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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number 000-50368

ABX AIR, INC.

(Exact name of registrant as specified in its charter)

145 Hunter Drive, Wilmington, OH 45177

(Address of principal executive offices)

937-382-5591

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of class: none

Name of each exchange on which registered: none

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.01 per share

(Title of class)

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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter: $0.

As of March 19, 2004, 58,270,400 shares of the registrant’s common stock were outstanding having an aggregate market value of $359,528,368.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders to be held May 6, 2004 are incorporated by reference into Part III.

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FORWARD LOOKING STATEMENTS

Statements contained in this annual report on Form 10-K, including “Managements Discussion and Analysis of Financial Condition and Results of Operations,” in Item 7, that are not historical facts are considered forward-looking statements (as that term is defined in the Private Securities Litigation Reform Act of 1995). Words such as “projects,” “believes,” “anticipates,” “will,” “estimates,” “plans,” “expects,” “intends” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are based on expectations, estimates and projections as of the date of this filing, and involve risks and uncertainties that are inherently difficult to predict. Actual results may differ materially from those expressed in the forward-looking statements for any number of reasons, including those described in “Risk Factors Associated with ABX’s Business.”

Filings with the Securities and Exchange Commission

Our filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, are available free of charge from our website at www.ABXAir.com.

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ABX AIR, INC. AND SUBSIDIARIES

2003 FORM 10-K ANNUAL REPORT

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PART I

ITEM 1. BUSINESS

Background

ABX Air, Inc. (“ABX”) is a Delaware corporation that was formed in 1980 and was recently a wholly-owned subsidiary of Airborne, Inc. (“Airborne”). On August 15, 2003 we were separated from Airborne and became an independent, publicly-owned company. We are an airline providing air cargo transportation and hub services within the United States and to Canada and Puerto Rico. We operate and maintain an in-service fleet of 115 aircraft. Through a network of 12 hubs in the United States, we provide package sorting and handling services. We utilize contracted line-haul from third party trucking companies to transport deferred delivery cargo within our network. Deferred delivery cargo must be delivered at a specific time, but is less time sensitive than express freight typically transported by our aircraft. We do not provide local pickup and delivery services to consumers. Our headquarters and the principal site of our airline hub and package sorting operation are located in Wilmington, Ohio.

Since our inception, Airborne has been our primary customer, accounting for over 98% of our annual revenues. We assist Airborne in providing domestic express and deferred delivery services to its customers. Airborne’s express delivery services include its Overnight Service, Next Afternoon Service (“NAS”) and Second Day Service (“SDS”). Overnight Service and NAS packages are primarily transported by our fleet of aircraft and sorted through our nightly hub operations. SDS packages and packages shipped using Airborne’s deferred delivery services, which include Airborne@Home and Ground Delivery Service, are primarily transported by contracted trucks and sorted through our Wilmington daytime sort and regional hub operations. Some of the packages for SDS and for deferred delivery services may be transported on our aircraft.

We also provide air transportation services such as on-demand charter services and airport-to-airport freight transportation on a space available basis. We sell aircraft parts and provide maintenance and repair services for airframes and aircraft components. We also provide flight-training services to customers.

Separation from Airborne

The separation of ABX from Airborne was a condition to the merger agreement between Airborne and DHL Worldwide Express B. V. (“DHL”). The merger agreement required Airborne to separate its air operations from its ground operations with the air operations being retained by ABX. Immediately prior to the separation, certain assets and liabilities related to Airborne’s ground operations were transferred out of ABX to Airborne. Immediately following the closing of the transaction, Airborne became an indirect, wholly-owned subsidiary of DHL and ABX became an independent, publicly-traded company, initially owned by Airborne’s former stockholders.

The separation of ABX from Airborne occurred according to the terms and conditions of the separation agreement, which was included in our S-4 registration statement amended on July 11, 2003. In the separation:

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Commercial Agreements with Airborne

Under the ACMI agreement, we provide air cargo transportation to Airborne on a cost plus pricing structure. We have complete and exclusive responsibility for the operation, maintenance and safety of the aircraft. Costs incurred under the ACMI agreement are generally marked-up 1.75% and recorded in revenues. Certain costs, the most significant of which include fuel, rent, interest on the promissory note to Airborne, ramp fees and landing fees incurred under the Airborne ACMI agreement, are recorded in revenues without markup. By achieving certain cost and service goals specified in the agreement, the markup can increase from a base of 1.75%, up to 3.35%.

The ACMI agreement has a term of seven years and automatically renews for an additional three years unless a one-year notice of non-renewal is given. Airborne may terminate the ACMI agreement if, after a cure period, ABX is not in compliance with applicable performance standards specified in the agreement. After August 15, 2004, the agreement allows Airborne to reduce the air routes that we fly or remove aircraft from service. For any aircraft removed from service during the term of the ACMI agreement, the agreement allows us to put the aircraft to Airborne, requiring Airborne to buy such aircraft from us at book value or fair value depending on our level of stockholders’ equity and the size of the promissory note to Airborne at the time the put is executed.

Under the Hub Services agreement, we provide staff to conduct package sorting, warehousing, and line-haul logistics as well as airport, facilities and equipment maintenance services for Airborne. Costs incurred under these agreements are generally marked-up 1.75% and included in revenues. By achieving certain cost and service goals specified in the agreement, the markup can increase from a base of 1.75%, up to 3.85%.

The Hub Services agreement has a term of three years, with automatic one-year renewals unless a ninety-day notice of non-renewal is given. Airborne may terminate the Hub Services agreement if, after a cure period, ABX is not in compliance with applicable performance standards specified in the agreement. Airborne may also terminate the Hub Services agreement if the ACMI agreement has been terminated. After August 15, 2004, the agreement allows Airborne to terminate specific services at one or more of the hubs after giving us sixty days of advanced notice.

Products and Services

Beyond the ACMI and hub services that we provide to Airborne, we also provide air transportation and related service to other customers. The chart below represents the distribution of our revenues based on our activities in the fourth quarter of 2003.

Our strategy is to increase our customer base through the development of air transportation related services and by leveraging our current air cargo capabilities. Our services provided to non-Airborne customers, are described below.

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ACMI and On Demand Charter Services

We can use our aircraft to fly charters for customers other than Airborne. A typical charter contract requires ABX to supply the aircraft, crew, maintenance and insurance for specified cargo operations, while the customer is responsible for substantially all other aircraft operating expenses, including fuel, landing fees, parking fees and ground and cargo handling expenses. Under a charter arrangement, we have exclusive operating control of our aircraft and our customers must typically obtain any government authorizations and permits required to service the designated routes. This model allows customers to utilize our capabilities instead of committing to aircraft ownership. Throughout 2003, we performed scheduled weekly flights for customers operating from Miami, Florida to several cities in the Caribbean and Central America.

Airport-to-Airport Transportation of Freight on a Space Available Basis

Our ACMI agreement with Airborne allows us, subject to certain limitations described in the ACMI agreement, to sell any aircraft space that Airborne does not use to other customers. On the routes we operate for Airborne, we sell airport-to-airport transportation services to freight forwarders and we have a contract to provide such services to the U.S. Postal Service.

Aircraft Maintenance and Modification Services

We are a Federal Aviation Administration (“FAA”) certified repair station and we can leverage the maintenance facilities (including hangars and a component shop which we lease) and our engineering capabilities to perform airframe and component maintenance and repair services for other airlines and maintenance repair organizations. We have developed technical expertise related to aircraft modifications as a result of our long history in aviation. We own many Supplemental Type Certificates (“STC’s”). An STC is granted by the FAA and represents an ownership right, similar to an intellectual property right, which authorizes the alteration of an airframe, engine or component. Historically, we have not marketed these capabilities, but as we identify opportunities in the market, we will attempt to match our capabilities with market needs.

