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

Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 1-7797

PHH Corporation
(Exact name of Registrant as specified in its charter)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed in 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 ý    No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2): Yes o    No ý

The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.

PHH Corporation and Subsidiaries

Table of Contents

FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "estimates", "plans", "may increase", "may fluctuate" and similar expressions or future or conditional verbs such as "will", "should", "would", "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors and assumptions could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

•

terrorist attacks, such as the September 11, 2001 terrorist attacks on New York City and Washington, D.C., other attacks, acts of war or measures taken by governments in response thereto may negatively affect our financial results and could also result in a disruption in our business;



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the effect of economic or political conditions or any outbreak or escalation of hostilities on the economy on a national, regional or international basis and the impact thereof on our businesses;



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the effects of a decline in the volume or value of U.S. existing home sales, due to adverse economic changes or otherwise, on our mortgage and relocation businesses;



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the effects of changes in current interest rates, particularly on our mortgage business and on our financing costs;



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our ability to develop and implement operational, technological and financial systems to manage growing operations and to achieve enhanced earnings or effect cost savings;



•

competition in our existing and potential future lines of business and the financial resources of, and products available to, competitors;



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our ability to reduce quickly our substantial technology costs and other overhead costs in response to a reduction in revenue;



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our ability to provide fully integrated disaster recovery technology solutions in the event of a disaster;



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our ability to obtain financing on acceptable terms to finance our growth strategy and to operate within the limitations imposed by financing arrangements and to maintain our credit ratings;



•

in relation to our management and mortgage programs, (i) the deterioration in the performance of the underlying assets of such programs and (ii) our inability to access the secondary market for mortgage loans and to act as servicer thereto, which could become limited in the event that our credit ratings are downgraded below investment grade and, in certain circumstances, where we fail to meet certain financial ratios; and



•

changes in laws and regulations or the applications thereof, including changes in accounting standards, state, international and federal tax laws, privacy policy regulation or other laws that impact our mortgage, fleet or relocation businesses.

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond our control.

You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

INDEPENDENT ACCOUNTANTS' REPORT

To the Board of Directors and Stockholder of
PHH Corporation
Parsippany, New Jersey

We have reviewed the accompanying consolidated condensed balance sheet of PHH Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of Cendant Corporation, as of June 30, 2003, the related consolidated condensed statements of income for the three and six month periods ended June 30, 2003 and 2002, and the related consolidated condensed statements of cash flows for the six month periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statements of income, stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2003 (February 13, 2003 as to the subsequent event described in Note 20), we expressed an unqualified opinion (and included an explanatory paragraph with respect to the adoption of the non-amortization provisions for goodwill and other indefinite lived intangible assets and the modification of the accounting treatment relating to securitization transactions and the accounting for derivative instruments and hedging activities, as discussed in Note 1 to the consolidated financial statements) on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 6, 2003

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PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In millions)

See Notes to Consolidated Condensed Financial Statements.

3

PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions, except share data)

See Notes to Consolidated Condensed Financial Statements.

4

PHH Corporation and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)

See Notes to Consolidated Condensed Financial Statements.

5

PHH Corporation and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)

1.    Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts and transactions of PHH Corporation and its subsidiaries (collectively, the "Company"). The Company is a wholly-owned subsidiary of Cendant Corporation ("Cendant"). Pursuant to certain covenant requirements in the indentures under which the Company issues debt, the Company continues to operate and maintain its status as a separate public reporting entity. In management's opinion, the Consolidated Condensed Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. In addition, management is required to make estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgments and available information. Accordingly, actual results could differ from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

The Company segregates the financial data related to its management and mortgage programs as such activities are autonomous and distinct from the Company's other activities. Assets classified under management and mortgage programs are assets generated in the operations of the Company's fleet management, relocation and mortgage services businesses. The Company seeks to offset the interest rate exposures inherent in these assets by matching them with financial liabilities that have similar term and interest rate characteristics. Fees generated from these assets are used, in part, to repay the interest and principal associated with the financial liabilities. Funding for the Company's assets under management and mortgage programs is also provided by both unsecured borrowings and asset-backed financing arrangements, which are classified as liabilities under management and mortgage programs, as well as securitization facilities with special purpose entities. Cash inflows and outflows relating to the generation or acquisition of such assets and the principal debt repayment or financing of such assets are classified as activities of the Company's management and mortgage programs.

The Consolidated Condensed Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K filed on March 5, 2003.

