In June 2004, GFC completed a debt exchange transaction for portions of three series of Notes due in 2006 (“Old Notes”) for a new series of 6.273% Notes due in 2011 (“New Notes”). The Old Notes, which represented an aggregate $638.0 million of indebtedness, are comprised of the 6 3/4% Notes due March 1, 2006, the 7 3/4% Notes due December 1, 2006, and the 6 7/8% Notes due December 15, 2006. A total of $165.3 million of Old Notes were tendered in the transaction. As part of the exchange, a premium to par value of $13.5 million was paid to noteholders that participated in the transaction. The premium included an amount reflective of the current market value of the notes above par at the date of exchange plus an inducement fee for entering into the exchange.

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      The carrying value of long-term debt is adjusted for fair value hedges. As of December 31, 2003, long-term debt of $2,934.1 million excludes a fair value adjustment of $42.8 million. The adjustment for qualifying fair value hedges is excluded from the above table as such amount does not represent a contractual commitment with a fixed amount or maturity date. Other represents GFC’s obligation under the terms of the DEC acquisition agreement to cause DEC to make qualified investments of $36.2 million by December 31, 2005. To the extent there are not satisfactory investment opportunities during 2005, DEC may invest in long term securities for purposes of future investment.

      Subsequent to December 31, 2003, GFC completed a $165.3 million debt exchange transaction for portions of three series of notes due in 2006 for a new series of notes due in 2011.

      At December 31, 2003, GFC’s unconditional purchase obligations of $667.1 million consisted primarily of commitments to purchase railcars and scheduled aircraft acquisitions. GFC had commitments of $401.1 related to the committed railcar purchase program, entered into in 2002. GFC also had commitments of $169.8 million for orders and options for interests in five new aircraft to be delivered in 2004 and 2006. Additional unconditional purchase obligations include $73.1 million of other rail related commitments.

      At December 31, 2003, GFC’s unconditional purchase obligations by segment were (in millions):

      In connection with certain investments or transactions, GFC has entered into various commercial commitments, such as guarantees and standby letters of credit, which could potentially require performance in the event of demands by third parties. Similar to GFC’s balance sheet investments, these guarantees expose GFC to credit and market risk; accordingly GFC evaluates commitment and other contingent obligations using the same techniques used to evaluate funded transactions.

      Lease and loan payment guarantees generally involve guaranteeing repayment of the financing utilized to acquire assets being leased by an affiliate to customers, and are in lieu of making direct equity investments in the affiliate. GFC is not aware of any event of default which would require it to satisfy these guarantees, and expects the affiliates to generate sufficient cash flow to satisfy their lease and loan obligations. GFC also provides a guarantee related to $300.0 million of convertible debt issued by GATX Corporation.

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      Asset residual value guarantees represent GFC’s commitment to third-parties that an asset or group of assets will be worth a specified amount at the end of a lease term. Approximately 66% of the asset residual value guarantees are related to rail equipment. Based on known and expected market conditions, management does not believe that the asset residual value guarantees will result in any negative financial impact to GFC. GFC believes these asset residual value guarantees will likely generate future income in the form of fees and residual sharing proceeds.

      GFC and its subsidiaries are also parties to letters of credit and bonds. No material claims have been made against these obligations. At December 31, 2003, GFC did not expect any material losses to result from these off balance sheet instruments because performance is not anticipated to be required.

      GFC’s commercial commitments at December 31, 2003 were (in millions):

      GFC contributes to pension plans sponsored by GATX that cover substantially all employees. Contributions to the GATX plans are allocated to GFC on the basis of payroll costs. GFC’s allocated share of contributions to these plans was $2.1 million and $26.6 million in the years ended December 31, 2003 and 2002, respectively. GFC expects to contribute approximately $2.0 million to the GATX sponsored pension plans and $8.0 million to its other post-retirement benefit plans in 2004. Through June 30, 2004, GFC has been allocated contributions of $.8 million to the GATX sponsored pension plans in addition to contributions of $3.4 million to its other post-retirement benefits plans. Allocated contributions to the GATX sponsored pension plans and contributions to its other post-retirement plans will be dependent on a number of factors including plans asset investment returns, actuarial experience and methodology used to determine allocations.

Critical Accounting Policies and Estimates

      The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to use judgment in making estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses and related disclosures. The Company regularly evaluates its estimates and judgments based on historical experience and other relevant factors and circumstances. Actual results may differ from these estimates under different assumptions or conditions.

      The Company considers the following as critical accounting policies:

      Operating lease assets and facilities  — Operating lease assets and facilities are stated principally at cost. Assets acquired under capital leases are included in operating lease assets and the related obligations are recorded as liabilities. Provisions for depreciation include the amortization of the cost of capital leases. Operating lease assets and facilities are depreciated using the straight-line method to an estimated residual value. Railcars, locomotives, aircraft, marine vessels, buildings and leasehold improvements are depreciated over the estimated useful lives of the assets. The Company periodically reviews the appropriateness of depreciable lives and residual values based on physical and economic factors, as well as existing market conditions.

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      Impairment of long-lived assets  — A review for impairment of long-lived assets, such as operating lease assets and facilities, is performed whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future net cash flows expected to be generated by the asset. Estimated future cash flows are based on a number of assumptions including lease rates, lease term, operating costs, life of the asset and disposition proceeds. If such assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs. In addition, the Company periodically reviews the residual values used in the accounting for finance leases. When conditions indicate the residual value has declined, the Company recognizes the accounting impact in that period.