We perform airframe overhauls on our fleet of McDonnell Douglas DC-9 (“DC-9”) aircraft and line maintenance on our fleet of McDonnell Douglas DC-8 (“DC-8”), DC-9 and Boeing 767 aircraft. We also refurbish in-house approximately 60% of the airframe components for our DC-8 and DC-9 aircraft and the wheels and brakes for all of our aircraft types. We also perform intermediate repairs on the engines for our DC-8 aircraft and the engines and auxiliary power units for our DC-9 aircraft. We have developed a turnkey approach for installing FAA certified Reduced Vertical Separation Minima (“RVSM”) equipment in DC-9 aircraft and signed an exclusive distribution agreement to sell the related hardware. RVSM is designed to reduce air traffic congestion by permitting aircraft to fly closer together vertically above certain altitudes. Additionally, we update aircraft manuals for customers in conjunction with the modification of aircraft from passenger to cargo configuration.

Aircraft Parts Sales and Brokerage

Our wholly-owned subsidiary, Airborne FTZ Inc. (“FTZ”), which holds a certificate relating to free trade zone rights, is an ASA (Aviation Suppliers Association) 100 Certified reseller and broker of aircraft parts. FTZ carries an inventory of DC-8, DC-9 and Boeing 767 spare parts, and also maintains inventory on consignment from original equipment manufacturers, resellers, lessors and other airlines. FTZ’s customers include the commercial air cargo industry, passenger airlines, aircraft manufacturers and contract maintenance companies serving the commercial aviation industry, as well as other resellers.

Flight Crew Training

We train flight crewmembers in-house utilizing our own classroom instructors and facilities. We own four flight simulators, including one Boeing 767, one DC-8 and two DC-9 flight simulators. Our Boeing 767 and one of our DC-9 flight simulators are level C certified, which allows us to qualify flight crewmembers under FAA

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requirements without performing check flights in an aircraft. Our DC-8 and the other DC-9 flight simulator are level B certified which allows us to qualify flight crewmembers by performing a minimum number of aircraft flights. We are FAA certificated to offer training to customers and rent usage of the flight simulators for outside training programs.

Industry

The air cargo delivery industry provides time definite delivery services, usually for time critical or priority shipment. Transported shipments range from individual letters to shipper-packaged pallets of material such as electronic equipment, retail catalogs, movies and pharmaceuticals. The principle competitive factors in our industry are price, geographic coverage, flight frequency, reliability and capacity.

Cargo volumes within the U.S. are highly dependent on the economic conditions and the level of commercial activity. We expect the market to grow over the long term as the U.S. economy recovers. Continued emphasis among businesses for just-in-time inventory management and time critical delivery services increases the demand for air cargo delivery. Historically, ABX and our industry have experienced higher cargo volumes during the fourth calendar quarter of each year.

The industry has been and is expected to remain highly competitive primarily because of excess capacity among U.S. airlines. We compete for domestic cargo volume principally with other all-cargo airlines, integrated carriers and passenger airlines which have substantial belly cargo capacity. Other all-cargo airlines include Astar Air Cargo, Inc. (“Astar”), (formerly DHL Airways), Atlas Air Inc., Evergreen International Inc. and Kitty Hawk Inc. Integrated, (door-to-door) carriers include Federal Express Corporation (“FedEx”) and United Parcel Service Inc. (“UPS”). At least two of our competitors have an ACMI or charter agreement with a DHL affiliated company.

Our air transport capabilities also compete with expedited ground delivery services utilizing trucks. Shippers may be able to utilize expedited ground delivery on short-haul routes where expedited services are available, typically from integrated and less-than-truckload carriers. Generally, the cost of truck-transported freight is substantially less than air transportation.

Airline Operations

Aircraft

We currently utilize pre-owned Boeing 767, DC-8 and DC-9 aircraft. Once acquired, aircraft are modified for use in our cargo operation. As of December 31, 2003, our in-service fleet consisted of 115 aircraft, including twenty-four Boeing 767, seventeen DC-8, and seventy-four DC-9 aircraft. We own 109 of these aircraft and lease five Boeing 767 and one DC-9 aircraft. The average age of our Boeing 767, DC-8 and DC-9 aircraft is 20, 35 and 33 years, respectively.

With newer generation and more operationally efficient Boeing 767 aircraft, the less economical DC-8 aircraft can be placed into shorter lane segments, transferred to backup or charter operation roles, or removed from service. Future DC-8 aircraft retirements will be determined based on ACMI requirements, capacity requirements, charter service demand and the timing of placing future Boeing 767 aircraft into service.

The majority of our aircraft are not equipped with a standard cargo door, but instead utilize the former passenger door for the loading and unloading of freight. This reduces the cost of modifying the aircraft from passenger to cargo configuration, but limits the size of the freight that can be carried onboard the aircraft and necessitates the use of specialized containers and loading equipment. The absence of a cargo door also negatively impacts the market value of the aircraft. We currently have eight DC-8 aircraft that are equipped with an activated standard cargo door. We also have nine DC-9 aircraft that are equipped with a standard cargo door that are currently not activated. We are currently modifying two Boeing 767 aircraft with a standard cargo door and plan to install standard cargo doors on three Boeing 767 aircraft that we are committed to purchase in 2004 and 2005.

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Flight Operations and Control

Our operations (including aircraft dispatching, flight tracking and crew scheduling) are planned and controlled by dispatch and flight operations personnel at the Wilmington Air Park, an airport located in Wilmington, Ohio. We staff the flight operations office 24 hours per day, 7 days per week. Our flight operations office at Wilmington Air Park also coordinates the technical support necessary for our flights into other airports. Because our flight operations can be hindered by inclement weather, we use sophisticated landing systems and other equipment that are intended to minimize the effect that weather may have on our flight operations.

Maintenance

Our operations are regulated by the FAA for aircraft safety and maintenance. We believe that maintaining a majority of our fleet of aircraft ourselves reduces maintenance costs, minimizes the out-of-service time for aircraft and achieves a higher level of reliability. We are certificated as an FAA repair station to perform maintenance on DC-8, DC-9 and Boeing 767 aircraft and their related avionics and accessories. Our maintenance and engineering personnel coordinate all routine and non-routine maintenance programs. Our maintenance programs include tracking the maintenance status of each aircraft, consulting with manufacturers and vendors about procedures to correct irregularities and training ABX maintenance personnel on the requirements of our FAA-approved maintenance program. We conduct nearly all of our own maintenance training.

We perform major airframe maintenance and modification on our DC-9 aircraft. We perform routine inspections and airframe maintenance, including Airworthiness Directives and Service Bulletin compliance on our DC-8, DC-9 and Boeing 767 aircraft. We contract with maintenance repair organizations to perform heavy maintenance on DC-8 and Boeing 767 airframes. We also contract with maintenance repair organizations for the performance of heavy maintenance on aircraft engines.

We own a supply of spare aircraft engines, auxiliary power units (“APUs”), aircraft parts and consumable items. The number of spare items we maintain is based on the size of the fleet of each aircraft type we operate and the reliability records of the item types. These serviceable spare engines, APUs, spare parts and consumable items are used strictly in support of our fleet of aircraft.

