(3,133	)		54,882

Net cash provided (used) by operating activities		134,649			79,029			(24,643	)		(271	)		188,764
INVESTING ACTIVITIES:
Net cash used by investing activities		(8,372	)		(157	)		(76,925	)		(77	)		(85,531	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(28,167	)		(78,872	)		102,523			—			(4,516	)

Net increase (decrease) in cash		98,110			—			955			(348	)		98,717
Cash and cash equivalents at beginning of period		37,523			—			51			2,816			40,390

Cash and cash equivalents at September 30, 2001	$	135,633		$	—		$	1,006		$	2,468		$	139,107

NOTE ~~G—CHANGE IN ACCOUNTING:~~M—SUPPLEMENTAL GUARANTOR INFORMATION—CONVERTIBLE SENIOR NOTES

~~Effective January 1, 2000,~~

On March 25, 2002, the Company ~~changed its method~~issued $150 million of ~~accounting for major engine overhaul costs~~5.75% Convertible Senior Notes due April 2007 (“Notes”). In connection with the issuance of these Notes, the Company and certain subsidiaries (collectively, “Guarantors”) have fully and unconditionally guaranteed, on ~~DC-9 aircraft from~~a joint and several basis, the ~~accrual method~~obligations to pay principal, premium, if any, and interest with respect to the ~~direct expense method where costs~~Notes. The Guarantors are ~~expensed as incurred. Previously, these costs were accrued~~AEI, ABX, SKY, WAP, FTZ, Aviation Fuel, Inc. (“AFI”) and Sound Suppression, Inc. (“SSI”). AEI provides domestic and international delivery services in ~~advance~~addition to performing customer service, sales and marketing activities. AFI purchases and sells aviation and other fuels. SSI retrofits company aircraft with hush kits to meet noise regulations. A description of the ~~next scheduled overhaul based upon engine usage~~operating activities of the other guarantors and ~~estimates~~their relationship to the Company is contained in Note L. Note L also contains a description of ~~overhaul costs.~~ the intercompany loan and dividend restrictions that apply to the Company and its subsidiaries.

The following are consolidating condensed statements of operations of the Company ~~believes that this new method~~for the three month and nine month periods ended September 30, 2002 and 2001, the consolidating condensed balance sheets of the Company as of September 30, 2002 and December 31, 2001, and the consolidating condensed statements of cash flows for the nine month periods ended September 30, 2002 and 2001. A description regarding the basis of presenting these statements is ~~preferable because it is more consistent with industry practice~~contained in Note L.

Statement of Operations Information:

	Three months ended September 30, 2002											Nine months ended September 30, 2002
	Airborne, Inc.			Guarantors			Non- guarantors		Consolidated			Airborne, Inc.			Guarantors			Non- guarantors		Consolidated
	(in thousands)											(in thousands)
Revenues	$	—		$	842,761		$	—	$	842,761		$	—		$	2,441,732		$	—	$	2,441,732
Operating expenses:
Transportation purchased		—			285,455			—		285,455			—			801,853			—		801,853
Station and ground operations		—			282,301			—		282,301			—			812,378			—		812,378
Flight operations and maintenance		—			134,886			—		134,886			—			392,783			—		392,783
General and administrative		252			64,074			—		64,326			1,041			191,936			—		192,977
Sales and marketing		—			22,862			—		22,862			—			68,630			—		68,630
Depreciation and amortization		—			49,547			—		49,547			—			145,399			—		145,399

		252			839,125			—		839,377			1,041			2,412,979			—		2,414,020

Earnings (loss) from operations		(252	)		3,636			—		3,384			(1,041	)		28,753			—		27,712
Other income (expense):
Interest income		—			1,458			—		1,458			—			3,772			—		3,772
Interest expense		—			(9,108	)		—		(9,108	)		—			(25,778	)		—		(25,778	)
Discount on sales of receivables		—			(989	)		251		(738	)		—			(2,956	)		28		(2,928	)
Other		—			196			—		196			—			2,499			—		2,499

Earnings (loss) before income taxes		(252	)		(4,807	)		251		(4,808	)		(1,041	)		6,290			28		5,277
Income tax expense (benefit)		(88	)		(1,750	)		88		(1,750	)		(364	)		2,964			10		2,610

Net earnings (loss)	$	(164	)	$	(3,057	)	$	163	$	(3,058	)	$	(677	)	$	3,326		$	18	$	2,667

	Three months ended September 30, 2001											Nine months ended September 30, 2001
	Airborne, Inc.			Guarantors			Non- guarantors		Consolidated			Airborne, Inc.			Guarantors			Non- guarantors		Consolidated
	(in thousands)											(in thousands)
Revenues	$	—		$	772,788		$	—	$	772,788		$	—		$	2,408,534		$	—	$	2,408,534
Operating expenses:
Transportation purchased		—			254,080			—		254,080			—			787,204			—		787,204
Station and ground operations		—			257,326			—		257,326			—			802,480			—		802,480
Flight operations and maintenance		—			133,286			—		133,286			—			428,658			—		428,658
General and administrative		125			61,004			—		61,129			572			193,445			—		194,017
Sales and marketing		—			21,689			—		21,689			—			69,020			—		69,020
Depreciation and amortization		7			51,648			—		51,655			157			156,820			—		156,977
Federal legislation compensation		—			(7,800	)		—		(7,800	)		—			(7,800	)		—		(7,800	)

		132			771,233			—		771,365			729			2,429,827			—		2,430,556

Earnings (loss) from operations		(132	)		1,555			—		1,423			(729	)		(21,293	)		—		(22,022	)
Other income (expense):
Interest income		—			560			—		560			—			879			—		879
Interest expense		—			(5,484	)		—		(5,484	)		(1,576	)		(13,178	)		—		(14,754	)
Dividend income		—			—			—		—			20,000			(20,000	)		—		—
Discount on sales of receivables		—			(2,537	)		530		(2,007	)		—			(10,050	)		2,057		(7,993	)
Other		—			8,779			—		8,779			—			11,355			—		11,355

Earnings (loss) before income taxes		(132	)		2,873			530		3,271			17,695			(52,287	)		2,057		(32,535	)
Income tax expense (benefit)		(46	)		1,419			185		1,558			(807	)		(10,805	)		720		(10,892	)

Net earnings (loss)	$	(86	)	$	1,454		$	345	$	1,713		$	18,502		$	(41,482	)	$	1,337	$	(21,643	)

Balance Sheet Information:

September 30, 2002	Airborne, Inc.			Guarantors			Non- guarantors			Elimination			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	—		$	330,422		$	2,554		$	—		$	332,976
Trade accounts receivable, less allowance		—			29,814			225,126			—			254,940
Spare parts and fuel inventory		—			36,972			—			—			36,972
Refundable income taxes		—			2,739			—			—			2,739
Deferred income tax assets		—			33,967			—			—			33,967
Prepaid expenses and other		—			30,987			275			—			31,262

Total current assets		—			464,901			227,955			—			692,856
Property and equipment, net		—			1,186,703			—			—			1,186,703
Intercompany advances		234,387			(354	)		(11,255	)		(222,778	)		—
Equipment deposits and other assets		225,742			29,319			—			(215,111	)		39,950

Total assets	$	460,129		$	1,680,569		$	216,700		$	(437,889	)	$	1,919,509

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	—		$	147,898		$	—		$	(180	)	$	147,718
Salaries, wages and related taxes		—			93,141			—			—			93,141
Accrued expenses		4,479			128,961			297			—			133,737
Current portion of long-term obligations		—			109,691			—			—			109,691

Total current liabilities		4,479			479,691			297			(180	)		484,287
Long-term obligations		150,000			221,167			—			—			371,167
Intercompany liabilities		—			222,597			—			(222,597	)		—
Deferred income tax liabilities		—			146,555			—			—			146,555
Post retirement liabilities		—			38,529			—			—			38,529
Other liabilities		—			49,283			—			—			49,283
Shareholders’ equity:
Common stock		51,658			102			10			(112	)		51,658
Additional paid-in capital		308,812			—			215,000			(215,000	)		308,812
Retained earnings		5,038			530,738			1,393			—			537,169
Accumulated other comprehensive loss		—			(8,093	)		—			—			(8,093	)
Treasury stock		(59,858	)		—			—			—			(59,858	)

Total shareholders’ equity		305,650			522,747			216,403			(215,112	)		829,688

Total liabilities and shareholders’ equity	$	460,129		$	1,680,569		$	216,700		$	(437,889	)	$	1,919,509

Balance Sheet Information:

December 31, 2001	Airborne, Inc.			Guarantors			Non- guarantors		Elimination			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	—		$	191,664		$	9,836	$	—		$	201,500
Trade accounts receivable, less allowance		—			28,763			97,277		—			126,040
Spare parts and fuel inventory		—			38,413			—		—			38,413
Refundable income taxes		—			27,161			—		—			27,161
Deferred income tax assets		—			30,572			—		—			30,572
Prepaid expenses and other		—			27,619			402		—			28,021