Changes in Accounting Policies
Stock-Based Compensation.    Under Cendant's existing stock plans, Cendant common stock awards (including stock options, stock appreciation rights, restricted shares and restricted stock units) are granted to the Company's employees, including directors and officers of the Company. Prior to January 1, 2003, Cendant measured its stock-based compensation using the intrinsic value approach under Accounting Principles Board ("APB") Opinion No. 25, as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Accordingly, Cendant did not recognize compensation expense upon the issuance of its stock options to employees because the option terms were fixed and the exercise price equaled the market price of the underlying common stock on the date of grant. Therefore, the Company was not allocated compensation expense upon Cendant's issuance of common stock options to the Company's employees. The Company complied with the provisions of SFAS No. 123 by providing pro forma disclosures of net income giving consideration to the fair value method provisions of SFAS No. 123.

On January 1, 2003, Cendant adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123, which is considered by the Financial Accounting Standards Board ("FASB") to be the preferable accounting method for stock-based employee compensation. Cendant also adopted SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," in its entirety on January 1, 2003. Under the fair value method of accounting provisions of SFAS No. 123, Cendant is required to expense all employee stock options over their vesting period based upon the fair value of the award on the date of grant. Under SFAS No. 148, which amended SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting provisions, Cendant elected to use the prospective transition method when adopting SFAS No. 123. Accordingly, Cendant is only required to expense employee stock options that were granted subsequent to December 31, 2002.

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The following table illustrates the effect on net income as if the fair value based method had been applied to all employee stock awards granted by Cendant to the Company's employees prior to January 1, 2003:

---

^(a)

The 2003 amounts reflect the second quarter 2003 issuance by Cendant of 1.0 million restricted stock units to certain of the Company's employees (including officers) as a form of compensation. These restricted stock units entitle the employee to receive one share of Cendant's common stock upon vesting, which occurs ratably over a four year period. Accordingly, Cendant allocated compensation expense to the Company during the three and six months ended June 30, 2003, which on an after-tax basis is less than $1 million.

^(b)

Pro forma compensation expense reflected for grants awarded prior to January 1, 2003 is not indicative of future compensation expense that would be recorded by the Company. Future expense will vary based upon factors such as the type of award granted by the Company and the then-current fair market value of such award.

Costs Associated with Exit or Disposal Activities.    On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Such standard requires costs associated with exit or disposal activities (including restructurings) initiated after December 31, 2002 to be recognized when the costs are incurred, rather than at the date of commitment to an exit or disposal plan. This standard nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The impact of adopting this standard was not material to the Company's results of operations or financial position.

Guarantees.    On January 1, 2003, the Company adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," in its entirety. Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of any guarantee issued or modified after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee. The impact of adopting this Interpretation was not material to the Company's results of operations or financial position.

Recently Issued Accounting Pronouncements
Consolidation of Variable Interest Entities.    On January 17, 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). Such Interpretation addresses the consolidation of entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks and rewards. These entities have been commonly referred to as special purpose entities ("SPE"), although other non-SPE-type entities may be subject to the Interpretation. This Interpretation provides guidance related to identifying variable interest entities and determining whether such entities should be consolidated. It also requires disclosures for both the primary beneficiary of a variable interest entity and other parties with significant variable interests in the entity. Transferors to a qualifying SPE ("QSPE") and certain other interests in QSPEs are not subject to this Interpretation.

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Pursuant to FIN 46, the Company will consolidate Bishop's Gate Residential Mortgage Trust ("Bishop's Gate") on July 1, 2003 through the application of the prospective transition method. Therefore, the consolidation of this entity will not result in any changes to the Company's consolidated financial statements for any prior periods (including first and second quarters of 2003). Furthermore, the consolidation of Bishop's Gate will not affect the Company's results of operations but will cause its total assets and liabilities under management and mortgage programs to increase by approximately $2.1 billion each on July 1, 2003. See Note 5—Off—Balance Sheet Financing Arrangements for more information regarding the Bishop's Gate mortgage securitization facility.

Derivative Instruments and Hedging Activities.    On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." Such standard amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this standard are generally effective for contracts entered into or modified after June 30, 2003 and are not expected to have a material impact on the Company's consolidated financial statements.

2.    Intangible Assets

Intangible assets consisted of:

---

^(a)

Included as a component of other assets on the Company's Consolidated Condensed Balance Sheets.

^(b)

The changes in the carrying amount of goodwill reflect foreign currency translation adjustments within the Company's Real Estate Services segment.