      Allowance for possible losses  — The purpose of the allowance is to provide an estimate of credit losses with respect to reservable assets inherent in the investment portfolio. Reservable assets include gross receivables, loans and finance leases. GFC’s estimate of the amount of loss incurred in each period requires consideration of historical loss experience, judgments about the impact of present economic conditions, collateral values, and the state of the markets in which GFC participates, in addition to specific losses for known troubled accounts. GFC charges off amounts that management considers unrecoverable from obligors or the disposition of collateral. GFC assesses the recoverability of investments by considering several factors, including customer payment history and financial position. The allowance for possible losses is periodically reviewed for adequacy considering changes in economic conditions, collateral values, credit quality indicators and customer-specific circumstances. GFC believes that the allowance is adequate to cover losses inherent in the portfolio as of December 31, 2003. Because the allowance is based on judgments and estimates, it is possible that those judgments and estimates could change in the future, causing a corresponding change in the recorded allowance.

      Investments in affiliated companies  — Investments in affiliated companies represent investments in domestic and foreign companies and joint ventures that are in businesses similar to those of GFC, such as commercial aircraft leasing, rail equipment leasing, technology equipment leasing and other business activities, including ventures that provide asset residual value guarantees in both domestic and foreign markets. Investments in 20 to 50 percent-owned companies and joint ventures are accounted for under the equity method and are shown as investments in affiliated companies. Certain investments in joint ventures that exceed 50% ownership are not consolidated and are also accounted for using the equity method when GFC does not have effective or voting control of these legal entities and is not the primary beneficiary of the venture’s activities. The investments in affiliated companies are initially recorded at cost and are subsequently adjusted for GFC’s share of the affiliate’s undistributed earnings. Distributions, which reflect both dividends and the return of principal, reduce the carrying amount of the investment.

      Pension and Post-retirement Benefits Assumptions  — GFC’s pension and post-retirement benefit obligations and related costs are calculated using actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of plan expense and liability measurement. GFC evaluates these critical assumptions annually. Other assumptions involve demographic factors such as retirement, mortality, turnover and rate of compensation increases.

      The discount rate is used to calculate the present value of expected future pension and post-retirement cash flows as of the measurement date. The guideline for establishing this rate is a high-quality long-term bond rate. A lower discount rate increases the present value of benefit obligations and increases pension expense. The expected long-term rate of return on plan assets is based on current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. A lower expected rate of return on pension plan assets will increase pension expense.

      Income Taxes  — GFC evaluates the need for a deferred tax asset valuation allowance by assessing the likelihood of whether deferred tax assets, including net operating loss carryforward benefits, will be realized in the future. The assessment of whether a valuation allowance is required involves judgment including the forecast of future taxable income and the evaluation of tax planning initiatives, if applicable.

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      Taxes have not been provided on undistributed earnings of foreign subsidiaries as the Company has invested or will invest the undistributed earnings indefinitely. If in the future, these earnings are repatriated to the U.S., or if the Company expects such earnings will be remitted in the foreseeable future, provision for additional taxes would be required.

      GFC’s operations are subject to taxes in the U.S., various states and foreign countries and as result, may be subject to audit in all of these jurisdictions. Tax audits may involve complex issues and disagreements with taxing authorities could require several years to resolve. Accruals for tax contingencies require management to make estimates and assessments with the respect to the ultimate outcome of tax audit issues.

New Accounting Pronouncements

      See Note 2 to the annual consolidated financial statements and Note 3 to the quarterly consolidated financial statements for a summary of new accounting pronouncements that may impact GFC’s business.

Quantitative and Qualitative Disclosures About Market Risk

      In the normal course of business, GFC is exposed to interest rate and foreign currency exchange rate risks that could impact results of operations. To manage these risks, GFC, pursuant to established and authorized policies, enters into certain derivative transactions, principally interest rate swaps, Treasury note derivatives and currency swaps. These instruments and other derivatives are entered into for hedging purposes only to manage existing underlying exposures. GFC does not hold or issue derivative financial instruments for speculative purposes.

      GFC’s interest expense is affected by changes in interest rates as a result of its use of variable rate debt instruments. Based on GFC’s variable rate debt instruments at December 31, 2003 and giving affect to related derivatives, if market rates were to increase hypothetically by 10% of GFC’s weighted average floating rate, after-tax interest expense would increase by approximately $2.2 million in 2004. There was no material change to GFC’s interest rate and foreign currency exchange rate exposure as of June 30, 2004.

      GFC conducts operations in foreign countries, principally in Europe. As a result, changes in the value of the U.S. dollar as compared to foreign currencies would affect GFC’s reported earnings. Based on 2003 reported earnings from continuing operations, a uniform and hypothetical 10% strengthening in the U.S. dollar versus applicable foreign currencies would decrease after-tax income from continuing operations in 2004 by approximately $3.0 million.

      The interpretation and analysis of the results from the hypothetical changes to interest rates and currency exchange rates should not be considered in isolation; such changes would typically have corresponding offsetting effects. For example, offsetting effects are present to the extent that floating rate debt is associated with floating rate assets.

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