GATX FINANCIAL CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-8319

GATX FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-1661392
(State of incorporation) (I.R.S. Employer Identification No.)

500 WEST MONROE STREET
CHICAGO, IL 60661-3676
(Address of principal executive offices, including zip code)

(312) 621-6200
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The registrant had 1,041,250 shares of $1 par value common stock
outstanding (all owned by GATX Corporation) as of February 28, 2005.

The registrant meets the conditions set forth in General Instructions I (1)
(a) and (b) of Form 10-K and, therefore, is filing this form with the reduced
disclosure format.

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GATX FINANCIAL CORPORATION
2004 FORM 10-K

INDEX

1

PART I

ITEM 1. BUSINESS

GENERAL

GATX Financial Corporation (GFC or the Company) is a wholly-owned
subsidiary of GATX Corporation (GATX) and is headquartered in Chicago, Illinois
and provides services primarily through three operating segments: GATX Rail
(Rail), GATX Air (Air), and GATX Specialty Finance (Specialty). GFC specializes
in railcar, locomotive, commercial aircraft, marine vessel and other targeted
equipment leasing. In addition, GFC owns and operates a fleet of self-loading
vessels on the Great Lakes through its wholly owned subsidiary American
Steamship Company (ASC).

GFC also invests in companies and joint ventures that complement its
existing business activities. GFC partners with financial institutions and
operating companies to improve scale in certain markets, broaden diversification
within an asset class, and enter new markets.

At December 31, 2004, GFC had balance sheet assets of $5.8 billion,
comprised largely of railcars and commercial aircraft. In addition to the $5.8
billion of assets recorded on the balance sheet, GFC utilizes approximately $1.3
billion of assets, primarily railcars, which were financed with operating leases
and therefore are not recorded on the balance sheet.

On June 30, 2004, GFC completed the sale of substantially all the assets
and related nonrecourse debt of GATX Technology Services (Technology) and its
Canadian affiliate. Subsequently, the remaining assets consisting primarily of
interests in two joint ventures were sold prior to year end. Financial data for
the Technology segment has been segregated as discontinued operations for all
periods presented.

See discussion in Note 22 to the consolidated financial statements for
additional details regarding financial information about geographic areas.

BUSINESS SEGMENTS

See discussion in the RISK FACTORS section of Part I and MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS section
of Part II, Item 7 of this document for additional details regarding each
segment's business and operating results.

GATX RAIL

Rail is headquartered in Chicago, Illinois and is principally engaged in
leasing rail equipment, including tank cars, freight cars and locomotives. Rail
has total assets of $3.9 billion including $1.2 billion of off-balance sheet
assets. Rail's customers ("lessees") are comprised primarily of railroads and
chemical, petroleum, agricultural and food processing companies. Rail primarily
provides full service leases, under which it maintains the railcars, pays ad
valorem taxes, and provides other ancillary services. Rail also provides net
leases under which the lessee is responsible for maintenance, insurance and
taxes. As of December 31, 2004, GFC's owned worldwide fleet totaled
approximately 128,500 railcars. GFC also had an ownership interest in
approximately 26,700 railcars worldwide through investments in affiliated
companies. In addition, GFC manages approximately 12,700 railcars for third
party owners.

As of December 31, 2004, Rail's owned North American fleet consisted of
approximately 107,000 railcars, comprised of 61,000 tank cars and 46,000 freight
cars. The cars in this fleet have depreciable lives of 30 to 38 years and an
average age of approximately 16 years. In December 2004, Rail purchased the
remaining 50% interest in Locomotive Leasing Partners, LLC (LLP) which owned 486
locomotives as of the acquisition date. In aggregate, Rail owned 531 locomotives
at December 31, 2004. Rail also has interests in 5,900 railcars and 259
locomotives through its investments in affiliated companies in North America.

In North America, Rail typically leases new railcars for a term of
approximately five years. Renewals or extensions of existing leases are
generally for periods ranging from less than a year to ten years and the overall

2

average remaining lease term is four years. Rail purchases new railcars from a
number of manufacturers, including Trinity Industries, Inc., American Railcar
Industries and Union Tank Car Company. In November 2002, Rail entered into
agreements with Trinity Industries, Inc. and Union Tank Car Company for the
purchase of 5,000 and 2,500 newly manufactured cars, respectively, pursuant to
which it may order railcars at any time through 2007. To date, a total of 4,934
cars have been ordered under these committed purchase programs.

Rail's primary competitors in North America are Union Tank Car Company,
General Electric Railcar Services Corporation, and various other lessors. At the
end of 2004, there were approximately 275,000 tank cars and 1.4 million freight
cars owned and leased in North America. At December 31, 2004, Rail's owned fleet
comprised approximately 22% of the tank cars in North America and approximately
3% of the freight cars in North America. Principal competitive factors include
price, service, availability and customer relationships.

Rail operates a network of major service centers across North America
supplemented by a number of mini-service centers and a fleet of service trucks
(mobile service units). Additionally, Rail utilizes independent third-party
repair facilities.

In addition to its North American fleet, Rail owns or has an interest in
38,100 railcars in Europe. At December 31, 2004, Rail, through its wholly owned
subsidiaries in Austria, Germany and Poland, directly owned approximately 18,100
railcars. Rail also owns a 37.5% interest in AAE Cargo AG (AAE), a freight car
lessor headquartered in Switzerland that operates approximately 20,000 cars. In
Europe, approximately 12.5% of the wholly owned fleet has an average lease term
of less than one month, while the rest of the fleet has an average lease term
ranging from one to five years. Major competitors in Europe include VTG Group
and Ermeva.

Worldwide, Rail provides more than 130 railcar types used to ship over 650
different commodities, principally chemicals, petroleum, and food products.
During 2004, approximately 33% of Rail's leasing revenue was attributable to
shipments of chemical products, 28% related to shipments of petroleum products,
11% related to shipments of food products, 11% related to leasing cars to
railroads and 17% related to other revenue sources. Rail leases railcars to over
850 customers and in 2004, no single customer accounted for more than 3% of
total railcar leasing revenue.

GATX AIR

Air is headquartered in San Francisco, California and is primarily engaged
in leasing narrowbody aircraft that are widely used by commercial airlines
throughout the world. Air has total assets of $2.1 billion which includes $29.1
million of off-balance sheet assets. Air typically enters into net leases under
which the lessee is responsible for maintenance, insurance and taxes. Air owns
directly or with other investors 163 aircraft, 50 of which are wholly owned with
the balance owned in combination with other investors in varying ownership
percentages. For example, Air holds a 50% interest in Pembroke Group, an
aircraft lessor and manager based in Ireland, which currently owns 28 aircraft.
Air also holds a 50% interest in a partnership with Rolls-Royce Plc that
primarily leases aircraft engines to airlines. New aircraft have an estimated
useful life of approximately 25 years. The weighted average age of Air's fleet
is approximately five years based on net book value. Aircraft on lease at
December 31, 2004 have an average remaining lease term of approximately three
years and lease terms typically range from three to seven years.

Air's customer base is diverse by carrier and geographic location. Air
leases to 61 airlines in 33 countries and in 2004, no single customer accounted
for more than 8% of Air's total revenue or represented more than 9% of Air's
total net book value. At December 31, 2004, Air had a significant concentration
of commercial aircraft in Turkey with approximately $286.8 million or 14% of
Air's total assets, and Brazil with approximately $206.9 million or 10% of Air's
total assets. Air has purchased new aircraft and also acquires aircraft in the
secondary market. Air primarily competes with GE Commercial Aviation Services,
International Leasing Finance Corporation, and other leasing companies and
subsidiaries of commercial banks. Air carriers consider leasing alternatives
based on factors such as pricing and availability of aircraft types.

3

Air also manages 66 aircraft for third parties. Air's management role
includes marketing the aircraft, monitoring aircraft maintenance and condition,
and administering the portfolio, including billing and collecting rents,
accounting and tax compliance, reporting and regulatory filings, purchasing
insurance, and lessee credit evaluation.

GATX SPECIALTY FINANCE

Specialty is headquartered in San Francisco, California and is comprised of
the former specialty finance and venture finance business units, which are now
managed as one operating segment. Specialty has total assets of $489.9 million
including $12.5 million of off-balance sheet assets. The Specialty portfolio
consists primarily of leases and loans, frequently including interests in an
asset's residual value, and joint venture investments involving a variety of
underlying asset types, including marine.

Although Specialty had limited investment volume in 2004, it is pursuing
investments in marine assets as well as select industrial equipment
opportunities. Marine-related assets, including $10.0 million of off-balance
sheet assets, are $178.7 million at December 31, 2004, which is 37% of
Specialty's total assets.

Specialty also manages portfolios of assets for third parties with a net
book value of $728.8 million. The majority of these managed assets are in
markets in which GFC has a high level of expertise such as aircraft, power
generation, rail equipment, and marine equipment. Specialty generates fee-based
income through portfolio administration and remarketing services for third
parties.

Specialty sold its venture finance portfolios in the United Kingdom (U.K.)
and Canada in 2003, and continues to run-off the remaining venture finance
portfolio. GFC anticipates that the venture finance portfolio will be
substantially liquidated by the end of 2005. Venture finance-related assets are
$53.1 million at December 31, 2004 or 11% of Specialty's total assets.