Total current assets		—			344,192			107,515		—			451,707
Property and equipment, net		—			1,247,373			—		—			1,247,373
Intercompany advances		302,279			(114,548	)		9,487		(197,218	)		—
Equipment deposits and other assets		5,963			156,912			—		(115,111	)		47,764

Total assets	$	308,242		$	1,633,929		$	117,002	$	(312,329	)	$	1,746,844

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	—		$	142,497		$	—	$	(624	)	$	141,873
Salaries, wages and related taxes		—			75,458			—		—			75,458
Accrued expenses		—			145,380			617		—			145,997
Current portion of long-term obligations		—			107,410			—		—			107,410

Total current liabilities		—			470,745			617		(624	)		470,738
Long-term obligations		—			218,053			—		—			218,053
Intercompany liabilities		—			196,593			—		(196,593	)		—
Deferred income tax liabilities		—			143,526			—		—			143,526
Post retirement liabilities		—			39,423			—		—			39,423
Other liabilities		—			40,888			—		—			40,888
Shareholders’ equity:
Common stock		51,376			102			10		(112	)		51,376
Additional paid-in capital		304,976			8			115,000		(115,000	)		304,984
Retained earnings		11,758			527,411			1,375		—			540,544
Accumulated other comprehensive loss		—			(2,820	)		—		—			(2,820	)
Treasury stock		(59,868	)		—			—		—			(59,868	)

Total shareholders’ equity		308,242			524,701			116,385		(115,112	)		834,216

Total liabilities and shareholders’ equity	$	308,242		$	1,633,929		$	117,002	$	(312,329	)	$	1,746,844

	Nine months ended September 30, 2002
	Airborne, Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	(677	)	$	3,326		$	18		$	2,667
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		(219,779	)		251,364			100,010			131,595
Change in current assets and liabilities		72,736			(41,141	)		(107,310	)		(75,715	)

Net cash provided (used) by operating activities		(147,720	)		213,549			(7,282	)		58,547
INVESTING ACTIVITIES:
Net cash used by investing activities		—			(64,428	)		—			(64,428	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		147,720			(10,363	)		—			137,357

Net increase (decrease) in cash		—			138,758			(7,282	)		131,476
Cash and cash equivalents at beginning of period		—			191,664			9,836			201,500

Cash and cash equivalents at September 30, 2002	$	—		$	330,422		$	2,554		$	332,976


	Nine months ended September 30, 2001
	Airborne, Inc.			Guarantors			Non- guarantors			Consolidated
	(in thousands)
OPERATING ACTIVITIES:
Net earnings (loss)	$	18,502		$	(41,482	)	$	1,337		$	(21,643	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash operating activities		175			154,630			720			155,525
Change in current assets and liabilities		60,351			(5,583	)		114			54,882

Net cash provided (used) by operating activities		79,028			107,565			2,171			188,764
INVESTING ACTIVITIES:
Net cash used by investing activities		(156	)		(85,375	)		—			(85,531	)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities		(78,872	)		74,356			—			(4,516	)

Net increase (decrease) in cash		—			96,546			2,171			98,717
Cash and cash equivalents at beginning of period		—			39,121			1,269			40,390

Cash and cash equivalents at September 30, 2001	$	—		$	135,667		$	3,440		$	139,107

Item 2. Management’s Discussion and ~~appropriate given the relatively large size~~Analysis of ~~its DC-9 fleet.~~

~~The cumulative effect~~Financial Condition and Results of ~~this change~~Operations

Results Of Operations

We achieved improved operating earnings in accounting resulted in a non-cash credit of $14,206,000, net of taxes, or $.29 per share on a diluted basis being recognized in the quarter ending March 31, 2000. Excluding the cumulative effect, this change increased net earnings for the third quarter and first nine months of ~~2000 by approximately $1.4 million, net of tax or $.03 per share, and $4.2 million, net of tax or $.09 per share, respectively.~~

~~NOTE H-NEW ACCOUNTING PRONOUNCEMENTS:~~

The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets", SFAS No. 143 "Accounting for Asset Retirement Obligations" and SFAS No. 144 "Accounting for2002 compared to the Impairment or Disposal of Long-Lived assets". SFAS No. 141 requires that all business combinations initiated after July 1, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 requires that goodwill and some intangible assets be charged to expense through the testing and measuring of these items for impairment as opposed to periodic amortization over the estimated useful life of the assets. SFAS No. 143 requires entities to recognize the fair value of a liability for an asset retirement obligationsame periods in ~~the period in which it is incurred assuming a reasonable estimate of fair value~~2001. This progress can be ~~made. SFAS No. 144 expands~~attributed primarily to higher domestic revenues resulting from the implementation of key growth initiatives that began in 2001, including the expansion of our product line and ~~clarifies previous accounting standards regarding~~ the ~~disposal~~implementation of ~~long-lived assets. SFAS No. 141, No. 142, No. 143~~yield management actions, and ~~No. 144 are not expected~~ to ~~have~~improved productivity. This performance was accomplished despite a ~~material impact on~~difficult economic environment that has hampered our core domestic air shipment and revenue growth, cost pressures in certain corporate related expense areas, and the ~~Company’s consolidated results~~recording of ~~operations, financial position or cash flows.~~

8

~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF~~
~~RESULTS OF OPERATIONS AND FINANCIAL CONDITION~~

~~RESULTS OF OPERATIONS:~~

~~The Company~~non-recurring restructuring and impairment charges.

We reported a net ~~income for~~loss in the third quarter of ~~2001~~2002 of $3.1 million or $.06 per diluted share, including non-recurring charges of $4.0 million, or $2.4 million after tax, or $.05 per share. This compares to net earnings of $1.7 million or $.04 per ~~diluted share. This compares to a net loss of $5.5 million or $.11 per~~ share ~~for~~in the third quarter of ~~2000 and a net loss of $6.4 million or $.13 per share reported in the 2nd quarter of 2001. For the first nine months of~~ 2001, the net loss was $21.6 million or $.45 per share compared to net earnings before a change in accounting of $26.1 million or $.54 per share for the first nine months of 2000. Net earnings reported for the first nine months of 2000, including a $.29 per share credit for a change in accounting were, $40.4 million or $.83 per share.

~~The third quarter of 2001~~which included ~~non-recurring~~ gains on the sale of ~~certain securities and FCC licensed~~ radio frequencies ~~totaling $8.3 million ($5.4~~of $5.4 million after tax or $.11 per ~~share). One time gains for frequency sales~~share and ~~securities gains for the first nine months of 2001 totaled $10.4 million ($6.8 million after tax or $.14 per share compared to $.02 per share in the first nine months of 2000).~~

~~The results for the third quarter of this year include pre-tax losses of approximately $13 million associated with lost business as a result of the September 11~~^th terrorist attacks.The two day closure of the Company’s air network by order of the Federal government following the attacks resulted in lost revenue and additional costs.The Company was able to partially adjust its network and continue business operations through the temporary expansion of its ground linehaul, hub and sort operations.During the week of the attacks shipment volumes declined 27% compared to year earlier levels. In the weeks following the attacks shipment volumes improved although fourth quarter volumes through early November continued to be approximately 3%on average below volumes of the comparable period of 2000.

~~The Company recorded a $7.8 million credit for~~ compensation provided under the Air Transportation Safety and System Stabilization Act ~~("Act"~~of $4.8 million after tax or $.10 per share.

We reported net earnings for the first nine months of 2002 of $2.7 million or $.05 per diluted share, including non-recurring charges of $3.9 million after tax or $.08 per share and a non-recurring securities gain of $1.0 million after tax or $.02 per share. This compares to a net loss of $21.6 million or $.45 per share in the first nine months of 2001, which included gains on the sale of radio frequencies and securities of $6.8 million after tax or $.14 per share, the previously mentioned federal compensation of $4.8 million after tax or $.10 per share and restructuring charges of $1.9 million or $.04 per share.

Non-recurring charges in the third quarter of 2002 included a $3.1 million impairment charge on an unscheduled retirement of a DC-8 aircraft. In late September 2002, a routine maintenance check on this aircraft revealed the need for extensive unanticipated repairs. We decided to retire the aircraft from service rather than incur the additional maintenance costs. The non-cash impairment charge is associated with adjusting the aircraft’s net book value to its fair value, which is the equivalent of an estimated parts value. Additionally, we incurred $0.9 million in restructuring charges that were a result of the domestic and international operational realignment actions announced in the second quarter of 2002, and for which restructuring charges of $2.3 million were recorded in the second quarter of 2002.