Due to the nature of ABX’s business, our aircraft experience relatively low utilization. For this reason, we have elected to schedule and perform heavy maintenance on our aircraft on a calendar basis as opposed to an hourly basis. This results in ABX’s aircraft undergoing inspections and maintenance on a more frequent basis, thereby improving mechanical reliability, lowering costs and, ultimately, improving service to our customers.

Insurance

We are required by the Department of Transportation (the “DOT”) to carry liability insurance on each of our aircraft. Each of our aircraft leases and the ACMI and Hub Services agreements also require us to carry such insurance. We currently maintain public liability and property damage insurance and aircraft hull and liability insurance for each of the aircraft in our fleet in amounts consistent with industry standards.

Sort and Line-haul Operations

We operate and maintain Airborne’s primary sort facility located in Wilmington, Ohio. The Wilmington facility currently has the capacity to handle approximately 1.3 million pieces during the primary 3.25-hour nightly sort operation. On average, approximately 930,000 pieces are sorted each weekday night at the sort center. In addition to the sort facility in Wilmington, we operate eleven regional hubs on behalf of Airborne that are located near Allentown, Pennsylvania; Atlanta, Georgia; Centralia, Washington; Columbia, Missouri; Fresno, California; Orlando, Florida; Providence, Rhode Island; Roanoke, Virginia; South Bend, Indiana; Vista, California; and Waco, Texas. These regional hub facilities primarily sort shipments originating and having a destination within approximately 250 miles. We also conduct a daytime sort operation in Wilmington that processes deferred delivery services. The day sort generally receives shipments through a combination of aircraft

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and trucks originating from regional hubs, Airborne station facilities or customer sites. The night sort and day sort operations at Wilmington handle approximately 42% and 34% of total shipment weight, respectively, while the regional hubs handle the remaining 24%.

Employees

As of December 31, 2003, there were approximately 7,000 ABX employees, including 4,000 full-time employees and 3,000 part-time employees. We employ approximately 740 flight crewmembers, 1,500 aircraft maintenance technicians and flight support personnel, 2,610 sort employees at the Wilmington Air Park, 900 sort employees at the eleven regional hubs, 450 employees for airport and hub maintenance, 400 employees for warehousing and line-haul logistics and 400 employees for administrative functions. We perform employee background checks for a ten-year period prior to employment and, in fact, conduct more pre-employment screening than mandated by FAA regulations. In addition, management personnel who are directly involved in the supervision of flight operations, training, maintenance and aircraft inspection, must meet experience standards prescribed by FAA regulations. All of our employees are subject to pre-employment drug and alcohol testing, and employees holding certain positions are subject to subsequent random testing. Our flight crewmembers are our only group of unionized employees.

Labor Agreements

The International Brotherhood of Teamsters (“IBT”) is the duly designated and authorized representative of ABX’s flight crewmembers under the Railway Labor Act (“RLA”), as amended. The flight crewmembers’ contract becomes amendable as of July 31, 2006. Under the RLA, labor agreements do not expire, so the existing contract remains in effect throughout any negotiation process. Mediation under the RLA is conducted by the National Mediation Board, which has the sole discretion as to how long mediation can last and when it will end. In addition to direct negotiations and mediation, the RLA includes a provision for potential arbitration of unresolved issues and a 30-day “cooling off” period before either party can resort to self-help.

Training

FAA regulations require ABX flight crewmembers to be licensed as Federal Aviations Regulation (“FAR”) Part 121 airline pilots, with specific ratings for the aircraft type to be flown, and to be medically certified as physically fit to fly aircraft. Licenses and medical certification are subject to recurrent requirements as set forth in the FARs to include recurrent training and minimum amounts of recent flying experience.

The FAA mandates initial and recurrent training for most flight, maintenance and engineering personnel. Mechanics and quality control inspectors must also be licensed and qualified for specific aircraft. We pay for all of the recurrent training required for our flight crewmembers and provide training of our ground service and maintenance personnel. Our training programs have received all required FAA approvals.

Competitive Strengths

Our competitive strengths are:

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In addition to the strengths above, our business is subject to various risks, some of which are described starting on page 27.

Intellectual Property

We own a small number of other U.S. patents that while essential for our business operations, are of nominal commercial value. We believe that our intellectual property rights and licensing rights are adequate for our business. We also own approximately 160 STC’s issued by the FAA. We believe that our most marketable STC is the Reduced Vertical Separation Minima for DC-9 aircraft, which is designed to reduce air traffic congestion by permitting aircraft to fly closer together vertically above certain altitudes.

Information Systems

We have invested significant management and financial resources in the development of information systems to facilitate cargo, flight and maintenance operations. We utilize our systems to maintain records about the maintenance status and history of each major aircraft component, as required by FAA regulations. Using our systems, we track and control inventories and costs associated with each maintenance task, including the personnel performing those tasks. In addition, our flight operations system coordinates flight schedules and crew schedules. We have developed and procured systems to track flight time, flight crewmember duty and flight hours and crewmember training status.

Regulation

Our air carrier operations are generally regulated by the DOT and the FAA. Our operations must comply with numerous environmental laws, ordinances and regulations. In addition, we must also comply with various other federal, state, local and foreign authorities.

Environment

Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or clean up of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to clean up such contaminated property properly, may adversely affect the ability of the owner of the property to use such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated and may impose remedial or compliance costs. Under the Airborne sublease, ABX and Airborne are required to defend, indemnify and hold each other harmless from and against certain environmental claims associated with Wilmington Air Park.

We are subject to the regulations of the U.S. Environmental Protection Agency and state and local governments regarding air quality and other matters. In part, because of the highly industrialized nature of many

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of the locations at which we operate, there can be no assurance that we have discovered all environmental contamination for which we may be responsible.

Our aircraft currently meet all known requirements for engine emission levels. However, under the Clean Air Act, individual states or the U.S. Environmental Protection Agency may adopt regulations requiring reduction in emissions for one or more localities based on the measured air quality at such localities. Such regulations may seek to limit or restrict emissions by restricting the use of emission producing ground service equipment or aircraft auxiliary power units. There can be no assurance that, if such regulations are adopted in the future or changes in existing laws or regulations are promulgated, such laws or rules would not have a material adverse effect on our financial condition or results of operations.

The federal government generally regulates aircraft engine noise at its source. However, local airport operators may, under certain circumstances, regulate airport operations based on aircraft noise considerations. The Airport Noise and Capacity Act of 1990 provides that, in the case of Stage 3 aircraft (all of our operating aircraft satisfy Stage 3 noise compliance requirements), an airport operator must obtain the carriers’ or the government’s approval of the rule prior to its adoption. We believe the operation of our aircraft either complies with or is exempt from compliance with currently applicable local airport rules. However, some airport authorities are considering adopting local noise regulations and, to the extent more stringent aircraft operating regulations are adopted on a widespread basis, we might be required to spend substantial funds, make schedule changes or take other actions to comply with such local rules.

The U.S. government, working through the International Civil Aviation Organization, has agreed to adopt more stringent aircraft engine emissions regulations with regard to newly certificated engines beginning at the end of 2003 and aircraft noise regulations applicable to newly certificated aircraft after January 2006. Although these rules will not apply to any of ABX’s existing aircraft, additional rules could be adopted in the future that would either apply these more stringent noise and emissions standards to aircraft already in operation or require that some portion of the fleet be converted over time to comply with these new standards.