The principal competitors of Specialty are captive leasing companies of
equipment manufacturers, leasing subsidiaries of commercial banks, independent
leasing companies, lease brokers and investment banks.

TRADEMARKS, PATENTS AND RESEARCH ACTIVITIES

Patents, trademarks, licenses, and research and development activities are
not material to GFC's businesses taken as a whole.

SEASONAL NATURE OF BUSINESS

Seasonality is not considered significant to the operations of GFC and its
subsidiaries taken as a whole.

CUSTOMER BASE

Neither GFC as a whole nor any of its business segments is dependent upon a
single customer or concentration among a few customers.

EMPLOYEES

As of December 31, 2004, GFC and subsidiaries had approximately 2,450
employees, of whom 47% were covered by union contracts, primarily hourly rail
service center employees.

ENVIRONMENTAL MATTERS

GFC's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulations. These laws cover
discharges to waters, air emissions, toxic substances, and the generation,
handling, storage, transportation and disposal of waste and hazardous materials.
This regulation has the effect of increasing the cost and liabilities associated
with leasing rail cars. Environmental risks are also inherent in rail
operations, which frequently involve transporting chemicals and other hazardous
materials.

4

Some of GFC's real estate holdings, as well as previously owned properties,
are or have been used for industrial or transportation-related purposes or
leased to commercial or industrial companies whose activities may have resulted
in discharge of contaminants. As a result, GFC is now subject to and will from
time to time continue to be subject to environmental cleanup and enforcement
actions. In particular, the federal Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), also known as the Superfund law,
generally imposes joint and several liability for cleanup and enforcement costs,
without regard to fault or the legality of the original conduct, on current and
former owners and operators of a site. Accordingly, GFC may be responsible under
CERCLA and other federal and state statutes for all or part of the costs to
cleanup sites at which certain substances may have been released by GFC, its
current lessees, former owners or lessees of properties, or other third parties.
Environmental remediation and other environmental costs are accrued when
considered probable and amounts can be reasonably estimated. As of December 31,
2004, environmental costs were not material to GFC's results of operations,
financial position or liquidity. For further discussion, see Note 16 to the
consolidated financial statements.

RISK FACTORS

GFC's businesses are subject to a number of risks which investors should
consider.

- Liquidity and Capital Resources. GFC is dependent, in part, upon the
issuance of unsecured and secured debt to fund its operations and
contractual commitments. A number of factors could cause GFC to incur
increased borrowing costs and to have greater difficulty accessing public
and private markets for both secured and unsecured debt. These factors
include the global capital market environment and outlook, financial
performance and outlook, and credit ratings as determined primarily by
rating agencies such as Standard & Poor's (S&P) and Moody's Investor
Service (Moody's). In addition, based on GFC's current credit ratings,
access to the commercial paper market and uncommitted money market lines
is uncertain and cannot be relied upon. It is possible that GFC's other
sources of funds, including available cash, bank facilities, cash flow
from operations and portfolio proceeds may not provide adequate liquidity
to fund its operations and contractual commitments.

- Terrorism/International Conflict. National and international political
developments, instability and uncertainties, including continuing
political unrest and threats of terrorist attacks, could result in global
economic weakness in general and in the United States in particular, and
could have an adverse impact on GFC's businesses. The effects may
include, among other things, legislation or regulatory action directed
toward improving the security of aircraft and railcars against acts of
terrorism which affects the construction or operation of aircraft and
railcars, a decrease in demand for air travel and rail services,
consolidation and/or additional bankruptcies in the rail and airline
industries, lower utilization of new and existing aircraft and rail
equipment, lower rail and aircraft rental rates and impairment of rail
and air portfolio assets or capital market disruption which may raise
GFC's financing costs or limit its access to capital. Depending upon the
severity, scope and duration of these effects, the impact on GFC's
financial position, results of operations and cash flows could be
material.

- Competition. GFC is subject to intense competition in its rail and
aircraft leasing businesses. In many cases, these competitors are larger
entities that have greater financial resources, higher credit ratings and
access to lower cost of capital than GFC. These factors may enable
competitors to offer leases and loans to customers at lower rates than
GFC is able to provide, thus impacting GFC's asset utilization or GFC's
ability to lease assets on a profitable basis.

- Lease versus Purchase Decision. GFC's core businesses rely upon its
customers continuing to lease rather than purchase assets. There are a
number of items that factor into the customer's decision to lease or
purchase assets, such as tax considerations, interest rates, balance
sheet considerations, and operational flexibility. GFC has no control
over these external considerations and changes in these factors could
negatively impact demand for its leasing products.

- Effects of Inflation. Inflation in railcar rental rates as well as
inflation in residual values for air, rail and other equipment has
historically benefited GFC's financial results. Effects of inflation are
unpredictable as to timing and duration, depending on market conditions
and economic factors.

5

- Asset Obsolescence. GFC's core assets may be subject to functional,
regulatory, or economic obsolescence. Although GFC believes it is adept
at managing obsolescence risk, there is no guarantee that changes in
various market fundamentals or the adoption of new regulatory
requirements will not cause unexpected asset obsolescence in the future.

- Allowance for Possible Losses. GFC's allowance for possible losses may
be inadequate if unexpected adverse changes in the economy exceed the
expectations of management, or if discrete events adversely affect
specific customers, industries or markets. If the allowance for possible
losses is insufficient to cover losses related to reservable assets,
including gross receivables, finance leases, and loans, then GFC's
financial position or results of operations could be negatively impacted.

- Impaired Assets. An asset impairment charge may result from the
occurrence of unexpected adverse changes that impact GFC's estimates of
expected cash flows generated from our long-lived assets. GFC regularly
reviews long-lived assets for impairments, including when events or
changes in circumstances indicate the carrying value of an asset may not
be recoverable. An impairment loss is recognized when the carrying amount
of an asset is not recoverable. GFC may be required to recognize asset
impairment charges in the future as a result of a weak economic
environment, challenging market conditions in the air or rail markets or
events related to particular customers or asset types.

- Insurance. The ability to insure its rail and aircraft assets and their
associated risks is an important aspect of GFC's ability to manage risk
in these core businesses. There is no guarantee that such insurance will
be available on a cost-effective basis consistently in the future.

- Environmental. GFC is subject to federal and state requirements for
protection of the environment, including those for discharge of hazardous
materials and remediation of contaminated sites. GFC routinely assesses
its environmental exposure, including obligations and commitments for
remediation of contaminated sites and assessments of ranges and
probabilities of recoveries from other responsible parties. Because of
the regulatory complexities and risk of unidentified contaminants on its
properties, the potential exists for remediation costs to be materially
different from the costs GFC has estimated.

- Potential for Claims and Lawsuits. The nature of assets which GFC owns
and leases exposes the Company to the potential for various claims and
litigation related to, among other things, personal injury and property
damage, environmental claims and other matters. Some of the commodities
transported by GFC's railcars, particularly those classified as hazardous
materials, can pose risks that GFC and its subsidiaries work with its
customers to minimize. The potential liabilities could have a significant
effect on GFC's consolidated financial condition or results of
operations.

- Commodity/Energy Prices. Energy prices, including the price of natural
gas and oil, are significant cost drivers for many of our customers,
particularly in the chemical and airline industries. Sustained high
energy or commodity prices could negatively impact these industries
resulting in a corresponding adverse effect on the demand for our
products and services. In addition, sustained high steel prices could
result in higher new railcar acquisition costs.

- Regulation. GFC's air and rail operations are subject to the
jurisdiction of a number of federal agencies, including the Department of
Transportation. State agencies regulate some aspects of rail operations
with respect to health and safety matters not otherwise preempted by
federal law. GFC's operations are also subject to the jurisdiction of
regulatory agencies of foreign countries. New regulatory rulings may
negatively impact GFC's financial results through higher maintenance
costs or reduced economic value of its assets.

- Risk Concentrations. GFC's revenues are generally derived from a wide
range of asset types, customers and geographic locations. However, from
time to time, GFC could have a large investment in a particular asset
type, a large revenue stream associated with a particular customer, or a
large number of customers located in a particular geographic region.
Decreased demand from a discrete event impacting a particular asset type,
discrete events with a specific customer, or adverse regional economic
conditions, particularly for those assets, customers or regions in which
GFC has a concentrated exposure, could have a negative impact on GFC's
results of operations.
6

- Foreign Currency. GFC's results are exposed to foreign exchange rate
fluctuations as the financial results of certain subsidiaries are
translated from the local currency into U.S. dollars upon consolidation.
As exchange rates vary, revenue and other operating results, when
translated, may differ materially from expectations. GFC is also subject
to gains and losses on foreign currency transactions, which could vary
based on fluctuations in exchange rates and the timing of the
transactions and their settlement. In addition, fluctuations in foreign
exchange rates can have an effect on the demand and relative price for
services provided by GFC domestically and internationally, and could have
a negative impact on GFC's results of operations.

- Asset Utilization and Lease Rates. GFC's profitability is largely
dependent on its ability to maintain assets on lease (utilization) at
satisfactory lease rates. A number of factors can adversely affect
utilization and lease rates, including, but not limited to: an economic
downturn causing reduced demand or oversupply in the markets in which the
company operates, changes in customer behavior, or any other change in
supply or demand caused by factors discussed in this Risk section.

- Retirement Benefits. GFC's pension and other post-retirement costs are
dependent on various assumptions used to calculate such amounts,
including discount rates, long-term return on plan assets, salary
increases, health care cost trend rates and other factors. Changes to any
of these assumptions could adversely affect GFC's results of operations.