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

	Three Months Ended September 30				Change		Nine Months Ended September 30				Change
	2002		2001		Change		2002		2001		Change
Shipments (in thousands):
Domestic
Overnight		40,219		40,425	(0.5	%)		119,975		130,263	(7.9	%)
Next Afternoon Service		12,931		12,327	4.9	%		39,116		38,963	0.4	%
Second Day Service		17,470		17,282	1.1	%		53,233		55,073	(3.3	%)
Ground Delivery Service		12,022		1,492	NM			26,638		1,821	NM
airborne@home		7,032		4,747	48.1	%		17,889		15,547	15.1	%

Total Domestic		89,674		76,273	17.6	%		256,851		241,667	6.3	%

International
Express		1,346		1,375	(2.1	%)		4,107		4,524	(9.2	%)
Freight		91		95	(4.2	%)		271		299	(9.4	%)

Total International		1,437		1,470	(2.2	%)		4,378		4,823	(9.2	%)

Total Shipments		91,111		77,743	17.2	%		261,229		246,490	6.0	%

Average Pounds per Shipment:
Domestic		5.06		4.24	19.3	%		4.75		4.17	13.9	%
International		62.23		60.55	2.8	%		58.96		55.03	7.1	%
Average Revenue per Pound:
Domestic	$	1.62	$	2.04	(20.6	%)	$	1.75	$	2.06	(15.0	%)
International	$	1.01	$	0.99	2.0	%	$	0.98	$	1.02	(3.9	%)
Average Revenue per Shipment
Domestic	$	8.32	$	8.87	(6.2	%)	$	8.45	$	8.76	(3.5	%)
International	$	65.52	$	61.41	6.7	%	$	59.65	$	57.16	4.4	%

Total revenues increased 9.1% in the third quarter of 2002 to $842.8 million compared to revenues of $772.8 million in the third quarter of 2001. For the first nine months of 2002, total revenues increased 1.4% compared to the same period in 2001. Shipment volumes increased 17.2% and 6.0% in the third quarter and first nine months of 2002, respectively, compared to the same periods in 2001. The third quarter of 2002 had one more operating day than in 2001, while the first nine months of 2002 had the same number of operating days as the comparable period a year ago. The third quarter of 2001 was negatively impacted by the disruption to business and the closure of the air system for two days as a result of the September 11, 2001 terrorist attacks. This impacts comparison of this year’s third quarter operating, shipment, and revenue trends over last year’s third quarter.

Domestic revenues increased 9.7% to $748.6 million in the third quarter compared to revenues of $682.5 million in the third quarter of 2001. Domestic revenues increased 2.2% for the first nine months of 2002 compared to the same period in 2001. Domestic shipments increased 17.6% to 89.7 million in the third quarter compared to 76.3 million in the third quarter of 2001. For the first nine months of 2002, domestic shipments increased 6.3% compared to the first nine months of 2001. Average revenue per domestic shipment was $8.32 in the third quarter compared to $8.87 in the third quarter of 2001. Average revenue per domestic shipment was $8.45 for the first nine months of 2002 compared to $8.76 in the like period in 2001. The overall decline in domestic revenue per shipment was due primarily to a higher percentage of total shipments attributed to lower yielding deferred products. The core air express products revenue per shipment has experienced quarterly sequential increases throughout 2002 and increases over the same periods in 2001. The increases are due primarily to rate and fee actions and have offset reductions in our fuel surcharge and related revenues. Revenue per shipment on our Ground Delivery Service yields had been decreasing in each quarter of 2002 due to shipment growth in higher volume, lower yielding customers. GDS yields per shipment in the third quarter improved over second quarter 2002 as we began focusing on balancing shipment growth with yield improvement. The airborne@home yields per shipment decreased in the third quarter of 2002 compared to the same period in 2001 and to the first and second quarters in 2002 due primarily to declines in the average weight per shipment.

Domestic revenues in 2002 and 2001 included fuel surcharge revenues which were used to help offset the historically high prices of fuel affecting costs in our air and surface operations. During 2001, we had in place a fuel surcharge of 4.0% applied to our air express products and a 1.2% surcharge on our airborne@home and Ground Delivery Service products. The fuel surcharge rates were reduced effective in January 2002 to 2.9% on air express products and 1.0% on airborne@home and ground products. Fuel surcharge revenues totaled $17.5 million and $52.2 million in the third quarter and for the first nine months of 2002, respectively. This compares to $22.4 million and $70.7 million recognized in the third quarter and first nine months of 2001, respectively.

Throughout 2001 and 2002, we have taken actions to increase rates on both domestic and international express services to improve our shipment yields. These actions include general rate increases on domestic services and the introduction of new fees that match competitor actions. These actions have assisted in improving product level yields as discussed above.

After a slow July, where air express shipments were down 8.5% on a per day basis compared to July 2001, volumes sequentially increased through the remainder of the third quarter. Our air express shipments averaged 1,100,000 per day in the third quarter, and averaged 1,149,000 shipments per day in September 2002, an increase of 4.1% over third quarter of 2002 average volumes. Core air express shipments declined 0.7% and 5.3%, on a per day basis, in the third quarter and first nine months of 2002, respectively. This year-over-year decline in air volumes, impacted by the poor economic environment and customers’ shift to deferred services, is being experienced industry wide. This decline compares to per day declines of 8.7% and 4.4% in last year’s third quarter and first nine months, respectively. Our core air express products are Overnight Express, Next Afternoon Service (NAS) and Second Day Service (SDS). For our higher yielding Overnight Express product, per day shipments decreased 2.1% in the third quarter of 2002 compared to a decrease of 11.3% in the third quarter of 2001. The NAS product per day shipments increased 3.3% in this year’s third quarter compared to a decline of 8.2% a year ago. SDS per day shipment volumes were flat against volumes a year ago compared to a decline of 2.4% in the third quarter of 2001.

In April 2001, we expanded our service portfolio by introducing our Ground Delivery Service (GDS) product. This new product utilizes our sort and linehaul infrastructure and was initially marketed to a targeted customer base. Marketing of this product has been expanded in 2002 to a broader customer segment, and we are focusing on the appropriate balance between growth and yields. GDS is an important growth initiative that offers us the opportunity not only to generate revenues from the deferred ground segment, where we had not previously participated, but also to leverage GDS with cross marketing of higher yielding air express shipments. GDS has shown strong growth since its introduction, producing volumes of 12.0 million shipments in the third quarter of 2002 compared to 1.5 million shipments in the third quarter of 2001. GDS shipment volumes in the second quarter of 2002 and first quarter of 2002 were 8.8 million and 5.8 million, respectively.

Our airborne@home product increased 48.1% to 7.0 million shipments in the third quarter of 2002 compared to 4.8 million shipments in the third quarter of 2001. The increase in the third quarter of 2002 is due in part to additional shipments from certain large customers for whom the airborne@home product has become more attractive because of recent increases in Priority Mail rates. For the first nine months of 2002 airborne@home shipments increased 15.1% to 17.9 million shipments compared to 15.5 million shipments in the comparable period of 2001. This service is intended to capture primarily business-to-consumer shipments from e-commerce and catalog fulfillment providers. airborne@home utilizes an arrangement with the U.S. Postal Service to provide final delivery.

Total domestic shipments per day increased 15.7% and 6.3% in the third quarter and first nine months of 2002 compared to the same periods in 2001. This growth is due to our GDS and airborne@home products, whose growth in shipment volumes has more than offset the declines in our core air express shipments.

International revenues increased 4.3% in the third quarter of 2002 to $94.2 million compared to $90.3 million in the third quarter of 2001. International revenues for the first nine months of 2002 declined 5.3% to $261.1 million compared to $275.7 million in the comparable period in 2001. Total international shipments decreased 2.2% to 1.4 million shipments in this year’s third quarter compared to 1.5 million shipments in the third quarter of 2001. For the first nine months of 2002, international shipments decreased 9.2% to 4.4 million from 4.8 million in the same period in 2001. Our international express shipments declined 2.1% and 9.2% in the third quarter and first nine months of 2002, respectively, compared to a year ago. International freight shipments declined 4.2% in the third quarter of 2002 and 9.4% in the first nine months compared to the same periods in 2001. International shipments and revenues were impacted in the first nine months of 2002 by continued weakness in U.S. exports.

In June 2002, we increased our presence in France and the region by acquiring our service partner, Pagtrans SA. The acquisition price is estimated to be $670,000, including direct costs. The final acquisition price will be based on a final measurement of the fair value of current assets and liabilities as of the purchase date that will be completed in late 2002.

International segment losses from operations, including restructuring charges of $0.5 million and $1.8 million recorded in the third quarter and first nine months of 2002, were $0.8 million and $2.9 million, respectively. The international segment reported earnings of $0.5 million in the third quarter of 2001 and losses of $1.8 million in the first nine months of 2001. Non-recurring restructuring charges of $0.4 million were included in the results for the first nine months of 2001.

The cost reductions implemented since the second quarter of 2001 were instrumental in the improvement in earnings from operations in the third quarter and first nine months of 2002 compared to the same periods in 2001. Operating expense per shipment decreased 7.2% to $9.21 in the third quarter of 2002 compared to $9.92 in the third quarter of 2001 and $9.79 for full year of 2001. Operating expense per shipment decreased 6.3% to $9.24 in the first nine months of 2002 compared to $9.86 in the first nine months of 2001. Although operating expense per shipment improved in the third quarter and for the first nine months of 2002, the corporate cost pressures previously described negatively impacted costs. Third quarter and nine month per shipment cost amounts for 2001 were negatively impacted by reduced shipment volumes resulting from the events of September 11.