Amortization expense relating to all intangible assets excluding mortgage servicing rights (see Note 3—Mortgage Servicing Activities) was $1 million for the six months ended June 30, 2003 and $1 and $2 million for the three and six months ended 2002, respectively. Such amortization expense was insignificant for the three months ended June 30, 2003. Based on its amortizable intangible assets (excluding mortgage servicing rights) as of June 30, 2003, the Company expects related amortization expense to approximate $1 million for the remainder of 2003 and $2 million for each of the five succeeding fiscal years.

3.    Mortgage Servicing Activities

The activity in the Company's residential first mortgage loan servicing portfolio consisted of:

---

^(*)

Does not include approximately $1.9 billion and $1.6 billion of home equity mortgages serviced by the Company as of June 30, 2003 and 2002, respectively.

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Substantially all of the mortgage loans within this servicing portfolio were sold by the Company without recourse. However, approximately $2.7 billion (approximately 2%) of loans within this servicing portfolio as of June 30, 2003 were sold with recourse. The majority of such loans were sold under a program where the Company retains the credit risk for a limited period of time and only for a specific default event. For these loans, the Company accrues a provision (equal to the fair value of the recourse obligation) for expected losses. As of June 30, 2003, the provision approximated $4 million and was recorded as a component of accounts payable and other current liabilities on the Consolidated Condensed Balance Sheets. There was no significant activity during 2003 that would cause the Company to utilize any of this provision. The Company believes that this provision is adequate to cover expected losses and that such losses would not be material to its results of operations.

The weighted average note rate on all the underlying mortgages within this servicing portfolio was 5.7% and 6.6% as of June 30, 2003 and 2002, respectively.

The activity in the Company's capitalized mortgage servicing rights ("MSR") asset consisted of:

---

^(*)

Represents provision for impairment recorded within net revenues in the Consolidated Condensed Statements of Income.

As of June 30, 2003, the Company expects MSR amortization expense for the remainder of 2003 and the five succeeding fiscal years to approximate $175 million, $350 million, $255 million, $220 million, $190 million and $160 million, respectively. As of June 30, 2003, the MSR portfolio had a weighted average life of approximately 4.2 years.

The Company uses derivatives to mitigate the impact that accelerated prepayments have on the fair value of its MSR asset. Such derivatives, which are primarily designated as fair value hedging instruments, tend to increase in value as interest rates decline and conversely decline in value as interest rates increase. The activity in the Company's derivatives related to mortgage servicing rights asset consisted of:

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The net impact to the Company's Consolidated Condensed Statements of Income resulting from changes in the fair value of the Company's MSR asset, after giving effect to hedging and other derivative activity, was as follows:

4.    Debt Under Management and Mortgage Programs and Borrowing Arrangements

Debt under management and mortgage programs consisted of:

---

^(a)

At June 30, 2003, approximately $2.1 billion of asset-backed term notes were included in outstanding borrowings.

^(b)

The change in the balance at June 30, 2003 reflects the repayment of outstanding borrowings as the operations of these businesses are being supported in 2003 largely through borrowings of unsecured debt.

^(c)

The change in the balance at June 30, 2003 principally reflects (i) the issuance of $400 million of 6% term notes due March 2008, (ii) the issuance of $600 million of 7¹/8% term notes due March 2013, (iii) the issuance of $194 million of term notes with various interest rates and maturity dates and (iv) the February 2003 repayment of $650 million of 8¹/8% term notes.

Available Funding Arrangements and Committed Credit Facilities
As of June 30, 2003, available funding under the Company's asset-backed debt programs and committed credit facilities related to the Company's management and mortgage programs consisted of:

---

^(*)

Capacity is subject to maintaining sufficient assets to collateralize debt.

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As of June 30, 2003, the Company also had $874 million of availability for public debt issuances under a shelf registration statement.

Debt Maturities and Covenants
The following table provides the contractual maturities for debt under management and mortgage programs at June 30, 2003 (except for notes issued under the Company's vehicle management program, where the underlying indentures require payments based on cash inflows relating to the corresponding assets under management and mortgage programs and for which appropriate estimates have been used).

---

^(*)

Unsecured commercial paper borrowings of $523 million are assumed to be repaid with borrowings under the Company's committed credit facility expiring in February 2005, as such amount is fully supported by the Company's committed credit facilities, which are described above.

At June 30, 2003, the Company was in compliance with all restrictive and financial covenants of its debt instruments and credit facilities related to management and mortgage programs.