- Income Taxes. GFC is subject to taxes in both the U.S. and various
foreign jurisdictions. As a result, GFC's effective tax rate could be
adversely affected by changes in the mix of earnings in the U.S. and
foreign countries with differing statutory tax rates, legislative changes
impacting statutory tax rates, including the impact on recorded deferred
tax assets and liabilities, changes in tax laws or by material audit
assessments. In addition, deferred tax balances reflect the benefit of
net operating loss carryforwards, the realization of which will be
dependent upon generating future taxable income.

- Internal controls and requirements of Section 404 of the Sarbanes-Oxley
Act. Section 404 of the Sarbanes-Oxley Act requires annual management
assessments of the effectiveness of internal control over financial
reporting and a report by the Company's independent auditors addressing
these assessments. If GFC fails to maintain the adequacy of internal
control over financial accounting, the Company may not be able to ensure
that GFC can conclude on an ongoing basis that it has effective internal
control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act and related regulations. Although GFC's management has
concluded that adequate internal control procedures are in place, no
system of internal control can provide absolute assurance that the
financial statements are accurate and free of error. As a result, the
risk exists that GFC's internal control may not detect all errors or
omissions in the financial statements.

Circumstances and conditions may change. Accordingly, additional risks and
uncertainties not presently known, or that GFC currently deems immaterial,
may also adversely affect GFC's business operations.

AVAILABLE INFORMATION

GFC files annual, quarterly and current reports and other information with
the Securities and Exchange Commission (SEC). You may read and copy any document
GFC files at the SEC's public reference room at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information
about the public reference room. The SEC maintains a website that contains
annual, quarterly and current reports, proxy statements and other information
that issuers (including GFC) file electronically with the SEC. The SEC's website
is www.sec.gov.

GFC makes available free of charge at the parent company's website,
www.gatx.com, its most recent annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to the Securities Exchange Act of 1934 as soon as
reasonably practicable after such material is electronically filed with, or
furnished, to the SEC. The information on GATX's website is not incorporated by
reference into this report.

7

ITEM 2. PROPERTIES

Information regarding the location and general character of certain
properties of GFC is included in ITEM 1, BUSINESS, of this document.

At December 31, 2004, locations of operations were as follows:

RAIL
HEADQUARTERS Ostroda, Poland Sarnia, Ontario
Chicago, Illinois Slotwiny, Poland Montreal, Quebec
Quebec City, Quebec
BUSINESS OFFICES MINI SERVICE CENTERS Moose Jaw, Saskatchewan
San Francisco, California Macon, Georgia Tierra Blanca, Mexico
Alpharetta, Georgia Terre Haute, Indiana
Chicago, Illinois Geismar, Louisiana AFFILIATES
Marlton, New Jersey Kansas City, Missouri San Francisco, California
Raleigh, North Carolina Cincinnati, Ohio Kansas City, Missouri
York, Pennsylvania Catoosa, Oklahoma Zug, Switzerland
Houston, Texas Freeport, Texas
Calgary, Alberta Plantersville, Texas AIR
Cambridge, Ontario Czechowice, Poland
Ennismore, Ontario Jedlicze, Poland HEADQUARTERS
Montreal, Quebec Plock, Poland San Francisco, California
Vienna, Austria
Hamburg, Germany MOBILE SERVICE UNITS BUSINESS OFFICES
Mexico City, Mexico Mobile, Alabama Seattle, Washington
Nowa Wies Wielka, Poland Colton, California Toulouse, France
Warsaw, Poland Lake City, Florida Tokyo, Japan
East Chicago, Indiana Singapore
MAJOR SERVICE CENTERS Sioux City, Iowa London, United Kingdom
Colton, California Norco, Louisiana
Waycross, Georgia Sulphur, Louisiana AFFILIATES
Hearne, Texas Albany, New York Dublin, Ireland
Red Deer, Alberta Masury, Ohio London, United Kingdom
Sarnia, Ontario Cooperhill, Tennessee
Coteau-du-Lac, Quebec Galena Park, Texas SPECIALTY
Montreal, Quebec Olympia, Washington
Moose Jaw, Saskatchewan Edmonton, Alberta HEADQUARTERS
Hanover, Germany Red Deer, Alberta San Francisco, California
Tierra Blanca, Mexico Vancouver, British Columbia
Gdansk, Poland Clarkson, Ontario AMERICAN STEAMSHIP COMPANY
Williamsville, New York

8

ITEM 3. LEGAL PROCEEDINGS

On May 25, 2001, a suit was filed in Civil District Court for the Parish of
Orleans, State of Louisiana, Schneider, et al. vs. CSX Transportation, Inc.,
Hercules, Inc., Rhodia, Inc., Oil Mop, L.L.C., The Public Belt Railroad
Commission for The City of New Orleans, GATX Corporation, GATX Capital
Corporation, The City of New Orleans, and The Alabama Great Southern Railroad
Company, Number 2001-8924. The suit asserts that on May 25, 2000, a tank car
owned by the GATX Rail division of GATX Financial Corporation (GFC), a wholly
owned subsidiary of GATX, leaked the fumes of its cargo, dimethyl sulfide, in a
residential area in the western part of the city of New Orleans and that the
tank car, while still leaking, was subsequently taken by defendant, New Orleans
Public Belt Railroad, to another location in the city of New Orleans, where it
was later repaired. The plaintiffs are seeking compensation for alleged personal
injuries and property damages. The petition alleges that a class should be
certified, but plaintiffs have not yet moved to have the class certified.
Settlement negotiations are ongoing.

In March 2001, East European Kolia-System Financial Consultant S.A. (Kolia)
filed a complaint in the Regional Court (Commercial Division) in Warsaw, Poland
against Dyrekcja Eksploatacji Cystern Sp. z.o.o. (DEC), an indirect wholly owned
subsidiary of GATX, alleging damages of approximately $52 million arising out of
the unlawful taking over by DEC in August of 1998, of a 51% interest in Kolsped
Spedytor Miedzynarodwy Sp. z.o.o. (Kolsped), and removal of valuable property
from Kolsped. The complaint was served on DEC in December 2001. The plaintiff
claims that DEC unlawfully obtained confirmation of satisfaction of a condition
precedent to its purchase of 51% interest in Kolsped, following which it
allegedly mismanaged Kolsped and put it into bankruptcy. The plaintiff claims to
have purchased the same 51% interest in Kolsped in April of 1999, subsequent to
DEC's alleged failure to satisfy the condition precedent. GFC purchased DEC in
March 2001 and believes this claim is without merit, and is vigorously pursuing
the defense thereof. DEC has filed a response denying the allegations set forth
in the complaint. The parties each confirmed their respective positions in the
case at a hearing held in early March of 2002. At a hearing held on October 22,
2003, the court rendered a decision in favor of DEC, dismissing Kolia's action.
In December 2003, the plaintiff filed an appeal of the decision. In January of
2004, the Regional Court refused to exempt Kolia from its obligation to pay fees
in connection with the appeal. During 2004, Kolia filed various procedural
motions to reverse the decision of the Regional Court, all of which were
unsuccessful. Kolia then filed a complaint in the Regional Court against the
decision to dismiss the appeal which complaint was dismissed because Kolia had
failed to pay the fee associated with the complaint. On February 8, 2005, Kolia
filed a letter with the Regional Court demanding to have its appeal heard by the
Court of Appeals. The Regional Court responded by indicating that Polish law did
not provide for an appellate court examination under the circumstance cited in
the letter and asked Kolia whether its letter should be treated as a complaint
for restitution of the proceedings de novo, an extraordinary appeal, a remedy
available under very limited circumstances, with respect to the final judgment.
The judgment in favor of DEC appears to be final as the plaintiff has failed to
appeal. DEC is requesting that the court issue a written opinion stating that
the judgment is final.

On December 29, 2003, a wrongful death action was filed in the District
Court of the State of Minnesota, County of Hennepin, Fourth Judicial District,
MeLea J. Grabinger, individually, as Personal Representative of the Estate of
John T. Grabinger, and as Representative/Trustee of the beneficiaries in the
wrongful death action, v. Canadian Pacific Railway Company, et al. The lawsuit
seeks damages for a derailment on January 18, 2002 of a Canadian Pacific Railway
train containing anhydrous ammonia cars near Minot, North Dakota. As a result of
the derailment, several tank cars fractured, releasing anhydrous ammonia which
formed a vapor cloud. One person died, as many as 100 people received medical
treatment, of whom fifteen were admitted to the hospital, and a number of others
were purportedly affected. The plaintiffs allege among other things that the
incident (i) caused the wrongful death of their husband/son, and (ii) caused
permanent physical injuries and emotional and physical pain. The complaint
alleges that the incident was proximately caused by the defendants who are
liable under a number of legal theories. On March 9, 2004, the National
Transportation Safety Board (NTSB) released a synopsis of its anticipated report
and issued its final report shortly thereafter. The report sets forth a number
of conclusions including that the failure of the track caused the derailment and
that the catastrophic fracture of tank cars increased the severity of the
accident. On

9

June 18, 2004, the plaintiff filed an amended complaint based on the NTSB
findings which added GFC and others as defendants. Specifically, the allegations
against GFC are that the steel shells of the tank cars were defective and that
GFC knew the cars were vulnerable and nonetheless failed to warn of the extreme
hazard and vulnerability. On July 12, 2004, GFC filed a motion to dismiss this
action on the basis that plaintiffs' claims are preempted by federal law and
that the plaintiffs have failed to state a claim with respect to certain causes
of action. On September 8, 2004, plaintiffs filed a third amended complaint (i)
dismissing counts that alleged liability of the tank car owners under the
theories of strict liability for an ultrahazardous activity, liability for
abnormally dangerous activity and liability for intentional infliction of
emotional distress (ii) clarifying claims that the tank cars were defective by
specifying that the cars were defective at the time of manufacture and (iii)
clarifying its claims against all defendants for damages for violation of North
Dakota environmental laws. GFC's motion to dismiss was deemed to apply to the
third amended complaint and the court heard argument on the motion and took the
matter under advisement on September 22, 2004. In December, the court dismissed
the motion without prejudice to refiling it as a motion for summary judgment
motion following completion of discovery. GFC intends to defend this suit
vigorously.