Department of Transportation

The DOT maintains authority over domestic and international aviation and has jurisdiction over international routes. The DOT has issued ABX a Domestic All-Cargo Air Service Certificate for air cargo transportation between all points within the United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands; and a Certificate of Public Convenience and Necessity (Route 377) to engage in scheduled foreign air cargo transportation between the U.S. and Canada. Prior to issuing such certificates, the DOT examines a company’s managerial competence, financial resources and plans, compliance disposition and citizenship in order to determine whether the carrier is fit, willing and able to engage in the transportation services it has proposed to undertake. By maintaining these certificates, ABX is vested with authority from the U.S. Government to conduct all-cargo, charter operations worldwide.

The DOT has the authority to modify, suspend or revoke our certificates for cause, including failure to comply with federal law or the DOT regulations. A corporation holding either of such certificates must qualify as a U.S. citizen, which requires that (1) it be organized under the laws of the United States or a state, territory or possession thereof, (2) that its president and at least two-thirds of its Board of Directors and other managing officers be United States citizens, (3) that not more than 25% of its voting interest be owned or controlled by non-U.S. citizens, and (4) that it not otherwise be subject to foreign control. Neither certificate confers proprietary rights on the holder, and the DOT may impose conditions or restrictions on such certificates. We believe we possess all necessary DOT issued certificates and authorities to conduct our current operations.

Federal Aviation Administration

The FAA regulates aircraft safety and flight operations generally, including equipment, ground facilities, maintenance, flight dispatch, training, communications, the carriage of hazardous materials and other matters

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affecting air safety. The FAA issues operating certificates and operations specifications to carriers that possess the technical competence to conduct air carrier operations. In addition, the FAA issues certificates of airworthiness to each aircraft that meets the requirements for aircraft design and maintenance. ABX believes it holds all airworthiness and other FAA certificates and authorities required for the conduct of its business and operation of its aircraft, although the FAA has the power to suspend, modify or revoke such certificates for cause, including failure to comply with federal law and FAA regulations.

The FAA has authority to issue maintenance directives and other mandatory orders relating to, among other things, the inspection and maintenance of aircraft and replacement of aircraft structures, components and parts, based on the age of the aircraft and other factors. For example, the FAA has required ABX to perform inspections of its DC-9, DC-8 and Boeing 767 aircraft to determine if certain of the aircraft structures and components meet all aircraft certification requirements. If the FAA were to determine that the aircraft structures or components are not adequate, it could order operators to take certain actions, including but not limited to, grounding aircraft, reducing cargo loads, strengthening any structure or component shown to be inadequate, or making other modifications to the aircraft. New mandatory directives could also be issued requiring ABX to inspect and replace aircraft components based on their age or condition.

Transportation Security Administration

As a result of the events of September 11, 2001, the United States Congress enacted the Aviation and Transportation Security Act that required the creation of a new administration, now a part of the Department of Homeland Security, known as the Transportation Security Administration (“TSA”). The FAA’s security related responsibilities have been transferred to the TSA, whose overall responsibility includes the screening of passengers, baggage and cargo and the security of aircraft and airports. The TSA has adopted, and may in the future adopt, security related regulations, including new requirements for the screening of cargo, which could have an impact on our ability to efficiently process cargo or otherwise increase costs. In addition, we may be required to reimburse the TSA for the cost of security services it may provide to ABX in the future. We believe that we are in compliance with all applicable security regulations.

Other Regulations

We believe our current operations are substantially in compliance with the numerous regulations to which our business is subject; however, various regulatory authorities have jurisdiction over significant aspects of our business, and it is possible that new laws or regulations or changes in existing laws or regulations or the interpretations thereof could have a material adverse effect on operations. The laws and regulations to which we are subject, and the agencies responsible for compliance with such laws and regulations, include the following:

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Security and Safety

Security

We conduct various security procedures to comply with FAA regulations and participate in the federal Domestic Security Integration Program. Airborne customers are required to inform us in writing of the nature and composition of any freight which is classified as “Dangerous Goods” by the DOT. In addition, we conduct background checks of our employees, restrict access to the aircraft, inspect the aircraft for suspicious persons or cargo, and inspect all dangerous goods. Notwithstanding these procedures, ABX could unknowingly transport contraband or undeclared hazardous materials for customers, which could result in fines and penalties and possible damage to our aircraft.

Safety and Inspections

Management is committed to the safe operation of aircraft. In compliance with FAA regulations, our aircraft are subject to various levels of scheduled maintenance or “checks” and periodically go through phased overhauls. In addition, a comprehensive internal review and evaluation program is in place and active. Our maintenance efforts are monitored closely by the FAA. We also conduct extensive safety checks on a regular basis.

ITEM 2. PROPERTIES

We sublease our corporate offices, maintenance hangars and a component repair shop from Airborne. These facilities are located at Airborne’s airport in Wilmington, Ohio. The maintenance hangars consist of a three hangar complex of approximately 210,000 square feet. The component repair shop consists of 100,000 square foot. We also have the non-exclusive right to use the airport which includes two runways, taxi ways, and ramp space for approximately 126 aircraft. The term of the sublease runs concurrently with the term of the Airborne ACMI agreement. We believe our existing facilities are adequate to meet our current and reasonably foreseeable future needs.

The following table contains detailed information about our in-service aircraft fleet. We own 109 of these aircraft and lease five Boeing 767 and one DC-9 aircraft. The table excludes two Boeing 767s purchased in 2003 that, as of December 31, 2003, were undergoing modification from passenger to cargo configuration. We have commitments to acquire three more Boeing 767 aircraft by mid-year 2005.

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ITEM 3. LEGAL PROCEEDINGS

We are currently a party to legal proceedings in various federal and state jurisdictions arising out of the operation of our business. The amount of alleged liability, if any, from these proceedings cannot be determined with certainty; however, we believe that our ultimate liability, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to our financial condition or results of operations.

DOT Continuing Fitness Review

We filed a notice of substantial change with the DOT arising from our separation from Airborne. In connection with our filing, which we made in mid-July of 2003, the DOT will determine whether we continue to be fit, willing and able to engage in air transportation of cargo and a U.S. citizen.

Under United States laws and DOT precedents, non-U.S. citizens may not own more than 25% of, or have actual control of, a U.S. air carrier. The DOT may determine that Airborne actually controls ABX as a result of our commercial arrangements (in particular, the ACMI agreement and the Hub Services agreement) with Airborne. If the DOT determines that ABX is controlled by Airborne, the DOT could require amendments or modifications of the ACMI and/or other agreements between ABX and Airborne. If ABX were unable to modify such agreements to the satisfaction of the DOT, the DOT could seek to suspend, modify or revoke our air carrier certificates and/or authorities, and this would materially and adversely affect our business.

Certain of Airborne’s competitors, including FedEx and UPS, have challenged the citizenship status of Astar, formerly DHL Airways. DHL has entered into an ACMI agreement with Astar, which accounts for a substantial portion of the business of Astar. FedEx and UPS allege this relationship, among others, constitutes control by DHL of Astar in violation of United States law. An Administrative Law Judge for the DOT has reviewed the citizenship of Astar and has issued a decision recommending to the DOT that it find that Astar is a U.S. citizen. The DOT has the right to confirm or reject the Administrative Law Judge’s recommended decision. In the event that FedEx and UPS are successful in their challenge to the citizenship of Astar, a similar challenge will likely be made regarding the citizenship of ABX.

The DOT issued a notice requesting comments on the procedures to be used in processing our filing, and several parties, including ABX, have provided comments. The DOT has yet to specify the procedures it intends to use. The DOT may decide to conclude its review of Astar’s filing before proceeding with our filing. While the two companies are different, and their respective relationships with DHL and Airborne are distinguishable, the outcome of Astar’s hearing will likely serve as a precedent for the DOT’s review of our filing. We anticipate the DOT will issue its final decision with respect to the Astar filing sometime in 2004, which will be subject to appeal.