5.    Off-Balance Sheet Financing Arrangements

The Company sells specific assets under management and mortgage programs in exchange for cash. In the Company's relocation business, relocation receivables are sold to Apple Ridge Funding LLC ("Apple Ridge"), a bankruptcy remote QSPE, and at its mortgage business, the Company sells its originated mortgage loans into the secondary market, which is customary practice in the mortgage industry. Such mortgage loans are sold into the secondary market primarily through one of the following means: (i) the direct sale to a government-sponsored entity, (ii) through capacity under a subsidiary's public registration statement (which approximated $1.97 billion as of June 30, 2003) or (iii) through Bishop's Gate, a bankruptcy remote SPE. Presented below is detailed information as of June 30, 2003 regarding off-balance sheet financing and sale arrangements.

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^(a)

Does not include cash of $20 million and $31 million at Apple Ridge and Bishop's Gate, respectively.

^(b)

Primarily represents term notes.

^(c)

Subject to maintaining sufficient assets to collateralize debt.

^(d)

As discussed in Note 1—Summary of Significant Accounting Policies, the Company will consolidate Bishop's Gate in its financial statements as of July 1, 2003, as required by FIN 46.

^(e)

Includes the Company's ability to fund assets with $151 million of outside equity certificates.

The receivables and mortgage loans transferred to the above SPEs, as well as the mortgage loans sold to the secondary market through other means, are generally non-recourse to the Company. Pretax gains recognized on all securitizations of financial assets, which are recorded within net revenues on the Company's Consolidated Condensed Statements of Income, were as follows:

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6.    Commitments and Contingencies

The June 1999 disposition of the Company's fleet businesses was structured as a tax-free reorganization and, accordingly, no tax provision was recorded on a majority of the gain. However, pursuant to an interpretive ruling, the Internal Revenue Service ("IRS") has taken the position that similarly structured transactions do not qualify as tax-free reorganizations under the Internal Revenue Code Section 368(a)(1)(A). If the transaction is not considered a tax-free reorganization, the resultant incremental liability could range between $10 million and $170 million depending upon certain factors, including utilization of tax attributes. Notwithstanding the IRS interpretive ruling, the Company believes that, based upon analysis of current tax law, its position would prevail, if challenged.

The Company is involved in pending litigation in the usual course of business. In the opinion of management, such other litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

7.    Comprehensive Income

The components of comprehensive income are summarized as follows:

The after-tax components of accumulated other comprehensive loss are as follows:

The currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries.

8.    Related Party Transactions

Cendant
In the ordinary course of business, the Company is allocated certain expenses from Cendant for corporate-related functions including executive management, finance, human resources, information technology, legal and facility related expenses. Cendant allocates corporate expenses to subsidiaries conducting ongoing operations based on a percentage of the subsidiaries' forecasted revenues. Such expenses amounted to $8 million each for the three months ended June 30, 2003 and 2002 and $17 million and $15 million for the six months ended June 30, 2003 and 2002, respectively.

On January 1, 2003, Cendant transferred the mortgage operations (with net assets of $11 million) of a recently acquired real estate brokerage business to the Company in a non-cash financing transaction. Additionally, during the six months ended June 30, 2003, the Company paid Cendant $63 million in connection with the settlement of intercompany activities. Furthermore, during the six months ended June 30, 2003, the Company paid cash dividends of $70 million to Cendant.

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NRT Incorporated
The Company participates in acquisitions made by NRT Incorporated ("NRT"), a wholly-owned subsidiary of Cendant, by acquiring mortgage operations of the real estate brokerage firms acquired by NRT. Reflected within the Company's Consolidated Condensed Statements of Income for the three months ended June 30, 2003 and 2002 are $10 million and $9 million, respectively, of fees paid to the Company by NRT in connection with real estate referrals. For the six months ended June 30, 2003 and 2002, the Company recorded real estate referral fees of $18 million and $16 million, respectively. These fees are customary as they are paid to the Company by all real estate brokerages (both affiliates and non-affiliates) who receive referrals from the Company's relocation business.

9.    Segment Information

Management evaluates the operating results of each of its reportable segments based upon revenue and "EBITDA," which is defined as net income before non-program related depreciation and amortization, income taxes and minority interest. On January 1, 2003, the Company changed its performance measure used to evaluate the operating results of its reportable segments and, as such, the information presented below for the three and six months ended June 30, 2002 has been revised to reflect this change. The Company's presentation of EBITDA may not be comparable to similar measures used by other companies. Presented below are the revenues and EBITDA for each of the Company's reportable segments and a reconciliation of EBITDA to income before income taxes and minority interest for the three and six months ended June 30, 2003 and 2002.

---

^(*)

Includes unallocated corporate overhead and the elimination of transactions between segments.