GFC has previously been named as a defendant and subsequently dismissed
without prejudice in nine other pending cases arising out of this derailment.
There are over 40 other cases arising out of this derailment pending in the
Fourth District Court of the State of Minnesota, Hennepin County. Thirty-one
additional cases were filed in the same court and then removed to federal court
by the Canadian Pacific Railway in July 2004. GFC has not been named in any of
these cases.

In October 2004, the liquidators of Flightlease Holdings (Guernsey) Limited
("FHG"), a member of the Swissair Group, commenced proceedings in the U.S.
Bankruptcy Court for the Northern District of California against (a) GATX Third
Aircraft Corporation ("Third Aircraft"), an indirect wholly owned subsidiary of
the Company, seeking recovery of approximately $1.9 million allegedly owed by
Third Aircraft, and (b) Third Aircraft and the Company seeking a court order
authorizing discovery in connection with a voluntary liquidation of FHG under
Guernsey law. The Guernsey liquidation is one of several liquidation or
insolvency proceedings, including proceedings in Switzerland, the Netherlands,
and the Cayman Islands, resulting from the bankruptcy of the Swissair Group in
2001. In September 1999, Third Aircraft and FHG formed an aircraft leasing joint
venture, which on the same day entered into a purchase agreement with Airbus
Industrie relating to the joint venture company's purchase of a substantial
number of Airbus aircraft. Prior to the Swissair Group's bankruptcy in October
2001, Third Aircraft and FHG had agreed to terminate the joint venture and
divide responsibility for the purchase of aircraft subject to the venture's
agreement with Airbus. By October 1, 2001 the joint venture company had ordered
a total of 41 aircraft from Airbus, and had made aggregate unutilized
pre-delivery payments to Airbus of approximately $228 million. Pursuant to
agreements by Third Aircraft and FHG to divide responsibility for the aircraft,
and to allocate the pre-delivery payments between them, Third Aircraft and
Airbus entered into a new purchase agreement and Airbus credited approximately
$78 million of the pre-delivery payments to Third Aircraft. By agreement of
Third Aircraft and FHG, the remaining portion of the pre-delivery payments
(approximately $150 million) was to be credited to FHG in a new contract with
Airbus. Following Swissair Group's bankruptcy, however, FHG and Airbus did not
enter into such a contract, and Airbus declared the joint venture in default and
retained the approximately $150 million in pre-delivery payments as damages. The
liquidators of FHG have stated that they believe that FHG may have suffered
damages, and may have potential claims arising out of these events against
various parties, including possibly Third Aircraft (including potential claims
for breach of fiduciary duty and for payment of the approximately $1.9 million
referred to above). The Company believes there is no valid basis for any
material claim by FHG or any of its affiliates against Third Aircraft or the
Company.

GFC and its subsidiaries have been named as defendants in a number of other
legal actions and claims, various governmental proceedings and private civil
suits arising in the ordinary course of business, including those related to
environmental matters, workers' compensation claims by GFC employees and other
personal injury claims. Some of the legal proceedings include claims for
punitive as well as compensatory damages. Several of the Company's subsidiaries
have also been named as defendants or co-defendants in cases alleging injury
relating to asbestos. In these cases, the plaintiffs seek an unspecified amount
of damages based on common law, statutory or premises liability or, in the case
of ASC, the Jones Act, which makes limited

10

remedies available to certain maritime employees. In addition, demand has been
made against the Company under a limited indemnity given in connection with the
sale of a subsidiary with respect to asbestos-related claims filed against the
former subsidiary. The number of these claims and the corresponding demands for
indemnity against the Company increased in the aggregate in 2004. It is possible
that the number of these claims could continue to grow and that the cost of
these claims could correspondingly increase in the future.

The amounts claimed in some of the above described proceedings are
substantial and the ultimate liability cannot be determined at this time.
However, it is the opinion of management that amounts, if any, required to be
paid by GFC and its subsidiaries in the discharge of such liabilities are not
likely to be material to GFC's consolidated financial position or results of
operations. Adverse court rulings or changes in applicable law could affect
claims made against GFC and its subsidiaries, and increase the number, and
change the nature, of such claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not required.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

GATX Corporation owns all of the outstanding common stock of GFC.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Not Required.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

COMPANY OVERVIEW

Information regarding general information and characteristics of the
Company including reporting segments is included in ITEM 1, BUSINESS, of this
document.

The following discussion and analysis should be read in conjunction with
the audited financial statements included herein. Certain statements within this
document may constitute forward-looking statements made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. These
statements are identified by words such as "anticipate," "believe," "estimate,"
"expect," "intend," "predict," or "project" and similar expressions. This
information may involve risks and uncertainties that could cause actual results
to differ materially from the forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. In addition, certain factors, including Rick Factors identified in
Part I of this document may affect GFC's businesses. As a result, past financial
results may not be a reliable indicator of future performance.

11

STATEMENT OF INCOME DISCUSSION

The following table presents income (loss) from continuing operations and
net income by segment for the years ended December 31, 2004, 2003 and 2002 (in
millions):

GFC provides services and products through three operating segments: Rail,
Air, and Specialty. Management evaluates the performance of each segment based
on several measures, including net income. These results are used to assess
performance and determine resource allocation among the segments.

GFC allocates corporate selling, general and administrative (SG&A) expenses
to the segments. Corporate SG&A expenses relate to administration and support
functions performed at the corporate office. Such expenses include information
technology, corporate SG&A, human resources, legal, financial support and
executive costs. Directly attributable expenses are generally allocated to the
segments and shared costs are retained in Other. Amounts allocated to the
segments are approximated based on management's best estimate and judgment of
direct support services.

Interest expense was allocated based upon a fixed leverage ratio for each
individual operating segment across all reporting periods, expressed as a ratio
of debt to equity. Rail's leverage ratio was set at 5:1, Air's leverage ratio
was set at 4:1 and Specialty's leverage ratio was set at 4:1. Interest expense
not allocated was assigned to Other in each period. Reflective of overall lower
leverage at GFC, management expects that leverage ratios to be utilized in 2005
will be modified to 4.5:1 at Rail and 3:1 at Air. Specialty will be unchanged at
4:1. Management believes this leverage and interest expense allocation
methodology applies an appropriate cost of capital for purposes of evaluating
each operating segment's risk-adjusted financial return.

Taxes are allocated to each segment based on the segment's contribution to
GFC's overall tax position.

GATX RAIL

Improving market conditions in the North American rail industry favorably
impacted Rail's results in 2004, as Rail experienced increasing lease rates and
utilization levels. Demand for railcars was boosted by increased car loadings
and ton-miles, and most car types realized a more balanced supply/demand
profile. The improving market conditions, higher lease rates and high levels of
utilization are expected to continue during 2005.

The full impact of higher lease rates will be felt gradually, as only
20%-25% of Rail's North American fleet comes up for renewal each year. During
2004, approximately 25,000 cars were either renewed or assigned to new
customers. Reversing a trend evident in recent years, Rail experienced an
improving pricing environment as 2004 progressed. Rail is optimistic that the
positive pricing momentum will carry over into 2005. As a result, Rail
anticipates that, on average, the approximately 27,000 cars up for renewal in
2005 will be renewed or assigned at rates higher than the previous contract
rate.

Utilization of Rail's North American fleet improved during 2004 from 93% to
98% by year end. The increase resulted from the successful placement of new and
acquired railcars with customers, the movement of railcars from idle to active
status, and the scrapping of railcars.

In North America, Rail acquired 6,200 railcars in 2004, including
approximately 3,000 new railcars and 3,200 used railcars purchased in the
secondary market. The new cars were primarily purchased under pre-
12

existing contracts with railcar manufacturers that provided Rail with a cost
advantage versus a spot purchase in the current market. Rail also increased its
presence in the locomotive leasing market by acquiring the remaining 50%
ownership interest of the Locomotive Leasing Partners, LLC (LLP) joint venture
in the fourth quarter.

Costs for maintaining the North American fleet continued to increase in
2004, primarily due to increased maintenance activity related to preparing cars
in storage for active service. The trend of increasing maintenance costs is
expected to continue due to increasing costs associated with regulatory
compliance and required maintenance as a result of the fact that a large number
of cars purchased in the mid- to late-1990's are approaching their 10-year
regulatory inspections. There is also the possibility that additional security
and safety regulations may be enacted, increasing future maintenance costs.