Corporate costs for pensions, workers’ compensation, employee healthcare and insurance increased $16.9 million and $27.2 million in the third quarter and first nine months of 2002 compared to the same periods in 2001. Certain of these increases are market driven. Pension costs have been impacted by decreased investment returns on plan assets while employee health care costs have increased consistent with market trends. Additionally, insurance costs increased for our aircraft and casualty coverage due to capacity constraints in the insurance market. We revised our estimated reserve for workers compensation expense in the third quarter to reflect higher claim loss estimates contained in a recently completed independent actuarial analysis report. While we have containment programs in place to actively manage costs in this area, workers compensation reserve estimates have been impacted by negative claim severity trends, including time-loss and medical cost components. We expect the total of these corporate cost items to be between $30 and $35 million higher for the full year 2002 over 2001 levels.

We have been aggressively managing our costs since the second quarter of 2001 through actions designed to improve productivity and adjust our cost structure to be more in line with the volume levels being generated. These actions, including the domestic and international realignment actions implemented in the second and third quarter of 2002, combined with shipment volume growth, resulted in productivity improvements of 13.0% and 9.0% in the third quarter and first nine months of 2002, respectively, as measured by shipments handled per paid employee hour. This compares to improvements of 3.9% and 3.2% in the third quarter and first nine months of 2001. Productivity was negatively impacted in 2001 by the September attacks.

Transportation purchased as a percentage of revenues increased to 33.9% in the third quarter of 2002 as compared to 32.9% in the same quarter a year ago. For the first nine months of 2002, this category of expense comprised 32.8% of revenues in comparison to 32.7% in the first nine months of 2001. Total transportation purchased expense increased 12.3% and 1.9% in the third quarter and

first nine months of 2002 compared to a year ago. International commercial linehaul costs increased as a percentage of revenues in the third quarter of 2002 compared to the third quarter of 2001 due to higher linehaul rates as a result of tighter capacity caused by the west coast port labor issue and peak season shipping. These costs decreased as a percentage of revenues in the first nine months of 2002 compared to 2001 primarily because of lower international shipment volumes. This category of expense also includes increased truck linehaul costs, pickup and delivery costs paid to independent contractors, and delivery costs paid to the U.S. Postal Service. These increases are due to shipment volume related increases, in particular GDS and airborne@home volume increases.

Station and ground expense as a percentage of revenues was 33.5% in this year’s third quarter compared to 33.3% in the third quarter of 2001. For the first nine months of 2002, this category of expense was 33.3% of revenues, the same as a year ago. Total station and ground expense increased 9.7% and 1.2% in the third quarter and first nine months of 2002, respectively, compared to the same periods in 2001. While this category of expense has been aided by improved productivity, this has been partially offset by higher wage, benefit and workers’ compensation costs.

Flight operations and maintenance expense as a percentage of revenues was 16.0% in the third quarter of 2002 compared to 17.2% in the third quarter of 2001, and was 16.1% in the first nine months of 2002 compared to 17.8% for the same period a year ago. This category of expense increased 1.2% in the third quarter compared to the third quarter of 2001 and declined 8.4% for the first nine months of 2002 compared to a year ago. Total fuel costs declined 5.1% in the third quarter and 21.7% for the first nine months of 2002 compared to the same periods a year ago due to lower jet fuel prices and reduced fuel consumption. The average aviation fuel price per gallon was $.87 in the third quarter and $.80 for the first nine months of 2002 compared to $.91 in the third quarter of 2001 and $.95 for the first nine months of 2001. While fuel prices decreased from comparable periods in 2001, prices increased in the third quarter of 2002 from the second and first quarters of 2002 when the prices per gallon were $.82 and $.71, respectively. To mitigate potential future exposure from extreme price increases in jet fuel, in September 2002 we entered into a call option contract on heating oil to hedge a significant portion of our projected jet fuel requirements for a six-month period beginning in October 2002.

Aviation fuel consumption decreased .5% in the third quarter to 37.6 million gallons and decreased 6.1% for the first nine months of 2002 in comparison to 2001. The decrease in consumption was primarily due to our efforts, beginning in the second quarter of 2001, to reduce costs by combining certain flight segments, in addition to our continued program to add more fuel-efficient 767 aircraft to our fleet. The consumption decrease in the third quarter of 2002 compared to the same period in 2001 was accomplished despite the reduced consumption in the third quarter of 2001 due to the closure of the national air system for two days as a result of the terrorist attacks. The placement of two additional 767 aircraft in service since the third quarter of 2001 has allowed less fuel efficient DC-8 aircraft to be moved to shorter lane segments or backup status or removed from service.

Aircraft maintenance costs were 5.9% of revenues in both the third quarter and first nine months of 2002 compared to 6.1% and 6.3% of revenues in the third quarter and first nine months of 2001. Maintenance costs in the third quarter of 2002 increased 5.6% over the third quarter of 2001 and 2.3% over the second quarter of 2002. Maintenance costs for the first nine months of 2002 decreased 4.7% compared to the same period in 2001. The level of quarterly maintenance costs is generally associated with scheduled repair activities and can fluctuate depending on the scheduling and level of required repairs as well as on unscheduled repair costs. In the third quarter of 2002, we incurred an unanticipated $1.0 million engine repair on a 767 aircraft. Also impacting flight operations expense are hull and war risk insurance costs, which have increased significantly since the events of September 11.

General and administrative expenses as a percentage of revenues were 7.6% in the third quarter and 7.9% in the first nine months of 2002 compared to 7.9% in the third quarter and 8.1% in the first nine months of 2001. General and administrative includes restructuring charges of $0.9 million in the third quarter of 2002, as discussed previously, and $3.2 million recorded for the first nine months of 2002. Restructuring charges recorded in the first nine months of 2001 were $2.9 million and related to company-wide labor reductions in the second quarter of 2001. General and administrative expenses in 2002 also included cost increases in the areas of wages, pension, health care, insurance, bad debt and litigation expenses and the cost of certain incentive plans that were suspended during 2001. However, overall cost reduction efforts and management’s continued emphasis on control over labor and discretionary costs have helped to mitigate some of these cost pressures and resulted in cost declines as a percentage of revenues.

Sales and marketing expense as a percentage of revenues was 2.7% in the third quarter and 2.8% for the first nine months of 2002 compared to 2.8% in the third quarter of 2001 and 2.9% for the first nine months of 2001. On a year-to-date basis costs have increased due to the addition of sales personnel and higher wage and incentive compensation, while marketing and packaging expenses have declined.

Depreciation and amortization expense totaled 5.9% of revenues in the third quarter of 2002 and 6.0% in the first nine months of 2002 compared to 6.7% and 6.5% in the same periods of 2001, respectively. This category of expense includes the DC-8 aircraft

impairment charge discussed previously of $3.1 million, recorded in the third quarter of 2002. Despite this additional charge, depreciation and amortization expense is lower in the third quarter and year-to-date periods in 2002 compared to the same periods in 2001 due to the timing of certain assets becoming fully depreciated and lower levels of capital expenditures in 2001 and the first nine months of 2002 in relation to expenditures in 2000 and prior. Through the first three quarters of 2002, we removed a total of four DC-8 aircraft from service, which completes our scheduled removals for the year.

Interest income increased in the third quarter and first nine months of 2002 compared to the same periods in 2001 due to higher levels of cash equivalent short-term investments.

Interest expense increased in the third quarter and first nine months of 2002 compared to the same periods a year ago due to higher levels of outstanding debt coupled with lower levels of capitalized interest. Interest expense increased due to additional debt incurred upon the financing of five 767 aircraft in August 2001 and the issuance of $150.0 million in Senior Convertible Notes in March 2002. Interest capitalized, primarily on the acquisition and modification of aircraft, during the third quarter and first nine months of 2002 was $0.6 million and $1.0 million compared to $0.5 million and $2.0 million recorded in the third quarter and first nine months of 2001.

Discounts on the sales of receivables associated with recording the obligation to fund the purchaser’s costs under our accounts receivable securitization facility were $0.7 and $2.9 million in the third quarter and first nine months of 2002 compared to $2.0 million and $8.0 million in the third quarter and first nine months of 2001. The decrease in cost is due to lower discounts on amounts sold as a result of the lower interest rate environment and the lower amount outstanding on the accounts receivable securitization facility. Because of the sales recognition treatment required for these securitization transactions, the cost is recorded separate from interest expense.

Included in other income for the first nine months of 2002 was a non-recurring gain of $1.8 million from the sale of a minority equity interest in one of our international agents. In the third quarter and first nine months of 2001 this category included $8.3 million of non-recurring gains recognized on the sale of certain radio frequencies and from the sale of certain securities.

Our effective tax benefit rate of 36.4% in the third quarter compares to a tax expense rate of 47.6% in the third quarter of 2001. The effective tax expense rate for the first nine months of 2002 was 49.5% compared to a tax benefit rate of 33.5% in the same period in 2001. The effective tax benefit or expense rate fluctuates depending on the level of losses or earnings in relationship to nondeductible expenses and the level of state income taxes.