We believe the DOT should find that ABX continues to be fit, willing and able to engage in air transportation of cargo and a U.S. citizen.

ALPA Lawsuit

We filed a motion, which was granted on August 25, 2003, to intervene in a lawsuit filed in the United States District Court for the Southern District of New York by DHL Holdings (USA), Inc. (“DHL Holdings”) and DHL Worldwide Express, Inc. against the Airline Pilots Association (“ALPA”), seeking a declaratory judgment that neither DHL entity is required to arbitrate a grievance filed by ALPA. ALPA represents the pilot group at Astar. The grievance seeks to require DHL Holdings to direct its newly acquired subsidiary, Airborne, to cease implementing its ACMI agreement with ABX on the grounds that DHL Worldwide Express, Inc. is a legal successor to Astar. ALPA has similarly filed a counterclaim requesting injunctive relief that includes having Airborne’s freight currently being flown by ABX transferred to Astar. The proceedings were stayed on

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September 5, 2003, pending the National Labor Relations Board’s (“NLRB”) processing of several unfair labor practice charges we filed against ALPA on the grounds that ALPA’s grievance and counterclaim to compel arbitration violates the National Labor Relations Act.

The NLRB recently determined to prosecute ALPA on the unfair labor practice charge. The NLRB heard the matter on March 10 and 11, 2004 and a decision is pending. In the event ALPA was to prevail on its counterclaim and/or grievance, this would materially and adversely affect our business.

We believe that ALPA’s claim to the work being performed by ABX is without merit and its counterclaim and grievance will be denied.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common Stock

Our registered common stock became publicly traded in an over-the-counter market under the symbol ABXA.OB on August 15, 2003. The following table shows the range of high and low closing prices per share of our common stock for the periods indicated as quoted on the OTC Bulletin Board. Such over-the-counter market prices reflect inter-dealer prices, without retail markup, mark-down or commission.

On March 5, 2004, there were approximately 18,047 stockholders of ABX common stock. The closing price of ABX common stock was $6.71 on March 19, 2004.

Dividends

We are restricted from paying dividends on our common stock in excess of $1.0 million during any calendar year under provisions of our promissory note due to Airborne. No cash dividends have been paid or declared.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Comparability of 2003 financial data to previous years is affected by ABX’s separation from Airborne Inc. on August 15, 2003. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ABX derived the selected consolidated balance sheet data as of December 31, 2003, 2002 and 2001 and the consolidated statements of operations data for each of the four years in the period ended December 31, 2003 from ABX’s audited consolidated financial statements. The consolidated balance sheet data as of December 31, 1999 and 2000 and the consolidated statements of operations data for the year ended December 31, 1999 was derived from unaudited consolidated financial statements.

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

The following Management’s Discussion and Analysis has been prepared with reference to the historical financial condition and results of operations of ABX Air, Inc. (“ABX”) and its subsidiaries and should be read in conjunction with our historical financial statements, the related notes contained in this report and the S-4 registration statement, as amended, filed by our former parent corporation, Airborne, Inc. (“Airborne”), on July 11, 2003.

INTRODUCTION

On August 15, 2003, ABX was separated from its former parent, Airborne and became an independent, publicly-owned company. The separation of ABX from Airborne was a condition of the merger agreement between Airborne and DHL Worldwide Express B. V. (“DHL”), an integrated, global cargo carrier, competing with Federal Express Corporation and United Parcel Service Inc. The merger agreement required Airborne to separate its air operations from its ground operations with the air operations being retained by ABX. Immediately prior to the separation, certain assets and liabilities related to Airborne’s ground operations and airport were transferred out of ABX to Airborne. ABX was capitalized with $60.0 million of cash and a $92.9 million promissory note payable to Airborne. All inter-company payables, totaling $457.3 million, were cancelled. (A description of the separation is in Item 1 Business, of this Form 10-K Annual Report.)

ABX operates an in-service fleet of 115 aircraft. We provide air cargo transportation services within the U.S., and to Canada and Puerto Rico. We complement our air transport capabilities with package handling, warehousing and line-haul logistic services. Airborne is our largest consumer of these services and constituted over 98% of our total revenues in 2003, 2002 and 2001. We also offer ACMI (aircraft, crew, maintenance and insurance) and on-demand charter services to freight forwarders and other major shippers. We employ approximately 4,000 full-time employees and 3,000 part-time employees. Management assesses the performance of ABX in its entirety and operates the Company as a single business segment.

Relationship with Airborne and DHL

At separation, ABX and Airborne entered into an aircraft, crew, maintenance and insurance agreement (“ACMI agreement”), and a hub and line-haul services agreement (“Hub Services agreement”). Under the ACMI agreement, ABX provides air cargo transportation to Airborne on a cost plus pricing structure. Under the Hub Services agreement, ABX provides staff to conduct package handling, warehousing, line-haul logistics and airport, facilities and equipment maintenance services for Airborne, also on a cost plus pricing structure. Costs incurred under these agreements are generally marked-up 1.75% and recorded in revenues. Under the ACMI and Hub Services agreements, if certain cost and service goals are met, the markup increases from the base of 1.75% up to 3.35% and 3.85%, respectively. Certain costs, the most significant of which include fuel, rent, interest on the promissory note to Airborne, ramp fees and landing fees incurred for the Airborne ACMI agreement, are recorded in revenues without markup.

Prior to the separation, we were Airborne’s primary provider of air cargo transportation services within the U.S. and to Canada and Puerto Rico, as well as Airborne’s primary provider of package handling, warehousing and line-haul logistics services. After the separation from Airborne, we have continued to be the primary provider for these same services to Airborne as specified in the ACMI and Hub Services agreements. In 2003, we did not provide air cargo transport or package sorting services for DHL labeled packages.

The ACMI agreement has a term of seven years, with an automatic renewal for an additional three years, unless a one-year notice of non-renewal is given, or if ABX is not in compliance with applicable performance standards specified in the agreement. The Hub Services agreement has a term of three years, with one-year automatic renewals, unless a ninety-days notice of non-renewal is given. Under the ACMI and Hub Services agreements, if we do not meet certain performance standards, after a cure period, Airborne may terminate the

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ACMI agreement and the Hub Services agreement prior to the end of their respective terms. During the first year of the term of the ACMI and Hub Services agreements, Airborne cannot make any changes that would reduce the scope of the services to be provided by ABX under the two agreements, barring an ABX event of default relating to service performance failures. However, after August 15, 2004 Airborne may terminate specific ACMI aircraft and add, delete or modify the air routes we operate under the ACMI agreement. Additionally, after August 15, 2004 Airborne may add, delete or modify services we provide to it under the Hub Services agreement.

Impairment

The separation of ABX from Airborne, and the execution of the related commercial agreements collectively constituted an event which required us to evaluate the recoverability of the carrying value of long-term assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, ABX was required to record an impairment charge for the excess of the carrying value of the long-lived asset group over its fair value. The fair value of ABX’s aircraft was derived using a market approach by comparing recent sales of similar assets and adjusting these comparables for factors such as age and condition. The fair value of aircraft, aircraft-related spare parts inventory, maintenance tooling and equipment and other ABX fixed assets was derived utilizing a cost approach in which replacement cost was adjusted downward to reflect reduction in value due to physical depreciation and functional obsolescence. As a result of the fair value analysis, we recorded a pre-tax, non–cash charge to write down assets and inventory by $600.9 million. The impairment charge resulted in a net deferred tax asset, which under provisions of SFAS No. 109, “Accounting for Income Taxes,” was fully offset by a valuation allowance which was established due to the likelihood that future taxable earnings generated would not allow for the asset’s full utilization. Due to the impairment charge, an income tax benefit of $134.8 million was provided, net of the valuation allowance of $81.0 million.