Rail's European operations experienced stable market conditions during
2004. Rail Europe was successful in placing new cars in existing markets, as
well as placing cars in new Eastern European markets, such as Romania and
Bulgaria. Rail acquired the remaining interest in a leading European tank car
lessor KVG Kesselwagen Vermietgesellschaft mbH, and KVG Kesselwagen
Vermietgesellschaft m.b.h. (collectively KVG) in 2002. Generally, utilization
remained high during 2004, but KVG began to see some weakness in the chemical
market. Rail purchased Dyrekcja Eksploatacji Cystern Sp. z.o.o. (DEC) in 2001.
During 2004, major steps were taken in DEC's transition from a trip lease to a
term rental business model, culminating with signing its two largest customers
to term rental agreements. Other transition efforts included the closing of
redundant repair centers. This transition is expected to stabilize revenues,
reduce operating costs and make additional cars available for lease. The AAE
Cargo AG (AAE) joint venture (37.5% owned) continued to experience strong demand
for the majority of its fleet, particularly inter-modal cars, due to high
seaport volumes, growth in the containerization of freight traffic, and
increased demand from private operators. The strengthening of the Euro and the
Zloty during 2004 positively impacted Rail's European results.

The long-term outlook for the European market remains positive, as the
European Union (EU) is encouraging the use of railways in place of the congested
road system. Poland and nine other countries joined the EU in 2004, which is
expected to eventually lead to more seamless borders, upgraded infrastructure
and improved rail efficiency in those countries. Operationally, KVG and DEC
continue to integrate their tank car operations.

Components of Rail's income statement are summarized below (in millions):

Rail's Fleet Data

The following table summarizes fleet activity for GFC's wholly owned North
American rail cars for the years ended December 31:

COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003

SUMMARY

Net income of $59.7 million in 2004 increased $5.5 million from the prior
year. The increase in 2004 was driven primarily by higher lease income, higher
asset remarketing income for both Rail and its affiliates as the rail market
continues to improve and larger gains on scrapping of railcars as a result of
higher steel prices, partially offset by higher maintenance and ownership costs.

Gross Income

Rail's 2004 gross income of $746.5 million was $52.7 million higher than
2003 due primarily to favorable North American market conditions and higher
scrapping gains resulting from higher scrap metal prices. North American renewal
and assignment activity was strong in 2004 and the active fleet increased by
approximately 5,900 railcars. Rail's secondary market acquisitions and new
railcar investments significantly contributed to the increase in active cars and
the corresponding increase in lease income. North American utilization improved
to 98% at December 31, 2004 representing 104,200 railcars on lease compared to
93% at December 31, 2003 with 98,300 of railcars on lease. In 2004, the average
renewal rate on a basket of common railcar types increased 2.7% versus the
expiring rate, with this improvement largely attributable to activity in the
second half of the year. The impact of this improvement on earnings will be
reflected in Rail's financial results gradually as rate changes move slowly
through the fleet due to the term nature of the business. We

14

expect this improvement to continue in 2005. Also favorably impacting Rail's
gross income was the impact of foreign exchange rates and higher gains
associated with scrapping activity.

Rail's European rail operations have improved during the course of the
year. Utilization rates remain high and operations have been positively impacted
by success in new markets and the placement of new car deliveries.

Asset remarketing income in 2004 included residual sharing fees from a
managed portfolio, other residual sharing fees and a gain on the sale of
railcars. The largest component of remarketing income in 2004 was the gain on
the sale of 482 cars to Canadian National Railways. Asset remarketing income in
2003 included the gain on disposition of a leveraged lease commitment on
passenger rail equipment.

Other income of $58.3 million increased $13.8 million from 2003 due
primarily to higher scrapping gains as the price of steel increased
significantly from 2003.

Share of affiliates' 2004 earnings of $16.6 million were higher than the
prior year. The increase was the result of significant asset remarketing gains
at domestic and foreign affiliates.

Ownership Costs

Ownership costs were $369.1 million in 2004 compared to $350.1 million in
2003. The increase was driven by significant investment volume in 2004. Through
new car and secondary market acquisitions, Rail purchased approximately 6,200
railcars and 1,000 railcars in North America and Europe, respectively.

Other Costs and Expenses

Maintenance expense of $186.8 million in 2004 increased $23.4 million from
2003. Maintenance costs increased sharply for a variety of reasons, including
costs associated with moving cars from one customer to another, moving cars from
idle to active service and continuing regulatory compliance. As railcars move
from idle to active service, repairs and improvements, such as replacement of
tank car linings and valves, are often required. Although fewer cars were
repaired, the cost per car increased due to the nature of the repairs.

During 2003, the American Association of Railroads (AAR) issued an early
warning letter that required all owners of railcars in the United States, Canada
and Mexico to inspect or replace certain bolsters manufactured from the
mid-1990s to 2001 by a now-bankrupt supplier. Rail owned approximately 3,500
railcars equipped with bolsters that were required to be inspected or replaced.
Approximately 2,200 of Rail's affected railcars are on full-service leases in
which case Rail is responsible for the costs of inspection or replacement. As of
December 31, 2004, bolsters on 2,100 cars have been replaced. The cost
attributable to the inspection and replacement of bolsters was $3.0 million in
2004, a decrease of $.9 million from the prior year period. Management expects
the remaining costs of bolster replacements to be approximately $.2 million and
to be completed by the end of the first quarter of 2005.

Other operating expenses were comparable between periods.

Potential Railcar Regulatory Mandates

As noted previously, Rail's operations as well as the entire railroad
industry face the increasing possibility that additional security or safety
regulations may be mandated, increasing future maintenance costs. Following are
two such matters that the Company is closely monitoring.

Certain recent railroad derailments, some of which involved GFC railcars,
focused attention on safety issues associated with the transportation of
hazardous materials. These incidents have led to calls for increased legislation
and regulation to address safety and security issues associated with the
transportation of hazardous materials. Suggested remedial measures vary, but
include rerouting hazardous material railcar movements and increasing the
inspection authority of the Federal Railroad Administration ("FRA"). Other
suggested remedial measures address the physical condition of tank cars,
including revising manufacturing specifications for high pressure cars which
carry hazardous materials. Specific focus has been directed at pressurized
railcars built prior to 1989 that utilized non-normalized steel. The National
Transportation Safety Board ("NTSB")
15

issued a report in 2004 recommending that the FRA conduct a comprehensive
analysis to determine the impact resistance of pressurized tank cars built prior
to 1989, and use the results of that analysis to rank cars according to risk and
to implement measures to eliminate or mitigate such risks. The NTSB has not
recommended that pressure cars built prior to 1989 be removed from service, nor
has the FRA issued any orders curtailing use of these cars. The Company owns
approximately 6,500 pre-1989 built pressurized tank cars (6% of its North
American fleet). While the Company is actively working with trade associations
and others to participate in the legislative and regulatory process affecting
rail transportation of hazardous materials, the outcome of proposed remedial
measures, the probability of adoption of such measures, and the resulting impact
on GFC should such measures be adopted cannot be determined at this time.

Additionally, the Association of American Railroads ("AAR") has issued a
proposal which would require all tank cars to be equipped with long travel
constant contact side bearings ("LT-CCSBs"). The application of LT-CCSBs is
intended to reduce empty tank car derailments by the reduction of train/track
operational issues. Management believes it is highly likely that the AAR will
adopt the LT-CCSB rule essentially as written. If it does so, this will affect
certain tank cars throughout the industry and the Company will be required to
retrofit approximately 50,000 of its tank cars over the next 7 to 10 years at a
cost of $700 to $800 per car. The Company generally has the contractual right to
increase lease rates to recover a portion of the costs of this retrofit, and is
currently formulating its plans on how it will exercise this contractual right.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002

SUMMARY

Rail's net income of $54.2 million in 2003 increased $29.0 million from the
prior year. Income before the cumulative effect of accounting change decreased
$5.9 million. The decrease was primarily due to lower North American lease
income driven by lower average lease rates.

Challenging market conditions in the North American rail industry affected
Rail in 2003. The oversupply of certain car types in the railcar market, short
backlogs at railcar manufacturers, a weak economic environment and aggressive
competition from other lessors resulted in lease rates that were below peak
lease rates of the late 1990s. As a result, new market rates for expiring
leases, either with the same customer or contracting with a new customer, were
lower on average than the previous rate. In 2003, average lease rates on a
basket of common car types declined 5.2% versus the expiring rates. With
approximately 26,000 cars having expiring leases during 2003, lower rates
negatively impacted Rail's lease income.

In anticipation of an improving economy, Rail continued to purchase new
cars and actively pursue secondary market transactions. Investment in railcars
for North America increased in 2003 over the prior year, resulting in active
cars increasing by approximately 1,100 cars after two consecutive years of
decline. The acquisition at the end of the fourth quarter of a fleet of 1,200
covered hoppers on long-term lease drove the increase in active cars. In
addition, Rail took delivery of approximately 1,000 new cars in 2003, under pre-
existing purchase agreements with manufacturers. Utilization of the North
American fleet improved from 90% to 93% due to aggressive efforts to improve the
renewal success rate, to market specific car types and to scrap older,
uneconomic cars from the fleet.

Maintenance costs increased in 2003 from the 2002 level. An increase in the
number of car assignments and costs associated with an American Association of
Railroads (AAR) requirement to replace bolsters on certain cars (see discussion
below) adversely impacted 2003 maintenance costs.