We recorded compensation of $13.0 million in 2001 provided to us under the Air Transportation Safety and System Stabilization Act (“Act”). The Act ~~authorized by Congress shortly after the attacks, will provide~~provided eligible cargo carriers compensation ~~to eligible air carriers~~ for certain direct losses associated with the closure of the national air system for a two-day period following the ~~period beginning~~terrorist attacks of September 11,^th 2001 and ~~for~~ incremental losses ~~as a result of these attacks and ending on~~through December 31, 2001. The ~~Company anticipates being eligible for additional~~ compensation ~~in the 4~~^th ~~quarter.~~

~~Operating results~~amounts have been ~~negatively impacted~~recorded based on our interpretation of the Act and related rules. In April 2002, the Department of Transportation (“DOT”) issued final rules governing the process and content of final filings that support carriers’ compensation claims. We completed and filed our final filing along with required audit schedules and have had discussions with applicable government agencies regarding these filings. While we believe we have complied with the provisions of the Act, these agencies have raised exceptions concerning the treatment of certain compensation items. We are currently evaluating our options concerning these exceptions. The final amount of proceeds we will realize is subject to resolution of the exceptions and possible completion of further review and audit procedures by the DOT or other applicable government agencies. We cannot be assured of the ultimate outcome of these reviews, but it is possible that a ~~declining economy, which appears to be experiencing further slowing since the events of September 11~~^th. The Company has experienced shipment volume declines in its higher yielding domestic products and a shift in volume mix towards lighter weight lower yielding deferred products. These factors have hampered revenue growth. Despite the negative revenue growth, earnings from operations improved $6.6 million over the second quarter of 2001 and $4.4 million over the third quarter 2000. The improved results are due primarily to cost reduction ~~actions the Company has taken.~~

9

~~The following table sets forth selected shipment and revenue data for the periods indicated:~~

Three Months Ended
Nine Months Ended

September 30
September 30

2001
2000
Change
2001
2000
Change

Shipments (in thousands):
    Domestic
        Overnight 40,389 45,540 (11.3 %) 130,148 139,694 (6.8 %)
        Next Afternoon Service 12,327 13,430 (8.2 %) 38,963 41,044 (5.1 %)
        Second Day Service 21,983 19,466 12.9 % 70,524 58,398 20.8 %
        Ground Delivery Service 1,517 - N/A 1,848 - N/A
        100 Lbs. And Over 57 72 (20.8 %) 184 214 (14.0 %)

        Total Domestic 76,273 78,508 (2.8 %) 241,667 239,350 1.0 %

    International
        Express 1,375 1,506 (8.7 %) 4,524 4,584 (1.3 %)
        Freight 95 102 (6.8 %) 299 297 0.7 %

        Total International 1,470 1,608 (8.6 %) 4,823 4,881 (1.2 %)

    Total Shipments 77,743 80,116 (3.0 %) 246,490 244,231 0.9 %

Average Pounds per Shipment:
    Domestic 4.24 4.27 (0.7 %) 4.17 4.27 (2.3 %)
    International 60.55 55.69 8.7 % 55.03 51.01 7.9 %

Average Revenue per Pound:
    Domestic $ 2.04 $ 2.07 (1.4 %) $ 2.06 $ 2.07 (0.5 %)
    International $ 0.99 $ 1.09 (9.2 %) $ 1.02 $ 1.11 (8.1 %)

Average Revenue per Shipment
    Domestic $ 8.82 $ 8.91 (1.0 %) $ 8.74 $ 8.93 (2.1 %)
    International $ 61.41 $ 61.29 0.2 % $ 57.16 $ 57.47 (0.5 %)

~~Domestic revenues decreased 3.3% and .7% in the third quarter and first nine months of 2001, respectively, in comparison~~ to the ~~same periods in 2000. Average domestic revenue per shipment declined 1.0% to $8.82 in~~amount of compensation previously recognized could occur. We estimate the ~~third quarter and 2.1% to $8.74 for the first nine months~~range of 2001. The yield decreases are due to declines in higher yielding overnight express shipments coupled with slightly lower average shipment weights in all product categories. Domestic revenues have been aided by a fuel surcharge on revenue of 3% that was originally implemented in February 2000 and was raised to 4% beginning October 2000. In the third quarter and for the first nine months of 2001 fuel surcharge revenues were $22.4compensation ultimately realized will be between $11.0 million and $70.7 million, respectively. This compares to fuel surcharge revenues of$19.5 million and $51.9 million being recognized in the third quarter and first nine months of 2000. In January 2001 the Company announced a new pricing structure for its domestic services that included a rate increase, a shift to zone-based pricing and a non-scheduled pickup fee. These actions were targeted to improve yields and increase revenues. However, the lack of shipment growth and the shift by domestic customers to lower yielding, less time sensitive deferred services has diluted the impact.

$15.0 million.

~~Domestic shipments decreased 2.8% in the third quarter and increased 1.0% in the first nine months of 2001 compared to the same periods of 2000.~~ Outlook

The first nine months of 2001 had one less operating day than 2000. Higher yielding overnight shipments accounted for 53.0% of total domestic shipments in the third quarter compared to 58.0% in the third quarter of 2000. Overnight shipments declined 11.3% in the third quarter and 6.8% for the first nine months of 2001. Total shipments for the quarter and year to date periods include the Company’s ~~airborne@home~~ product, which was introduced in late 1999 to service the e-commerce and business to residential consumer markets. These shipments, included in the Second Day Service category for reporting purposes, totaled 4.7 million in the third quarter and 15.5 million in the first nine months of 2001 compared to 1.8 million and 3.5 million shipments in the comparable periods in 2000.

In April 2001 the Company expanded its service portfolio by introducing a new product, Ground Delivery Service (GDS). The new product leverages the Company’s sort and linehaul infrastructure and is being marketed to a target customer base. The Company believes GDS is an important initiative that is targeted to establish growth both from the deferred ground segment where it has not previously participated, and from the ability to leverage GDS with the cross marketing of higher yielding air express shipments. GDS totaled 1.5 million shipments in the third quarter and 1.8 million for the first nine months of 2001. The Company is targeting GDS volumes of between 50,000 and 60,000 shipments per day in the fourth quarter of 2001.

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International revenues decreased 8.4% in the third quarter and 1.7% for the first nine months of 2001 compared to a year ago. Total international shipments decreased 8.6% in the third quarter of 2001 compared to 2000 and were 1.2% lower in the first nine months of 2001 compared to 2000.International revenues and shipments in the third quarter were negatively impacted by the terrorist attacks which not only suspended domestic flights but closed U.S. borders and suspended flight schedules that disrupted international operations for approximately two weeks. The slow economic environment and a typhoon in the Far East also hampered shipment volumes. Despite these events the international segments contribution to earnings for the third quarter was a profit of $.5 million compared to a loss of $3.1 million in 2000. The segment loss was $1.8 million in the first nine months of 2001 compared to $6.0 million in the comparable period of 2000. This improved segment performance ~~was due primarily to improvement in margins on the international heavy weight freight product.~~

Operating expenses were 99.8% and 100.9% of revenues in the third quarter and first nine months of 2001, respectively, compared to 100.4% and 97.7% for the corresponding periods in 2000. Operating cost per shipment decreased 1.4% to $9.92 in the third quarter compared to $10.07 in the third quarter of 2000. Operating cost per shipment for the first nine months of 2001 increased 1.5% to $9.86 compared to the same period in 2000. Operating cost per shipment information and operating costs expressed as a percentage of revenues for the third quarter were negatively impacted by the loss of business due to the events of September 11^th. However, all categories of operating costs, except for sales and marketing category, decreased in the third quarter compared to the second quarter of 2001 as a result of the continued cost reduction initiatives.

The Company has been aggressively managing costs through a number of cost cutting measures to assist in improving operating results. The Company has reduced and combined flight segments, reduced labor hours, and cut discretionary expenses to achieve cost efficiencies. Specifically, labor hours have been reduced which resulted in a 3.9% improvement in productivity, as measured by shipments handled per paid employee hour, during the third quarter, over levels incurred during the same period of 2000. Hours paid during the third quarter of 2001 were approximately 3.3% and 5.8% less than those paid during the second and first quarters of 2001, respectively. Productivity for the first nine months of 2001 showed an improvement of 3.2% compared to the first nine months of 2000.The Company continues to manage productivity at levels sufficient to maintain a high level of overall customer service.

Transportation purchased as a percentage of revenues was 32.9% in the third quarter of 2001 compared to 32.7% a year ago. This category of expense was 32.7% of revenues for the first nine months of 2001 compared to 31.5% in 2000. The increase in costs as a percentage of revenues was primarily due to increased farmed out pickup and delivery, surface linehaul costs and delivery costs paid to the U.S. Postal Service for delivery of shipments. These increases were partially offset by lower international commercial airline and offshore agent related costs, in part due to lower shipment volumes.