10.    Subsequent Events

On July 3, 2003, the terms of the Company's $750 million committed credit facility, which was scheduled to mature in February 2004, were amended to extend the maturity date to February 2005 and reduce the capacity to $500 million.

****

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Item 2.    Management's Narrative Analysis of the Results of Operations and Liquidity and Capital Resources

The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and accompanying Notes thereto included elsewhere herein and with our 2002 Annual Report on Form 10-K filed with the Commission on March 5, 2003. Unless otherwise noted, all dollar amounts are in millions.

We are a provider of relocation, mortgage and fleet management services. Our Real Estate Services segment provides homebuyers with mortgages and facilitates employee relocations and our Fleet Management Services segment provides fleet management and fuel card services to corporate clients and government agencies.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003 VS. THREE MONTHS ENDED JUNE 30, 2002

Discussed below are the results of operations for each of our reportable segments. Management evaluates the operating results of each of our reportable segments based upon revenue and "EBITDA," which is defined as net income before non-program related depreciation and amortization, income taxes and minority interest. On January 1, 2003, we changed our performance measure used to evaluate the operating results of our reportable segments and, as such, the information presented below for second quarter 2002 has been revised to reflect this change. Our presentation of EBITDA may not be comparable to similar measures used by other companies.

^*

Not meaningful.

^(a)

Includes unallocated corporate overhead and the elimination of transactions between segments.

Real Estate Services
Revenues and EBITDA increased $88 million (30%) and $16 million (18%), respectively, in second quarter 2003 compared with 2002.

Revenues from mortgage-related activities grew $95 million (55%) in second quarter 2003 compared with second quarter 2002 due to a significant increase in mortgage loan production as low interest rates have prompted record levels of mortgage refinancing activity. Revenues from mortgage loan production increased $166 million (89%) in second quarter 2003 compared with the prior year quarter and was derived from growth in our fee-based mortgage origination operations (discussed below) and an increase in the volume of loans that we packaged and sold, which more than doubled quarter-over-quarter. We sold $16.3 billion of mortgage loans in second quarter 2003 compared with $8.1 billion in second quarter 2002, generating incremental production revenues of $118 million. In addition, production revenues generated from our fee-based mortgage-origination activity increased $48 million (89%) as compared with second quarter 2002. Production fee income on fee-based loans is generated at the time of closing, whereas originated mortgage loans held for sale generate revenues at the time of sale (typically 30-60 days after closing). Accordingly, our production revenue in second quarter 2003 was driven by a mix of mortgage loans closed and mortgage loans sold. Total mortgage loans closed increased $10.9 billion (87%) to $23.3 billion in second quarter 2003, comprised of a $9.3 billion (121%) increase in closed loans to be securitized (sold by us) and a $1.6 billion (33%) increase in closed loans that were fee-based. The increase in loan origination volume was principally driven by continued substantial refinancing activity during second quarter 2003. Refinancings increased $9.7 billion (226%) to $14.0 billion and purchase mortgage closings grew $1.2 billion (14%) to $9.3 billion.

Net revenues from servicing mortgages loans declined $71 million, although recurring servicing fees (fees received for servicing existing loans in the portfolio) increased $7 million (7%) driven by a 16% quarter-over-quarter increase in the size of our average servicing portfolio to $119.8 billion. Net servicing revenues included an increase

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of $143 million in mortgage servicing rights ("MSRs") amortization and provision for impairment (both of which are recorded against revenue) due to the high levels of refinancings and related loan prepayments, resulting from the lower interest rate environment. However, this was partially offset by $72 million of incremental gains from hedging and other derivative activities to protect against changes in the fair value of MSRs due to fluctuations in interest rates. Operating and administrative expenses within this segment increased approximately $70 million, primarily due to the direct costs incurred in connection with continued high level of mortgage loan production and related servicing activities.

Fleet Management
Revenues and EBITDA increased $5 million (1%) and $1 million (3%), respectively, in the second quarter 2003 compared with the prior year quarter. These increases are primarily related to growth in fuel cards, card usage and higher gasoline prices whereby our fuel card business earns a percentage of the total gas purchased by its clients. The EBITDA impact was partially offset by higher operating expenses incurred to support the higher volume of cards.

SIX MONTHS ENDED JUNE 30, 2003 VS. SIX MONTHS ENDED JUNE 30, 2002

Discussed below are the results of operations for each of our reportable segments. The information presented for the six months ended June 30, 2002 has been revised to reflect the previously described change in the performance measure that we use to evaluate the operating results of our reportable segments.