In 2003, Rail's European operations generally experienced a more favorable
market environment than North America. Fleet utilization at both KVG and AAE,
Rail's European joint venture, was over 95%, as KVG's primary markets of
chemical, petroleum, mineral and liquid petroleum gas remained stable, and AAE
benefited from the high growth rates of shipping activity at European seaports.
Rail acquired the remaining interest in KVG in December 2002. DEC's performance
has been negatively affected by a weak Polish
16

economy. However, KVG was successful in placing DEC tank cars in service outside
of Poland. This activity between KVG and DEC marked the early stages of
integrating their tank car operations, a key European strategy for Rail.

Gross Income

Rail's 2003 gross income of $693.8 million was $21.6 million higher than
2002. Excluding the impact from the timing of the KVG acquisition in both
periods, gross income was down $20.5 million from 2002. The decrease was
primarily driven by lower North American lease income resulting from lower
average lease rates and fewer railcars on lease for most of the year. Although
average renewal rates continued to be lower than Rail's prior contractual rate,
the percentage decline in renewal rates improved during 2003.

Excluding KVG's pre-tax earnings of $4.7 million in 2002, share of
affiliates' earnings in 2003 increased $4.1 million. The increase was the result
of a favorable maintenance expense at domestic affiliates combined with a larger
fleet and favorable foreign exchange rates at a foreign affiliate.

Ownership Costs

Ownership costs were $350.1 million in 2003 compared to $333.7 million in
2002. The increase was primarily due to the acquisition and consolidation of
KVG.

Other Costs and Expenses

Maintenance expense of $163.4 million in 2003 increased $12.5 million from
2002. Excluding KVG, maintenance expense increased $2.8 million in 2003. The
variance was due primarily to the increase in car assignments discussed above.
Both 2003 and 2002 results included comparable levels of maintenance costs for
certain railroad mandated repairs.

In 2003, the AAR issued a series of early warning letters that required all
owners of railcars in the U.S., Canada and Mexico to inspect or replace certain
bolsters manufactured from the mid-1990s to 2001 by a now-bankrupt supplier.
Rail owned approximately 3,500 railcars equipped with bolsters that were
required to be inspected or replaced. Due dates for inspection or replacement of
the bolsters ranged from September 30, 2003 to December 31, 2004 depending on
car type and service. As of December 31, 2003, bolsters on approximately 1,300
cars had been replaced. 2003 maintenance expense included $3.9 million
attributable to the inspection and replacement of bolsters.

In the second quarter of 2002, the Federal Railroad Administration issued a
Railworthiness Directive (Bar Car Directive) which required Rail to inspect and
repair, if necessary, a certain class of its cars that were built or modified
with reinforcing bars prior to 1974. Approximately 4,200 of Rail's owned
railcars were affected by the Bar Car Directive. The unfavorable impact on
Rail's operating results for 2002 was approximately $2.7 million after-tax,
including lost revenue, inspection, cleaning and replacement car costs, which
were partially offset by gains on the accelerated scrapping of affected cars. As
of year end 2002, substantially all of the subject tank cars were removed from
Rail's fleet.

Selling, general and administrative (SG&A) expenses of $69.0 million
increased $9.8 million in 2003. Excluding KVG, SG&A expenses decreased $1.2
million due to cost savings initiatives. In 2003, Rail recorded a reversal of
provision for possible losses of $2.6 million resulting from improvement in
portfolio quality, recoveries of bad debts, and more favorable aging of Rail's
receivables.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

Cumulative Effect of Accounting Change

In accordance with Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, Rail completed a review of all
recorded goodwill in 2002. Fair values were established using

17

discounted cash flows. Based on this review, Rail recorded a one-time, non-cash
impairment charge of $34.9 million related to DEC in 2002. The charge is
non-operational in nature and was recognized as a cumulative effect of
accounting change as of January 1, 2002 in the consolidated statements of
income. The impairment charge was due primarily to lessened expectations of
projected cash flows based on market conditions at the time of the review and a
lower long-term growth rate projected for DEC.

GATX AIR

Worldwide revenue passenger miles increased in 2004 and lease rates are
recovering from the low levels of recent years, in particular for newer
aircraft. However, the recovery is fragile, and is threatened by the high cost
of jet fuel, as well as the possibility that additional airline failures and
terrorist acts will disrupt global travel. These challenging conditions persist,
particularly in North America, where the combination of high fuel prices and
pricing pressure from low-cost carriers have increased operating losses and
highlighted the vulnerabilities of many major U.S. carriers. Some European
airlines are also showing signs of weakness.

Air's owned portfolio, which consists principally of narrowbody aircraft,
had a weighted average age of five years based on the net book value at the end
of 2004. Air achieved almost full utilization in 2004. At December 31, 2004,
less than 1% of Air's portfolio was available for lease with over 98% on lease
with customers, and the remaining 1% was subject to signed letters of intent to
lease with customers. Air successfully placed 31 owned aircraft during 2004,
including 3 new and 28 existing aircraft.

Lessee defaults and the potential impairment of aircraft values will
continue to create potential uncertainties and volatility for Air's earnings.
For example, Boeing announced the cancellation of its B717 program in January
2005 because of weak demand. Air holds a 50% interest in Pembroke Group (net
book value of $63.3 million), an aircraft lessor and manager based in Ireland,
which has Boeing 717 aircraft in its portfolio, six of which GFC has an interest
in, all of which were on lease at December 31, 2004. Additionally, Air has one
B757-200 aircraft on lease to ATA, a bankrupt U.S. carrier. The future
marketability of these aircraft and/or potential valuation issues are uncertain
at this time.

Air's wholly owned and partnered aircraft are leased to customers under net
operating leases. Air's other recurring source of revenue is fee income, which
results from remarketing and administering aircraft in its joint ventures, as
well as managing aircraft for third parties. Air's level of fee income can be
unpredictable, varying with the performance of the managed fleet and Air's
success in remarketing and selling aircraft. Air also has 50% investments in two
partnerships with Rolls-Royce Plc: Pembroke Group and Rolls-Royce & Partners
Finance Limited. Rolls-Royce & Partners Finance Limited, which leases aircraft
engines, was a major contributor to Air's financial performance in 2004.

During 2004, Air took delivery of and placed three new A320 aircraft with
non-U.S. airlines and also purchased four aircraft in the secondary market
subject to existing leases, with the intent of partnering these aircraft in
2005. Air has two additional aircraft purchase commitments in 2006, and expects
to retain the purchased aircraft as wholly owned aircraft.

18

Components of Air's income statement are summarized below (in millions):

Air's Fleet Data

The following table summarizes information on GFC owned and managed
aircraft for the years ended December 31 ($'s in millions):

COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003

Summary

Net income of $9.8 million in 2004 increased $7.7 million from the prior
year. The increase in 2004 was driven by gains from the sale of four aircraft
and the absence of the Air Canada loss which occurred in 2003.

19

2004 profit was also driven by strong joint venture performance, particularly at
Air's engine leasing joint venture.

Gross Income

Air's 2004 gross income of $144.9 million was $3.1 million higher than
2003. The increase was primarily driven by higher lease and asset remarketing
income, partially offset by lower other income.

Lease income increased primarily due to the full year revenue recognition
on six new aircraft which were delivered at various times during 2003, three new
aircraft deliveries during 2004, and the purchase of four aircraft subject to
existing leases in 2004. Lease income in 2004 on the new aircraft purchases in
2004 and 2003 was approximately $12 million. The impact of higher variable rents
due to the increase in interest rates was $2.9 million. The increase was offset
by early lease terminations and lower lease rates on certain renewed lease
contracts. Asset remarketing income increased as the result of gains from the
sale of four aircraft in 2004. The decrease in other income was primarily
attributable to the recognition in 2003 of previously collected maintenance
deposits on aircraft held for pending sale (subsequently sold in 2004). These
maintenance deposits were entirely offset by related impairment charges taken on
the underlying aircraft in 2003. Share of affiliates' earnings decreased from
the prior year primarily because of asset impairments at the Pembroke affiliate
in 2004, more than offsetting continued strong performance at the Rolls-Royce
engine leasing joint venture.

Ownership Costs

Ownership costs of $105.3 million in 2004 were $5.1 million higher than in
2003. The increase was primarily due to the $4.4 million increase in
depreciation resulting from higher operating lease balances due to full year
depreciation on six new aircraft deliveries in 2003, three new deliveries in
2004, and four aircraft purchased in 2004. Interest expense was relatively
unchanged from the prior year.

Other Costs and Expenses

Total other costs and expenses of $25.3 million in 2004 were $13.3 million
lower than in 2003 primarily due to decreases in the provision for possible
losses and asset impairment charges, partially offset by higher SG&A expenses.
The provision for possible losses decreased $8.8 million from 2003 primarily due
to a net $9.6 million loss provision on disposal of an unsecured Air Canada note
in 2003. Asset impairment charges decreased by $9.8 million from 2003 primarily
due to impairment charges of $8.2 million in 2003 related to two commercial
aircraft held for pending sale (subsequently sold in 2004) that were offset by
the recognition into other income of previously collected maintenance deposits.
SG&A expenses increased by $3.4 million primarily due to higher employee costs
in 2004.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002

Summary

Net income of $2.1 million decreased $6.0 million compared to the prior
year. Improvement in share of affiliates' earnings was offset by an increase in
the provision for possible losses due to the Air Canada bankruptcy and increases
in SG&A expenses.