Station and ground expense was 33.1% of revenues in the third quarter compared to 32.8% a year ago. Station and ground expense was 33.1% of revenues in the first nine months of 2001 versus 32.0% for the same period in 2000. Total costs in this category decreased $6.8 million from the level incurred in the second quarter of 2001 and $22.2 million from the first quarter of 2001. Reductions in labor hours incurred for pickup and delivery, sort and other field operations were the primary factors for the decline in expense in comparison to the second and first quarter of 2001 levels.

Flight operations and maintenance expense as a percentage of revenues during the third quarter of 2001 decreased to 17.2% as compared to 17.9% in the same period of 2000 and 17.7% in the 2nd quarter of 2001. For the first nine months of 2001 flight operations costs were 18.1% of revenues compared to 17.4% in the comparable period of 2000. The average aviation fuel price for the third quarter and first nine months of 2001 was $.91 and $.95 per gallon, respectively, compared to $1.03 and $.96 per gallon, respectively for the comparable periods in 2000. Aviation fuel consumption in the third quarter decreased 15.2% to 37.8 million gallons compared to 44.6 million gallons in the third quarter of 2000. Consumption in the second and first quarters of 2001 was 40.5 million and 43.6 million gallons, respectively.For the first nine months of 2001, aviation fuel consumption of 122.0 million

11

gallons was 10.2% less than consumption for the comparable period in 2000. The decrease in consumption both sequentially and year over year is due, in part, to management efforts to reduce and combine certain flight segments to control costs beginning in the second quarter of 2001. Additionally, fuel consumption was lower due to the two day grounding of aircraft in September. Also, the Company has placed five additional 767 aircraft in service since the third quarter of 2000 thereby allowing less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or to be removed from service. Maintenance costs decreased during the third quarter compared to a year ago but increased during the first nine months of 2001 as a result of having additional 767 aircraft in service compared to the same periods of last year. The Company had 118 aircraft in service (19 Boeing 767s, 25 DC-8’s and 74 DC-9’s) at the end of the third quarter compared to 117 aircraft at the end of the third quarter of 2000.

General and administrative expense was 8.1% and 8.3% of revenues for the third quarter and first nine months of 2001, respectively. This compares to 8.0% and 7.9% of revenues for the third quarter and first nine months of 2000, respectively. Inclusive in this cost category of expense is a one-time charge of $2.9 million, recorded in the second quarter of 2001, for severance and restructuring costs associated with the announced reduction in force effective June 1st. The Company has aggressively reduced costs in this category of expense in 2001 and continues to employ strong cost controls over labor and discretionary costs.

Sales and marketing costs were 2.8% of revenues in the third quarter and 2.5% in the first nine months of 2001 compared to 2.5% in the comparable periods of 2000. Increased sales personnel and compensation costs as well as expanded marketing efforts to attract new business have resulted in higher levels of expenditures in this category.

Depreciation and amortization expense constituted 6.7% of revenues in the third quarter and 6.5% in the first nine months of 2001. This compares to 6.6% of revenues for the third quarter and 6.3% in the first nine months of 2000. Depreciation expense in the third quarter of 2001 decreased slightly from the amounts recorded a year ago due to lower levels of capital expenditures in 2001 coupled with certain aircraft becoming fully depreciated. These declines offset the depreciation effects of placing additional 767 aircraft in service since the end of the third quarter of last year.

Interest expense in the third quarter and first nine months of 2001 was lower than in 2000 due, in part, to lower average borrowings outstanding. Additionally, interest capitalized was $2.0 million in the first nine months of 2001 compared to $5.0 million in the like period of 2000. The lower level of average borrowings was a result of the off balance sheet refinancing of $200 million of long-term debt under an accounts receivable securitization facility that was implemented in December 2000. Debt levels were increased in August 2001 when the Company completed two sale-leaseback transactions for five 767 aircraft, accounted for as capitalized leases, which provided proceeds of $102.8 million.

Discounts associated with recording the obligation to fund the purchaser’s costs under the Company’s accounts receivable securitization facility were $2.0 million in the third quarter of 2001 and $8.0 million for the year to date period. The Company considers this expense to be an interest type of financing cost. Because of the sales recognition treatment associated with this type of financing, the cost is recorded separate from interest expense.

Included in other income were non-recurring gains associated from the sales of FCC licensed radio frequencies totaling $6.2 million in the third quarter of 2001 and $8.3 million for the first nine months of 2001. The Company is in the process of converting from voice to digital communication technology to support its pickup and delivery operations. The Company anticipates recording an additional $1.0 million in gains in the fourth quarter of 2001 that will substantially complete the sale of these frequencies for the foreseeable future. Additionally, a non-recurring gain of $2.1 million was recorded and included in other income during the third quarter of 2001 from the sale of shares of Equant N.V.These shares were acquired through the Company’s participation in SITA, a cooperative of major airline companies, which primarily provides data communication services to the air transport industry. The Company had no cost basis in these shares. In the second quarter of 2000, a $1.9 million non-recurring gain was recorded on the sale of securities received in connection with the demutualization of Metropolitan Life. The Company, as policyholder, received stock securities of Metropolitan Life when the insurance company demutualized.

12

The Company’s effective tax benefit rate of 33.5% for the first nine months of 2001 compared to an effective tax expense rate of 38.1% recorded in the first nine months of 2000. The effective tax expense rate was 47.6% for the third quarter of 2001 compared to a tax benefit rate of 39.9% in the third quarter of 2000. The lower tax benefit rate recorded for the first nine months of 2001 as compared to the tax expense rate incurred in 2000 is a function of the provision impact of non-deductible expenses and state taxes. The effective tax rate for 2001 is difficult to determine due to the provision impact and levels of nondeductible expenses and state taxes in relation to earnings.

~~The strength~~ of the U.S. and global economies will have an impact on ~~the~~our operating results ~~of operations~~ for the ~~balance~~remainder of ~~2001 and into~~ 2002 and beyond. The ~~current lack~~economy does not appear to be showing signs of ~~visibility regarding economic~~sustained growth. Accordingly, air express shipment volumes could be flat or lower in the fourth quarter of 2002 compared to volumes recorded in the comparable period of 2001.

Our fuel prices have increased since the end of the third quarter of 2002 and may remain high until the conflict in the Middle East has been resolved. On October 7, 2002, we increased our fuel surcharge to 3.5% of revenue on core domestic air segment shipments and 1.2% on GDS and airborne@home services, from previous levels of 2.9% and 1.0%, respectively, which had been in effect since January 2002. Additionally, effective November 4, 2002 we will increase the fuel surcharge to 4.3% and 1.3%, respectively. While these efforts will help mitigate the increase in fuel costs, it may be difficult to completely offset rising fuel costs if

prices spike further. As mentioned previously, in order to further mitigate the potential exposure to extreme price increases in jet fuel, we entered into a call option contract on heating oil to hedge a significant portion of our projected fuel requirements for a six-month period beginning in October 2002.

We expect that our GDS product will continue to show growth ~~has caused~~in the ~~Company~~fourth quarter, although at sequential quarterly growth rates less than the growth rate experienced during the first three quarters of 2002. We are currently focusing on balancing GDS volume growth with yield improvement. Accordingly, we currently estimate GDS volumes to be between 210,000 and 220,000 shipments per day in the fourth quarter of 2002. We expect ~~continued pressure on shipment~~our airborne@home product to achieve volumes of between 110,000 and ~~revenue~~120,000 shipments per day in the fourth quarter of 2002 with seasonal peaks well above these estimates in the latter part of the quarter. Continued growth ~~particularly~~ in ~~its higher yielding overnight express product. While the Company is continuing~~these products will result in incremental expenses primarily related to truck linehaul and delivery costs.

We continue to aggressively manage costs ~~it will be difficult~~by focusing on productivity improvements and controlling discretionary expenses. However, wage and benefit pressures and additional hours to ~~make reductions~~service expected growth would offset some of the ~~magnitude made over~~favorable cost savings produced by the ~~past two quarters. The Company has taken actions to substantially reduce its cost structure, so that it is positioned to benefit from an economic rebound and resulting volume growth when that occurs.~~

productivity gains.

Financial Condition, Liquidity and Capital ~~Resources:~~Resources

~~Cash~~

Operating cash flows in the first nine months of 2002, coupled with proceeds from a $150.0 million private placement offering of convertible senior notes in March 2002, increased cash and cash equivalent balances to $333.0 million as of September 30, 2002 compared to $201.5 million as of December 31, 2001. As of September 30, 2002, $35.4 million of cash equivalents were restricted from use and held in an insurance trust to support a portion of outstanding self-insured casualty liabilities, including workers compensation, automobile and general liability coverage’s.