Challenges and Risk

Our prospects for growth and financial security are primarily dependent on our relationship with Airborne and its parent, DHL. We operate in a competitive market to provide ACMI and hub services to Airborne. As a result of their merger, DHL and Airborne are in the process of integrating their combined product offerings, sales, marketing, administrative and operating resources. We expect Airborne and DHL to develop and utilize a common labeling system and seek to eliminate duplicative costs. To reduce cost, Airborne and DHL may eliminate overlapping air routes that are operated by their different air cargo carriers. Airborne and DHL may combine their sorting operations, reducing or eliminating the capacity needed at some of the hubs we operate. After August 15, 2004 our contracts allow Airborne to scale back the services that we provide to it. Our focus is to retain the Airborne cargo volumes and to win additional DHL cargo volumes by maintaining industry leading service levels with a low cost structure. Our growth is also dependent on DHL’s ability to expand its share of the U.S. delivery markets, where FedEx and UPS have significant resources, market penetration and brand recognition. Our expenses will be a challenge to contain in 2004 due to rising health care costs, increased employee compensation, pension expenses, stronger demand for ground shipping and new regulations for over-the-road trucking.

Since our separation from Airborne, we have begun to explore other sources of revenue. We are attempting to diversify our customer base and product offerings. Part of our diversification strategy is to sell our charter services and unused air cargo space to freight forwarders and shippers. Our strategy also includes marketing our technical expertise, aircraft maintenance services and training to other airlines. Our costs to develop, market and offer new services to non-Airborne customers are not reimbursed by Airborne. Many of our potential customers currently purchase these services from other providers, therefore increasing our sources of revenue will involve investment and time. Currently, we cannot accurately estimate the required investment, growth rates or timing of new business.

See page 27 for additional discussion of our business risk.

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RESULTS OF OPERATIONS

2003 compared to 2002

For 2003, we had a net loss of $446.9 million, inclusive of the SFAS No. 144 impairment charge of $600.9 million ($466.1 million, net of tax benefit). Excluding this charge, non-GAAP (generally accepted accounting principles) earnings for 2003 were $19.2 million compared to $13.3 million for 2002. Our operating results for 2003 reflect 138 days as a separate, independent business and 227 days as a subsidiary of Airborne. The separation from Airborne complicates the comparison of 2003 financial results to 2002. Since the separation, our Airborne revenues are generally based on a markup of 1.75% of expenses, except for certain cost, the most significant of which are fuel, rent, interest on the promissory note to Airborne, ramp and landing fees, that are recorded in revenue without markup. Prior to the August 15, 2003 separation, revenues from Airborne were calculated as the sum of pretax net expenses incurred plus 2.00%. Net expenses included all operating and interest expenses, including allocated expenses from Airborne, reduced by revenues recorded from our non-Airborne customers. Our expenses prior to August 15, 2003, included depreciation expense related to the ground equipment that was transferred to Airborne in the separation and administrative expense allocations from Airborne. Also complicating comparisons to prior year financial information is the impairment charge, which we recorded immediately after separation from Airborne. As a result of the much lower adjusted basis of our remaining fixed assets, depreciation expense was significantly reduced compared to pre-separation periods.

Revenues

Total revenues decreased 1.1% to $1.161 billion in 2003 compared to revenues of $1.174 billion in 2002. Revenues from Airborne decreased .6% to $ 1.149 billion in 2003 compared to $1.156 billion in 2002. The decrease in revenues is primarily due to lower reimbursable expenses, such as depreciation, incurred during 2003 compared to 2002 and the lower reimbursement rate earned from Airborne during the last 138 days of 2003.

Charter service revenues from customers other than Airborne decreased to $6.0 million in 2003 compared to $14.3 million in 2002. The decrease was due primarily to the loss of a charter customer. Other revenues, consisting primarily of aircraft parts sales and revenue associated with performing aircraft-related maintenance for other carriers, increased to $5.6 million in 2003 compared to $3.3 million in 2002. The increase in other revenues is due to higher levels of aircraft parts sales as well as an increase in revenues associated with aircraft-related maintenance services.

Operating Expenses

The table below compares selected operating statistics for the years ended December 31. The impairment charge and depreciation expenses have been excluded from operating cost ratios to provide a comparable expense basis among years. The operating cost ratios were calculated by subtracting the impairment charge and deprecation expenses from total operating expense for each year presented, then dividing by pieces and pounds, respectively for each year.

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Our operating expenses are impacted by the volume and type of packages handled. Generally, higher piece volumes increase our expenses and positively impact our revenues. The increases in pieces, pounds and pounds per piece in 2003 compared to 2002 are due to Airborne’s expansion of its ground based deferred delivery services. Labor productivity, measured by pieces handled per labor hour paid, and the operating cost efficiencies gained through our continued focus on improvement, had a positive impact on our ability to control costs during 2003. Our operating costs, excluding the impairment charge and depreciation expense, measured on a per piece basis, increased less than 1% in 2003 to $2.15 compared to $2.14 for 2002. Cost per pound comparisons to 2002 continue to reflect the impact of Airborne’s expansion of its deferred delivery services, which generally rely on lower cost contracted truck line-haul instead of higher cost, air transportation.

Salaries, wages and benefits expense increased 4.6% in 2003, compared to 2002. The increases compared to 2002 were primarily the result of higher healthcare benefit costs and increases in our company-sponsored defined benefit pension plan expenses. The increases reflect inflationary salary adjustments as well as a 4.0% increase in our flight crew salary costs. Total hours paid decreased for 2003 as compared to 2002 by 2.0%, reflecting productivity improvements primarily by our employees who handle Airborne’s shipments. We expect salaries, wages and benefits expense to increase in 2004 due to salary adjustments, escalating health care costs and increased expenses for our defined benefit pension plans. These increases will be partially offset by salaries and benefits of positions transferred to Airborne in 2003 in conjunction with the separation.

Purchased line-haul expense increased 14.2% in 2003 compared to 2002. The expense increases were primarily due to additional contracted truck line-haul to accommodate the growth in Airborne’s deferred delivery services that are generally transported via truck due to the less time sensitive nature of the delivery. Piece counts of the Wilmington day sort, which processes much of the cargo for deferred delivery services, increased 23.1% in 2003 to 94.2 million. In 2004, anticipated growth for deferred delivery services is expected to increase our purchased line-haul expense. Additionally, we expect new Department of Transportation (“DOT”) regulations, which require more rest period for over-the-road truck drivers combined with stronger demand for over-the-road trucking, to increase our purchased line-haul expense.

Fuel expense increased 16.3% in 2003 compared to 2002. The average aviation fuel price was $1.00 per gallon in 2003, compared to $.83 per gallon in 2002. Aviation fuel consumption decreased 3.6% to 148.0 million gallons in 2003 compared to 153.0 million gallons in 2002. The decrease in consumption was primarily due to combining certain flight segments and the placement of three Boeing 767 aircraft in service since the third quarter of 2002, which has allowed us to reduce our utilization of less fuel-efficient DC-8 aircraft. We do not hedge fuel prices or purchase fuel derivatives. The risks of volatile fuel prices are effectively assumed by Airborne through the ACMI agreement.