Challenging conditions in the aviation industry negatively affected Air in
2003. Although the industry appeared to be recovering from its severe downturn,
aircraft lessors experienced weak lease rates, credit defaults and asset
impairments during 2003. Specifically, aircraft over 15 years in age proved to
be more difficult to lease and presented the greatest uncertainty in value.
Rents on older aircraft declined in 2003, while rents on newer aircraft
stabilized.

20

Air's owned portfolio had a weighted average age of five years based on the
net book value at the end of 2003. With a relatively new fleet, Air achieved
almost full utilization in 2003. At December 31, 2003, less than 1% of Air's
portfolio was available for lease; over 96% had been on lease with customers,
and the remaining 3% were subject to signed letters of intent to lease with
customers. Air placed 19 owned aircraft during 2003, including six new and 13
existing aircraft.

Gross Income

Air's 2003 gross income of $141.8 million was $38.0 million higher than
2002. The increase was primarily driven by higher lease income due to the
full-year revenue recognition on 16 new aircraft which were delivered at various
times during 2002, and an additional six new aircraft deliveries which were
received and put on lease in 2003. Other income also contributed $7.1 million to
the increase, primarily attributable to the recognition of previously collected
maintenance reserves. These maintenance reserves were entirely offset by related
impairment charges taken on by the underlying aircraft.

Share of affiliates' earnings of $31.6 million were $16.8 million higher
than the prior year. The increase from the prior year is primarily due to
impairment losses that were recognized in 2002 on a fleet of 28 Fokker 50 and
Fokker 100 aircraft owned by Air's 50% owned Pembroke affiliate.

Ownership Costs

Ownership costs of $100.2 million in 2003 were $24.5 million higher than in
2002. The increase was primarily due to the $18.0 million increase in
depreciation resulting from higher balances for operating lease assets due to
full-year depreciation on 16 new aircraft deliveries in 2002 and six new
deliveries received and put on lease in 2003. Interest expense also contributed
$6.1 million to the increase as a result of higher debt balances due to the new
aircraft deliveries in 2002 and 2003, slightly offset by lower interest rates.

Excluding an accrual reversal in 2002, operating lease expense in 2003 was
lower by $4.3 million due to fewer leased-in aircraft compared to the prior
year. Operating lease expense of $3.5 million in 2002 was net of a credit of
$4.7 million for the reversal of a loss accrual recorded in prior years. GFC was
a lessee of an aircraft under an operating lease running through 2004. GFC had
subleased the aircraft to an unrelated third party with an initial lease term
expiring in 2001. Prior to 2001, as a result of financial difficulties of the
sublessee as well as concerns about subleasing the aircraft for the period 2001
to 2004, the Company recorded an accrual for the future costs expected to be
incurred on the operating lease in excess of the anticipated revenues. In 2002,
the Company restructured terms of the lease, ultimately acquiring ownership of
the aircraft, and leasing it to a new customer. As a result, the $4.7 million
accrual was reversed as a credit to operating lease expense.

Other Costs and Expenses

Total other costs and expenses increased by $18.1 million in 2003 primarily
due to the increase in SG&A expenses, the provision for possible losses and
asset impairment charges. SG&A expenses increased by $4.8 million due to lower
capitalized expenses as a result of fewer aircraft deliveries in 2003 versus the
prior year. The provision for possible losses increased $7.9 million primarily
due to a net $9.6 million loss provision on the disposal of an unsecured Air
Canada note. Asset impairment charges of $10.2 million in 2003 include
impairment charges of $8.2 million related to two commercial aircraft that were
offset by the recognition into income of previously collected maintenance
reserves, included in other income.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

GATX SPECIALTY FINANCE

The Specialty portfolio consists primarily of leases and loans, frequently
including an interest in an asset's residual value, and joint venture
investments involving a variety of underlying asset types, including marine,

21

aircraft and other investments. Specialty generates fee-based income through
transaction structuring and portfolio management services.

Prospectively, Specialty will continue to pursue investments in marine
assets and will also seek selective investments in long-lived industrial
equipment in targeted mature industries. As a result, future earnings may be
more spread oriented, with asset remarketing gains and income resulting from the
improved credit profile anticipated to decline from the 2004 levels. Earnings
may also be unpredictable due to the uncertain timing of asset remarketing and
gains from the sale of securities.

Components of Specialty Finance's income statement are summarized below (in
millions):

22

Specialty's Portfolio Data

The following table summarizes information on the owned and managed
Specialty Finance portfolio for the years ended December 31 ($'s in millions):

COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003

Summary

Net income of $40.6 million increased $2.5 million from the prior year
primarily due to improved credit quality of the portfolio and lower SG&A
expenses. The continued strong performance of marine joint ventures and
remarketing gains also contributed to the 2004 results. Specialty's new marine
investments were $13.9 million and $26.6 million in 2004 and 2003, respectively.
As expected, overall asset levels continued to decline as asset run-off exceeded
new investment volume.

Gross Income

Specialty's 2004 gross income of $108.7 million was $55.4 million lower
than 2003. The decrease was primarily the result of lower lease, interest and
asset remarketing income. The decreases of $13.1 million in lease income and
$23.7 million in interest income were the result of lower lease and loan
balances due to the run-off of portfolio assets. Asset remarketing income
decreased $10.3 million from 2003 and was comprised of both gains from the sale
of assets from Specialty's own portfolio as well as residual sharing fees from
the sale of managed assets. Because the timing of such sales is dependent on
changing market conditions, asset remarketing income does not occur evenly from
period to period. Share of affiliates' earnings were relatively unchanged from
2003 to 2004. However, 2004 income from marine joint ventures increased by $8.9
million in 2004. This increase was offset by 2003 income from other joint
venture investments that have been dissolved.

Ownership Costs

Ownership costs of $34.5 million in 2004 were $23.7 million lower than 2003
consistent with the decrease in the portfolio. The $17.3 million decrease in
interest expense was due to lower debt balances as a result of a smaller
portfolio, and the $6.1 million decrease in depreciation was due to lower
operating lease assets.

Other Costs and Expenses

Other costs and expenses of $8.8 million in 2004 were $34.9 million lower
than 2003 primarily as a result of decreased asset impairment charges, and an
increase in the reversal of provision for possible losses, and lower SG&A
expenses consistent with the decline in total assets. The 2003 asset impairment
charges were primarily related to an investment in a corporate aircraft and
various equity investments. SG&A expenses decreased $8.6 million from 2003
reflecting lower personnel and other costs related to the exit from the venture
business. Specialty reversed $6.5 million more in provision for possible losses
in 2004 versus 2003 due to a better-than-expected performance within the
portfolio.

23

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002

Summary

Net income of $38.1 million increased $33.2 million from 2002 primarily due
to lower asset impairments, provision reversals and lower SG&A expenses.

Specialty's portfolio declined during 2003 as a result of the decision in
late 2002 to curtail investment in the specialty finance portfolio and to sell
or otherwise run-off the venture finance portfolio. During 2003, the Canadian
and U.K. venture finance loan portfolios were sold, and the U.S. venture finance
loan portfolio, which had been retained along with associated warrants,
continued to run-off. Earnings were positively impacted by the timing of gains
on the sale of assets from the specialty finance portfolio and gains from the
sale of securities associated with the venture finance warrant portfolio. SG&A
expenses were lower as efficiencies were realized on the declining portfolio.
Investment volume was primarily related to prior funding commitments.

Gross Income

Specialty's 2003 gross income of $164.1 million was $7.1 million lower than
2002. The decrease was primarily driven by lower lease and interest income,
consistent with a declining asset base, offset by an increase in asset
remarketing income. Asset remarketing income is comprised of both gains from the
sale of assets from Specialty's own portfolio as well as residual sharing fees
from the sale of managed assets. Gains from the sale of Specialty's owned assets
increased by $13.6 million and residual sharing fees from managed portfolios
decreased by $7.9 million. Because the timing of such sales is dependent on
changing market conditions, asset remarketing income does not occur evenly from
period to period. Share of affiliates' earnings of $22.7 million were $4.5
million higher than the prior year as a result of contributions from new marine
affiliate investments.

Ownership Costs

Ownership costs of $58.2 million in 2003 were $14.7 million lower than in
2002, primarily due to a $4.3 million decrease in depreciation and a $10.4
million decrease in interest expense. The decrease in depreciation and interest
expense is consistent with the declining asset base.

Other Costs and Expenses

Total other costs and expenses decreased by $47.1 million in 2003 primarily
due to the decrease in the provision for possible losses and SG&A expenses. The
provision for possible losses decreased $22.7 million primarily due to the
improving credit quality of the portfolio and the decrease in the reservable
asset base. SG&A expenses decreased $10.1 million from 2002, reflecting lower
personnel costs as a result of the reduction in workforce in the fourth quarter
of 2002.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

OTHER

Other is comprised of corporate results, including SG&A and interest
expense not allocated to the segments, and the results of American Steamship
Company (ASC), a Great Lakes shipping company.

24

Components of the income statement are summarized below (in millions):

COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003

Summary

Other net income in 2004 included a $37.8 million after-tax gain from the
sale of the Company's Staten Island property and an after-tax insurance recovery
of $31.5 million. In addition, 2004 tax expense reflects $14.5 million of tax
benefits realized during the year.