Net cash provided by ~~operations net of the change in working capital~~operating activities for the first nine months of ~~2001~~2002 was ~~$149.2 million (exclusive of $50 million in proceeds from the receivable securitization facility). This compares to $213.9 million recorded in the first nine months of 2000.~~

~~Capital expenditures continue to be a primary factor affecting the financial condition of the Company. During the nine months of 2001, total capital expenditures net of dispositions were $98.3~~$158.5 million compared to ~~$298.4~~$138.8 million during the corresponding period of 2000. Capital spending has been reduced significantly in 2001 compared to 2000 due to management efforts to maintain spending at levels that better match the lower level of operating performance and shipment volume growth. The Company currently anticipates 2001 capital expenditures to be approximately $130 million, down from the previous target of $170 million.

~~The Company’s operating cash flow is a major source of liquidity. Additional liquidity of $50 million was provided~~ in the first nine months of 2001, ~~through~~exclusive of repurchases and sales from or to our receivables securitization facility. The improvement in operating cash flow is primarily due to improved operating performance. Cash provided by operating activities for the first nine months of 2002 compared to the same period in 2001 was negatively impacted by higher funding of our pension plans but improved by increases in cash flow resulting from changes in working capital and other operating obligations. In the third quarter of 2002, we completed the scheduled funding of $48 million of previously accrued pension obligations.

Capital expenditures and financing associated with those expenditures are significant factors that affect our financial condition. During the first nine months of 2002 we spent $71.2 million on capital investments compared to $98.3 million in the first nine months of 2001. We anticipate 2002 capital spending of $120 million, reduced from previous estimates of between $150 and $160 million. This level of spending is comparable to $126 million of capital expenditures recorded in 2001. We took delivery of two 767 aircraft in the first nine months of 2002 and anticipate taking delivery of one additional aircraft this year. Growth in our ground product has not required significant capital expenditures over the past few quarters since it is designed to leverage our existing sort, linehaul and pickup and delivery infrastructure. If ground volumes increase during the balance of 2002 and into 2003 as anticipated, we may need to make incremental capital expenditures to accommodate increased volumes.

In addition to our existing cash and cash equivalent reserves, we had $92 million in available borrowing capacity under our bank credit agreement as of September 30, 2002. No borrowings were outstanding under this agreement. This facility is collateralized by a substantial majority of our assets and contains certain restrictive covenants. We were in compliance with all restrictive covenants as of September 30, 2002. We also had eligible receivables to support an additional $150 million of sales proceeds under our accounts receivable securitization facility implemented in December 2000. In July 2001, this facility was amended to provide for a maximum of $250 million in proceeds from the sale of eligible receivables in addition to extending the term of the liquidity facility for a three-year period as opposed to the 364-day term of the previous agreement. As of the end of September 2001, a total of $200 million of receivables had been sold under this facility with eligible receivables supporting total advances of $216 million.

The Company also completed a renegotiation of its $275 million revolving credit agreement in June 2001. The renegotiated facility, which expires in June 2004, is collateralized by certain assets, reduces borrowing capacity by the amount of outstanding letters of credit and established new restrictive covenants. At September 30, 2001, the Company had pledged collateral to support approximately $141 million of the $275 million commitment and has the ability to pledge additional collateral.facility. As of September 30, ~~2001, no borrowings were~~2002, we had $100 million of outstanding ~~letter~~receivables securitized under this facility in comparison to $200 million securitized as of ~~credit commitments were $98~~December 31, 2001.

In March 2002, we completed a private placement offering of $150 million of 5.75% convertible senior notes. The notes are for a five-year term maturing in April 2007. Proceeds from the placement are intended to be used, in part, to pay off $100 million of senior notes that mature in December 2002.

In our opinion, existing cash and cash equivalents coupled with anticipated cash flow from operations and available capacity ~~was $43 million. The Company was in compliance with restrictive covenants under the agreement.~~

In July 2001, the Company arranged a TRAC (Terminal Rental Adjustment Clause) Lease facility for prospective vehicle acquisitions of up to $20 million in 2001. Historically, the Company has purchased its vehicles. With the TRAC Lease, Airborne has the option to purchase the delivery vehicles at the end of the lease term. As of September 30, 2001 the Company had placed $3.4 million of vehicle acquisitions under this arrangement.

In August 2001, the Company completed two sale-leaseback transactions on five Boeing 767-200 aircraft and received proceeds of $102.8 million. The transactions were accounted for as capitalized leases for financial reporting purposes. The Company used these proceeds to increase cash reserves and invested amounts in short-term commercial paper and money market instruments.

The Company’s ratio of long-term debt to total capitalization (exclusive of the receivable securitization) was 24.7% at September 30, 2001 compared to 24.6% at December 31, 2000 and 30.1% at September 30, 2000.

13

~~In management’s opinion, existing cash reserves, internally generated cashflows from operations coupled with resources available~~ under the accounts receivable securitization facility and ~~the revolving~~bank credit agreement should provide adequate flexibility ~~to finance~~for financing capital expenditures and ~~meet other liquidity requirements~~funding debt maturities scheduled for the balance of ~~2001~~2002 and into ~~2002.~~

~~FORWARD LOOKING STATEMENTS:~~

~~Statements contained herein~~2003.

While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for 2002 and into 2003, certain circumstances could arise that would materially affect liquidity. Cash flows from operations could be affected by any further deterioration in ~~other parts of this report, which are not historical facts, are considered forward-looking statements (as such term is defined~~core domestic air segment shipment volumes caused by a continued slow economy, further terrorist attacks, war in the ~~Private Securities Litigation Reform Act~~Middle East, or management’s inability to successfully implement sales growth initiatives in a cost effective manner or to realize anticipated cost reductions from realignment and cost savings programs. Operating results and cash flows could also be negatively

impacted by prolonged labor disputes or increases in our cost structure, such as from a significant rise in fuel prices. Weakening operating performance also could result in our inability to remain in compliance with financial covenants contained in our bank credit and accounts receivable securitization agreements, thereby reducing liquidity sources and potentially requiring the use of ~~1995). Such~~cash collateral to support outstanding letters of credit. Lower revenues could also cause amounts currently drawn under the securitization facility to be reduced.

Critical Accounting Policies and Estimates

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as disclosures included elsewhere in the Form 10-Q, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an on-going basis, we evaluate the estimates used, including those related to bad debts, self-insurance reserves, accruals for labor contract settlements, valuation of spare-parts inventory, impairments of property and equipment, income taxes and contingencies and litigation. We base our estimates on historical experience, current conditions and available information and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements.

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

We continually evaluate the fair value of our property and equipment. When an asset is considered impaired, the asset is written down to its fair value. Changes in the estimated useful lives of certain assets may result from excess capacity or changes in regulations grounding the use of our aircraft.

We value spare parts inventory at the lower of cost or market and write down the value of inventory for estimated obsolescence. An inventory reserve is maintained based upon estimates of spare part utilization by aircraft type. Should actual parts usage be affected by conditions that are less favorable than those projected by management, revisions to the estimated inventory reserve would be required.

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

We self-insure certain claims relating to ~~future events involve risks~~workers compensation, automobile, general liability, healthcare and ~~uncertainties, which~~loss and damage on customer shipments. We record a liability and expense for reported claims and also an estimate for incurred claims but not yet reported. Accruals for these claims are ~~inherently difficult to predict, including statements regarding future shipment growth~~estimated utilizing historical paid claims data, recent claims trends and ~~product acceptance, compensation expected under~~independent actuarial reports, as applicable. Changes in claim severity and frequency or other claim trends could result in actual claims being materially different from the ~~Air Transportation Safety and System Stabilization Act, capacity requirements, capital expenditure levels~~amounts provided for in our results of operations.

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

New Accounting Pronouncements

May 15, 2002. The provisions of the statement pertaining to lease modifications are effective for transactions consummated after May 15, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force Issue 94-3, required an exit cost liability to be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. Implementation of this statement is not anticipated to have a significant impact on our financial position or results of operations.

Risk Factors

The following risk factor should be considered when reading the disclosures in this Form 10-Q in addition to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2001.

A significant increase in the cost, or the unavailability, of adequate commercial terrorism insurance, including war risk liability insurance, could negatively affect our results of operations.

As a result of the terrorist attacks on September 11, 2001, insurers have significantly increased the cost of insurance coverage. At the same time, they have significantly reduced the maximum amount of terrorism insurance. The U.S. government has been providing supplemental war risk liability insurance coverage to air carriers, which is currently scheduled to expire on December 15, 2002. In the event commercial insurance carriers further reduce the amount of war risk liability insurance coverage available ~~financing capacity. Actual~~to us or significantly increase the cost of insurance, or if the U.S. government fails to renew the war risk liability insurance that it provides, our financial position and results ~~however,~~of operations could be materially adversely affected.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Other than the following, there have been no material changes in market risks from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Jet Fuel Risk

We are dependent on jet fuel to operate our fleet of aircraft, and our earnings are impacted by changes in jet fuel prices. For the third quarter of 2002 we consumed 37.6 million gallons of jet fuel at an average price of $.87 per gallon.