Depreciation and amortization expense decreased 33.4% to $98,503 in 2003 compared to 2002. The decline is due to the lower depreciable base of property and equipment as a result of our August 15, 2003 separation from Airborne. In conjunction with the separation, we transferred property and equipment having a net book value of approximately $183.8 million to Airborne. Immediately after the separation, we recorded a SFAS No. 144 impairment charge, writing down depreciable assets remaining with ABX to their fair value (see Note A to the audited financial statements). In the process of recording the asset impairment and separation adjustments, depreciable aircraft asset lives were reassessed and adjustments were made to reflect management’s assessment of appropriate useful lives based in part on the ACMI agreement with Airborne. We estimate that reducing the useful lives of the aircraft increased deprecation expense approximately $1.8 million in 2003. Annualized depreciation and amortization expense, including the effect of asset additions, is expected to approximate $38.0 million in 2004.

Maintenance, materials and repairs decreased 1.9% in 2003 compared to 2002 due primarily to performing fewer scheduled DC-8 heavy maintenance checks in 2003. In 2004, more aircraft are scheduled for heavy maintenance checks than in 2003. Accordingly, we expect these expenses to increase in 2004.

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Landing and ramp expense increased 6.6% in 2003 as compared to 2002. Included in this category are deicing costs, which were higher in 2003 due to adverse winter weather in the first quarter. These increases were offset by the transfer of ramp leases to Airborne effective with our separation on August 15, 2003. We expect landing and ramp expense to decline in 2004 due to the transfer of leases to Airborne.

Rent expense decreased 18.6% in 2003 compared to 2002. Effective August 15, 2003, the majority of lease agreements, including the lease agreements for the regional hubs, warehouse facilities and most airport locations, were transferred to Airborne. Since August 16, 2003, our expenses do not include rent expense for lease agreements transferred to Airborne. However, our expenses since August 16, 2003 include a pro rata portion of $2.0 million of annual lease expense for space at the Wilmington Air Park. We expect rent expense to decline slightly in 2004 due to the transfer of leases to Airborne.

Other operating expenses include pilot travel, professional fees, insurance, utilities and prior to August 16, 2003, allocations from Airborne (see Note C of the consolidated financial statements) and packaging and labeling supplies used by Airborne. Excluding the Airborne allocations, and packaging and labeling expenses, other operating expenses were $48.0 million in 2003 and 2002. We expect other operating expense to increase above $48.0 million in 2004, particularly for professional fees to support our operations as an independent company.

Interest Expense

Interest expense includes allocations from Airborne, interest on aircraft capital lease obligations of ABX, and since August 16, 2003, interest on the $92.9 million promissory note due to Airborne. Our interest expense decreased 36.1% in 2003 compared to 2002. Interest expense is lower because for the last 138 days of 2003, we did not incur an interest allocation from Airborne. Airborne interest allocations were $8.6 million and $18.1 million in 2003 and 2002, respectively. Interest on the promissory note is reimbursed by Airborne. The note bears interest of 5.0% per annum and principal payments can be deferred until 2028.

Income Taxes

The income tax benefit of $128.6 million for 2003 is primarily a result of a tax benefit of $220.3 million related to the impairment charge. The overall tax benefit was reduced by a valuation allowance of $81.0 million offsetting the net deferred tax asset created primarily as a result of the impairment charge.

Under provisions of SFAS No. 109 “Accounting for Income Taxes,” net deferred tax assets that are not likely to be realized require recording of an offsetting valuation allowance. Since it is reasonably likely ABX will not generate sufficient taxable earnings in future periods necessary to utilize the net deferred tax assets generated after recognition of the impairment charge, a valuation allowance has been recorded for the full amount of the net deferred tax assets remaining after the impairment charge. The effective income tax benefit rate was 22.4% in 2003 compared to an effective tax rate of 41.4% for 2002. The effective rate declined in 2003 due to the recording of the valuation allowance.

Post – Separation Earnings

We had non-GAAP earnings, excluding the impairment charge discussed above, of $10.6 million during the 138 days of the period ending December 31, 2003, during which we operated as an independent public company. Earnings from our two commercial agreements with Airborne (the ACMI agreement and Hub Services agreement) accounted for $9.1 million, while revenues from other customers accounted for $1.5 million of the $10.6 million of post-separation earnings.

Our earnings for the fourth quarter of 2003 were $7.6 million and consisted of $6.3 million from the Airborne agreements and $1.3 million from other customers. Our fourth quarter earnings from Airborne included incremental revenues of $1.2 million for service goals we achieved since August 16, 2003 under the two

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commercial agreements with Airborne. Additionally, the fourth quarter of 2003 included incremental revenues of $1.4 million earned by achieving cost goals for the fourth quarter. Beginning in 2004, any incremental markup for achieving cost goals under the two commercial agreements will be determined based on a weighting of 40% related to quarterly performance and 60% related to annual performance. Also, beginning in 2004, revenues for service goals are based on the attainment of annual targets. Accordingly, we will not recognize 60% of the cost goal revenues or any of the service goal revenues, until the fourth quarter of 2004.

The following tables summarize our post-separation operations during the quarter and 138-day periods, ended December 31, 2003 (in thousands).

For purposes of the above discussions on the results of operations, we have excluded the impairment charge of $600.9 million and its related tax benefit of $134.8 million from non-GAAP earnings. Non-GAAP earnings, which excludes the impairment charge, should not be considered a measure of financial performance under GAAP. We believe that excluding the impairment charge from our earnings is a significant component in understanding and assessing our financial performance. The impairment charge was triggered by our separation from Airborne, an event unlikely to recur. Excluding the impairment charge from our earnings is useful when comparing ABX’s financial results to previous periods or forming expectations of future results. Non-GAAP earnings should not be considered in isolation or as an alternative to net income, cash flows generated by operations, or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity.

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The table below presents a reconciliation of our non-GAAP measure to the most directly comparable GAAP measure for the year ended December 31,2003 (in thousands):

2002 Compared to 2001

Revenues

Total revenues of $1.174 billion in 2002 increased 0.7% compared to 2001 revenues of $1.165 billion. Revenues from Airborne increased 1.4% to $1.156 billion in 2002 compared to revenues of $1.140 billion in 2001 primarily as a result of an increase in our net expenses used to determine our revenue.

Charter service revenues decreased to $14.3 million in 2002 compared to $21.1 million in 2001. Charter revenues in 2002 were negatively impacted by the loss of U.S. Postal Service related charter business in addition to the weak economic climate. Other revenues, consisting primarily of aircraft parts and fuel sales, decreased to $3.3 million in 2002 compared to $4.2 million in 2001.

Operating Expenses

Total pieces handled increased 12.9% in 2002 to 456.2 million compared to 404.0 million in 2001. Total weight handled increased year-over-year by 28.5% to 1.949 billion pounds. Weight per piece increased 13.9% to 4.3 pounds in 2002 compared to 3.8 pounds in 2001. The increase in tonnage and weight per piece in 2002 is primarily due to Airborne’s expansion of its heavier weight Ground Delivery Service, (“GDS”), which was introduced in April 2001.

Operating costs measured on a per piece basis decreased 11.1% in 2002 to $2.47 compared to $2.78 in 2001. Operating costs measured on a per pound basis declined to $0.58, or 22.0% compared to $0.74 per pound in 2001. The significant decline in costs, on a per piece and per pound basis, reflects the impact of Airborne’s expansion of its deferred delivery service, which generally rely on lower-cost, contracted truck line-haul as opposed to the higher cost of air transportation, and our continued focus on labor productivity and cost control. Productivity, as measured by pieces handled per labor hour paid, increased 11.9% in 2002 to 31.9 compared to 28.5 pieces per labor hour paid in 2001.