Gross Income

Gross income of $252.2 million in 2004 increased $126.8 million from 2003
due to higher marine operating revenue and other income. The increase in marine
operating revenue of $26.8 million was driven by increased demand and more
favorable operating conditions on the Great Lakes. These factors also
contributed to higher marine operating expenses in 2004, and resulted in a net
$5.2 million increase in vessel operating contribution in 2004. Other income of
$140.2 million in 2004 includes a $68.1 million gain from the sale of a former
terminals facility in Staten Island and $48.4 million from the receipt of
insurance settlement proceeds associated with litigation GFC had initiated
against various insurers, related to coverage issues regarding the 2000-2001
Airlog litigation. Insurance settlement proceeds were $16.5 million in 2003.
Other income includes interest income on advances to GATX of $23.2 million in
2004 compared to $24.7 million in 2003.

25

Ownership Costs

Ownership costs of $1.9 million in 2004 were $13.3 million lower than the
prior year, primarily due to a decrease in interest expense resulting from lower
overall leverage at the Company. As noted previously, the debt not otherwise
allocated to the operating segments (based on set leverage ratios) is assigned
to Other, along with the related interest expense.

Other Costs and Expenses

SG&A expenses of $11.1 million were $26.4 million lower than prior year.
The variance is largely due to reduced personnel costs, net of allocations to
the segments, resulting from the transfer of approximately 200 corporate
employees to the parent company; also contributing to the variance is the
reversal of prior year reserves related to exited operations due to settlement
of contract contingencies, offset by fees associated with a bond exchange
completed in 2004.

The (reversal) provision for possible losses is derived from GFC's estimate
of possible losses inherent in its portfolio of reservable assets. In addition
to establishing loss estimates for known troubled investments, this estimate
involves consideration of historical loss experience, present economic
conditions, collateral values, and the state of the markets in which GFC
operates. GFC records a provision for possible losses in each operating segments
as well as in Other, targeting an overall allowance for possible losses in
accordance with established GFC policy. This overall allowance for possible
losses is measured and reported as a percentage of total reservable assets.
Reservable assets in accordance with generally accepted accounting principles
(GAAP) include loans, direct finance leases, leveraged leases and receivables.
Operating leases are not reservable assets in accordance with GAAP.

In 2004, GFC recorded a reversal of $12.3 million of provision for possible
losses in its operating segments and a reversal of $1.4 million of provision for
possible losses in Other. These reversals resulted in a consolidated allowance
for possible losses at December 31, 2004 of $19.4 million, or 4.3% of reservable
assets. In 2003, GFC recorded a $2.7 million provision for possible losses in
its operating segments and a $2.0 million provision for possible losses in
Other. These provisions resulted in a consolidated allowance for possible losses
at December 31, 2003 of $40.6 million, or 7.3% of reservable assets. The
decrease in the allowance for possible losses as a percentage of reservable
assets in 2004 was driven by the general improvement in the quality of GFC's
portfolio as well as the better-than-expected performance and run-off of venture
finance assets, which were reserved at a relatively higher rate than the rest of
the portfolio.

Asset impairment charges of $.2 million in 2004 decreased $5.8 million. The
2003 charge primarily related to ASC's sole off-lakes barge which ceased
operations during the year. The barge was written down to an estimate of future
disposition proceeds.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002

Gross Income

Gross income of $125.4 million in 2003 increased $17.9 million from 2002
due to higher marine operating revenue and other income. The increase in marine
operating revenue of $5.3 million was driven by a larger average fleet in
operation in 2003, and was offset by higher marine operating expenses. Other
income includes $14.4 million in 2003 due primarily to the receipt of settlement
proceeds of $16.5 million associated with the Airlog litigation GFC had
initiated against various insurers.

26

Ownership Costs

Ownership costs of $15.2 million were $17.1 million lower compared to 2002,
primarily due to a decrease in interest expense. Lower average debt balances and
lower average interest rates contributed to the favorable variance compared to
2002.

Other Costs and Expenses

In 2003, GFC recorded a $2.7 million provision for possible losses in its
operating segments and a $2.0 million provision for possible losses in Other.
These provisions resulted in a consolidated allowance for possible losses at
December 31, 2003 of $40.6 million, or 7.3% of reservable assets. In 2002, GFC
recorded a $21.5 million provision for possible losses in its operating
segments, offset by a reversal of $13.7 million of provision for possible losses
in Other. These provisions resulted in a consolidated allowance for possible
losses at December 31, 2002 of $61.7 million, or 7.1% of reservable assets.

Asset impairment charges of $6.0 million in 2003 increased $4.9 million.
The 2003 charge primarily relates to ASC's sole off-lakes barge which ceased
operations during the year and was written down to an estimate of future
disposition proceeds.

During 2002, GFC recorded a pre-tax charge of $5.7 million related to
reductions in workforce. The charge was predominantly related to a reduction in
corporate overhead costs associated with management's intent to exit the venture
business and curtail investment in the specialty finance sector. The reduction
in workforce charge included involuntary employee separation and benefit costs
as well as occupancy and other costs.

Taxes

See "Consolidated Income Taxes" for a discussion of GFC's consolidated
income tax expense.

Net Income (Loss)

Net income at Other of $2.1 million in 2003 improved from 2002 by $14.9
million as a result of insurance settlements, favorable interest expense, and
the reversal of tax audit reserves, partially offset by increased provision for
possible losses.

GATX CONSOLIDATED

CONSOLIDATED INCOME TAXES

GFC's consolidated income tax expense for continuing operations was $115.4
million in 2004, an increase of $72.0 million from the 2003 amount of $43.4
million. The 2004 consolidated effective tax rate was 36% compared to the 2003
rate of 31%. The 2004 tax provision was favorably impacted by deferred tax
reductions due to lower rates enacted in foreign jurisdictions, the tax effect
of foreign income, and extraterritorial income exclusion benefits (ETI). These
amounts were offset by the unfavorable impact of state income taxes. The 2003
tax provision was favorably impacted by tax audit reserves in connection with
the settlement of an Internal Revenue Service audit of 1995-1997, deferred tax
reductions due to lower rates enacted in foreign jurisdictions, and ETI
benefits.

See Note 14 for additional information about income taxes.

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DISCONTINUED OPERATIONS

The following table summarizes the gross income, income before taxes and
the (loss) gain on sale of segment, net of tax, which has been reclassified to
discontinued operations for all periods presented (in millions):

On June 30, 2004, GFC completed the sale of substantially all the assets
and related nonrecourse debt of Technology and its Canadian affiliate to CIT
Group, Inc. for net proceeds of $234.1 million. Subsequently, the remaining
assets consisting primarily of interests in two joint ventures were sold by year
end. Financial data for the Technology segment has been segregated as
discontinued operations for all periods presented.

Technology's operating results for the twelve months ended December 31,
2004 were $18.3 million, net of tax, which was $3.1 million higher than the
prior year results of $15.2 million. Operating results were favorably impacted
by the suspension of depreciation on operating lease assets associated with
Technology's assets classified as held for sale during the second quarter of
2004. The effect of ceasing depreciation was approximately $14.3 million
after-tax. The after-tax loss on the sale of the Technology segment was $7.2
million as of December 31, 2004. The pre-tax loss of $12.0 million reflected a
write-off of $7.6 million of goodwill as well as sale-related expenses including
severance costs and losses on terminated leases. Technology's 2003 operating
results of $15.2 million, net of a $9.8 million tax provision, were $10.5
million higher than the prior year results. Technology's 2002 operating results
were $4.7 million, net of a $2.6 million tax provision.

In 2002, GFC completed the divestiture of GATX Terminals. Financial data
for the Terminals has been segregated as discontinued operations for all periods
presented. In the first quarter of 2002, GFC sold its interest in a bulk-liquid
storage facility located in Mexico and recognized a $6.2 million gain, net of
taxes of $3.0 million. During 2003 and 2002, there was no operating activity at
Terminals during 2002-2004.

See Note 20 for additional information about discontinued operations.

BALANCE SHEET DISCUSSION

ASSETS

Total assets of continuing operations increased to $5.8 billion in 2004
from $5.7 billion in 2003. Increases in operating lease assets were partially
offset by decreases in loans, progress payments, investments in affiliated
companies and recoverable income taxes.

In addition to the $5.8 billion of assets recorded on the balance sheet,
GFC utilizes approximately $1.3 billion of other assets, such as railcars and
aircraft, which were financed with operating leases and therefore are not
recorded on the balance sheet. The $1.3 billion of off-balance sheet assets
represent the present value of GFC's committed future operating lease payments
using a 10% discount rate.

28

The following table presents assets of continuing operations (on and
off-balance sheet) by segment (in millions):

RECEIVABLES

Receivables of $452.0 million, including finance leases and loans,
decreased $107.1 million compared to the prior year primarily due to asset
run-off exceeding new investment at Specialty.

ALLOWANCE FOR POSSIBLE LOSSES

The purpose of the allowance is to provide an estimate of credit losses
inherent in the investment portfolio for which reserving is appropriate. In
addition to establishing loss estimates for known troubled investments, this
estimate involves consideration of historical loss experience, judgments about
the impact of present economic conditions, collateral values, and the state of
the markets in which GFC operates. This overall allowance for possible losse