We have historically implemented temporary fuel surcharges to mitigate the earnings impact of unusually high fuel prices. However, in the case of an extreme increase in price, which could result in the event of a Middle East war, market factors may vary because of competitor pricing initiatives, customer demand for time-definite and deferred services,the ability of management to successfully implement growth and profitability initiatives, economic and regulatory conditions, thelimit our ability to ~~secure adequate financing,~~increase our existing fuel ~~volatility~~surcharges to levels which would fully offset the effect that higher fuel costs would have on net earnings.

To mitigate the effect of extreme increases in the price of fuel, in September 2002, we entered into a call option contract to hedge a significant portion of our jet fuel requirements for a six-month period beginning in October 2002. The contract provides coverage if the price of fuel increases approximately 40% above the level incurred in the third quarter of 2002.

Item 4. Controls and ~~labor disputes.~~Procedures

Based on their evaluation of the Company’s disclosure controls and procedures as of a date within 90 days of the filing of this report, the Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 5.
Other Information.

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

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

(a) Exhibits –

EXHIBIT NO. ~~10 Material Contracts~~

~~10(a)~~	~~Employment Agreement dated April 24, 2001 between the Company and Mr. Robert T. Christensen. Substantially identical agreements exist between the Company and most~~12	Statements Regarding Computation of ~~its officers.~~Ratios


~~10(b)~~12(a)	Employment Agreement dated April 24, 2001 between the Company and Mr. Lanny H. Michael, Senior Vice President, Chief Financial Officer. Substantially identical agreements exist between the Company and eight otherRatio of ~~its executive officers.~~Earnings to Fixed Charges

14
EXHIBIT NO. 99
99(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K –

On August 14, 2002, the Company filed a Form 8-K furnishing as exhibits thereto copies of the sworn statements of the Company’s principal executive officer and principal financial officer submitted to the Securities and Exchange Commission pursuant to its order No. 4-460.

SIGNATURES

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

		~~AIRBORNE, INC.~~
		~~(Registrant)~~

			AIRBORNE, INC.
				Registrant

Date:	~~11/14/01~~	~~/s/ Lanny H. Michael~~
		~~Lanny H. Michael~~
		~~Senior Vice President &~~ ~~Chief Financial Officer~~
	11/13/02

~~Date:~~	~~11/14/01~~	/s/ ~~Robert T. Christensen~~CARL D. DONAWAY
		~~Robert T. Christensen~~ ~~Chief Accounting Officer~~

15

Carl D. Donaway
Chairman and Chief Executive Officer
Date: 11/13/02
/s/ LANNY H. MICHAEL
Lanny H. Michael
Executive Vice President and
Chief Financial Officer
Date: 11/13/02
/s/ ROBERT T. CHRISTENSEN
Robert T. Christensen
Chief Accounting Officer

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Carl D. Donaway, certify that:

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

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

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

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

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

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

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

Date:November 13, 2002

/S/ CARL D. DONAWAY

Carl D. Donaway

Chief Executive Officer and President

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lanny H. Michael, certify that:

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

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

Date:November 13, 2002

/S/ LANNY H. MICHAEL

Lanny H. Michael

Chief Financial Officer and Executive Vice President

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2001			2000			2001			2000

REVENUES:
Domestic	$	682,522		$	705,977		$	2,132,856		$	2,147,530
International		90,266			98,552			275,678			280,490

		772,788			804,529			2,408,534			2,428,020

OPERATING EXPENSES:
Transportation purchased		254,080			262,718			787,204			765,345
Station and ground operations		255,688			263,768			796,070			776,387
Flight operations and maintenance		133,286			143,665			428,658			425,729
General and administrative		62,767			64,312			200,427			191,309
Sales and marketing		21,689			20,200			69,020			60,740
Depreciation and amortization		51,655			52,892			156,977			152,768
Federal legislation compensation		(7,800	)		—			(7,800	)		—

		771,365			807,555			2,430,556			2,372,278

EARNINGS(LOSS)FROM OPERATIONS		1,423	)		(3,026	)		(22,022	)		55,742

OTHER INCOME (EXPENSE):
Interest, net		(4,924	)		(6,544	)		(13,875	)		(16,635	)
Discount onsales of receivables		(2,006	)		—			(7,993	)		—
Other		8,778			406			11,355			3,111

EARNINGS(LOSS)BEFORE INCOME TAXES		3,271			(9,164	)		(32,535	)		42,218

INCOME TAX BENEFIT(EXPENSE)		1,558			(3,655	)		(10,892	)		16,070

NET EARNINGS(LOSS) BEFORE CHANGE IN ACCOUNTING		1,713		$	(5,509	)		(21,643	)		26,148


CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX		—			—			—			14,206


NET EARNINGS(LOSS)	$	1,713		$	(5,509	)	$	(21,643	)	$	40,354


NET EARNINGS (LOSS) PER SHARE:
BASIC
Before change in accounting	$	0.04		$	(0.11	)	$	(0.45	)	$	0.54
Cumulative effect of change in accounting		—			—			—		$	0.29

Net Earnings(Loss)	$	0.04		$	(0.11	)	$	(0.45	)	$	0.83


DILUTED
Before change in accounting	$	0.04		$	(0.11	)	$	(0.45	)	$	0.54
Cumulative effect of change in accounting		—			—			—			0.29

Net Earnings(Loss)	$	0.04		$	(0.11	)	$	(0.45	)	$	0.83


DIVIDENDS PER SHARE	$	0.04		$	0.04		$	0.12		$	0.12

	September 30			December 31
	2001			2000
		(Unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	139,107		$	40,390
Trade accounts receivable,
less allowance of $11,528 and $10,290		123,768			218,685
Spare parts and fuel inventory		41,487			43,231
Refundable income taxes		23,943			21,595
Deferred income tax assets		28,454			28,839
Prepaid expenses and other		41,956			20,809

TOTAL CURRENT ASSETS		398,715			373,549

PROPERTY AND EQUIPMENT, NET		1,269,380			1,324,345

EQUIPMENT DEPOSITS and OTHER ASSETS		42,904			48,025

TOTAL ASSETS	$	1,710,999		$	1,745,919


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	128,207		$	180,623
Salaries, wages and related taxes		77,647			71,179
Accrued expenses		135,930			83,518
Current portion of debt		6,963			477

TOTAL CURRENT LIABILITIES		348,747			335,797

LONG-TERM DEBT		318,506			322,230

DEFERRED INCOME TAX LIABILITIES		137,070			125,444

POSTRETIREMENT LIABILITIES		35,098			62,360

OTHER LIABILITIES		36,566			37,233

SHAREHOLDERS’ EQUITY:
Preferred Stock, without par value -
Authorized 5,200,000 shares, no shares issued
Common stock, par value $1 per share -
Authorized 120,000,000 shares
Issued 51,363,241 and 51,279,651 shares		51,344			51,280
Additional paid-in capital		304,603			303,885
Retained earnings		540,284			567,700
Accumulated other comprehensive income		(1,351	)		(136	)

		894,880			922,729
Treasury stock, 3,240,526 and 3,244,526
shares, at cost		(59,868	)		(59,874	)

		835,012			862,855

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,710,999		$	1,745,919

			September 30		December 31
			2001		2000
		(In thousands)
Senior debt:
	Senior notes	$	200,000	$	200,000
	Aircraft Leases		102,837		—
	Revenue bonds		13,200		13,200
	Revolving bank credit		—		75,000
	Notes payable		—		28,000
	Other debt		9,432		6,507

			325,469		322,707
Less current portion			6,963		477

		$	318,506	$	322,230

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2001	2000	2001		2000

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	48,103,545	48,034,899		48,081,524	48,516,263
Diluted	48,128,062	48,185,156		48,104,026	48,850,931

	Three Months Ended									Nine Months Ended
	September 30, 2001									September 30, 2001
	Before Tax			Income Tax (Expense) or Benefit			Net of Tax			Before Tax			Income Tax (Expense) or Benefit		Net of Tax
Unrealized securities losses arising during the period	$	(1,724	)	$	664	$	(1,060	)	$	(1,557	)	$	599	$	(958	)
Less: Reclassification adjustment for gains realized in net income		—			—		—			(32	)		12		(20	)


Net unrealized securities losses		(1,724	)		664		(1,060	)		(1,589	)		611		(978	)
Foreign currency translation adjustments		(41	)		16		(25	)		(351	)		114		(237	)

Other comprehensive income (loss)	$	(1,765	)	$	680	$	(1,085	)	$	(1,940	)	$	725	$	(1,215	)

	Three Months Ended										Nine Months Ended
	September 30, 2000										September 30, 2000
	Before Tax			Income Tax (Expense) or Benefit				Net of Tax			Before Tax			Income Tax (Expense) or Benefit			Net of Tax
Unrealized securities losses arising during the period	$	593		$	(228	)	$	365		$	1,043		$	(401	)	$	642
Less: Reclassification adjustment for gains realized in net income		(67	)		26			(41	)		(588	)		227			(361	)


Net unrealized securities losses		526			(202	)		324			455			(174	)		281
Foreign currency translation adjustments		(16	)		6			(10	)		(227	)		87			(140	)

Other comprehensive income (loss)	$	510		$	(196	)	$	314		$	228		$	(87	)	$	141