Salary and wage expense in 2002 was 2.0% or $6.9 million higher than in 2001 as a result of increased average wage rates. During the same time period, benefit costs increased by 6.9% or $5.2 million reflecting higher healthcare costs and increases in our company-sponsored defined benefit pension plan expenses. Productivity improvements helped to offset some of the increased costs in this category. Total hours paid increased 1.0% in 2002 compared to 2001.

Purchased line-haul expense increased by 26.7% in 2002 as compared to 2001 primarily due to growth in Airborne’s GDS and Airborne@Home services.

Fuel expense decreased 13.1% in 2002 compared to 2001. The average aviation fuel price was $0.83 per gallon in 2002 compared to $0.91 per gallon in 2001. Aviation fuel consumption decreased 4.9% in 2002 to

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153.0 million gallons compared to 160.8 million gallons in 2001. The decrease in consumption in 2002 was due to our efforts to reduce and combine certain flight segments beginning in the second quarter of 2001. Also, we continued our program of placing Boeing 767 aircraft into service, which allowed less fuel-efficient DC-8 aircraft to be moved to shorter lane segments, backup status or removed from service. Two Boeing 767 aircraft were placed in service in 2002 and three in 2001.

Depreciation and amortization included a $3.1 million charge in 2002 due to an unscheduled retirement of a DC-8 aircraft. A routine maintenance check on this aircraft revealed the need for extensive, unanticipated repairs. Rather than incur the additional maintenance costs, we decided to retire the aircraft. The non-cash charge is associated with adjusting the aircraft’s net book value to its fair value, which is the equivalent of an estimated parts value. The decline in depreciation expense in 2002 is due to the relatively lower levels of capital expenditures made in 2002 and 2001 in relation to expenditures in 2000 and prior years, coupled with the timing of certain aircraft becoming fully depreciated.

Maintenance, materials and repairs were 4.9% lower in 2002 compared to 2001. This decline was due primarily to a decrease in aircraft component overhaul costs and to lower DC-9 engine maintenance costs due in part to a change in the way we contract with others for engine overhauls. In July 2001, a third party service provider began performing major engine overhauls for our DC-9 aircraft based upon a rate per engine cycle. These costs are charged to expense in the period utilization occurs.

Landing and ramp expense increased 2.2% in 2002 compared to 2001. Included in this expense category are airport landing and ramp usage charges in addition to deicing costs. The increase was due to higher fees charged by airports starting in September 2001.

Rent expense increased 2.4% in 2002 compared to 2001. During 2002, we added a second facility to the Allentown, Pennsylvania regional hub and opened a new regional hub facility in Southern California bringing the total number of regional hubs to eleven.

Other expense was 3.0% lower in 2002 compared to 2001. The decrease in other expenses is primarily a result of lower packaging and labeling supply expenses offset by increased insurance costs.

Interest Expense

Our interest expense increased by 22.3% in 2002 when compared to 2001. The increase in interest expense is a function of higher consolidated interest costs incurred by Airborne and the corresponding higher allocations and the financing by ABX in August 2001 of five Boeing 767 aircraft.

Income Taxes

Our tax provisions for 2002 and 2001 were calculated on a stand-alone basis. The tax consequences of our operations prior to August 16, 2003 are included in Airborne’s consolidated tax returns. ABX’s effective income tax rate was 41.4% in 2002 and 42.6% in 2001. The lower effective rate in 2002 was due to lower levels of state income taxes and non-deductible items.

Federal Legislation Compensation

In the aftermath of the terrorist attacks of September 11, 2001, Congress passed the Air Transportation Safety and System Stabilization Act (“Act”), an emergency economic assistance package administered by the DOT, which was designed to help air carriers mitigate losses resulting from the closure of the national air system. Under provisions of the Act, Airborne was entitled to receive amounts to the extent of the lesser of actual losses or a formula based upon revenue ton-miles flown, including miles flown by ABX. Airborne received proceeds under the Act, representing reimbursable losses agreed to by the DOT. The losses compensated under the Act were losses recorded by Airborne and primarily related to its loss of customer revenues, net of expense reductions and additional costs incurred. ABX did not receive any of the proceeds from Airborne.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows

Operating cash flows were $101.4 million, $177.7 million and $209.5 million for 2003, 2002 and 2001, respectively. Our operating cash flows are primarily a function of aircraft depreciation expense reimbursed by Airborne and the markup earned under our commercial agreements with Airborne, offset by pension funding. The decline in operating cash flows compared to 2002 is primarily a result of lower reimbursed depreciation expense and increased pension funding during 2003. During 2004, we have budgeted to be reimbursed for approximately $38.0 million of depreciation from Airborne. We estimate that contributions to our qualified defined benefit pension plans will be between $29.0 million and $46.0 million in 2004. The actual contributions will depend upon a discount rate formula that will be effected by the passage of a pension funding bill pending approval by the U.S. Congress and signature of the President. If the bill as currently drafted becomes law, the Company’s 2004 pension funding will be near the lower end of the range specified.

Capital Expenditures

Total capital expenditures were $88.5 million in 2003 compared to $98.4 million and $94.9 million in 2002 and 2001 respectively. We devote a substantial amount of our operating cash resources to fund our capital expenditures. A significant portion of our capital expenditures relates to the acquisition and modification of aircraft and related flight equipment. We have continued our program to acquire and deploy Boeing 767 aircraft, which provide a higher level of operating efficiency than the DC-8 aircraft they replace. We acquired three Boeing 767 aircraft in 2003, compared to two Boeing 767 aircraft in 2002 and one Boeing 767 aircraft in 2001. As of December 31, 2003, two Boeing 767’s were undergoing modification to cargo configuration. Other 2003 capital expenditures included a DC-9 flight simulator, facilities and package handling equipment (subsequent to the August 15, 2003 separation from Airborne, capital expenditures associated with facilities and package handling equipment were no longer our responsibility), computer equipment, as well as tooling and expenditures supporting the operation of the airport in Wilmington, Ohio.

Commitments

The level of capital spending for 2004 is anticipated to be approximately $83.0 million. We have commitments to acquire two additional Boeing 767 aircraft during 2004 and one in 2005. These aircraft are committed to be modified to a standard freighter configuration from their original passenger configuration. Payments for the aircraft and conversions of these and other recently purchased aircraft will approximate $68.0 million and $37.0 million in 2004 and 2005, respectively. There are currently no aircraft or aircraft-related commitments extending beyond 2005. Over the past two years, we have been successful in negotiating deferrals of aircraft deliveries without incurring additional costs and we may request deferrals of future deliveries. However, there is no assurance any deferral of planned deliveries will be successfully negotiated or achieved without incurring additional costs. As we place additional Boeing 767 aircraft into service, we may remove additional DC-8 aircraft from service depending on factors such as overall capacity requirements and the need for aircraft in our charter operation.

As of December 31, 2003, we had the following contractual obligations and commercial commitments (in thousands):

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The unconditional purchase obligations consist of commitments for aircraft acquisitions and modifications and contracted maintenance services.

We estimate that contributions to our qualified defined benefit pension plans to range between $29.0 million and $46.0 million in 2004. Contributions for future years cannot be determined with reasonable accuracy at this time. The actual contributions will depend upon several factors, including our elections with respect to the various government regulations related to pension plans. Currently, the U.S. Congress is considering a funding reform bill whose passage would have significant impact on our pension contributions in future years.

As of December 31, 2003, approximately $20.5 million in various letters of credit are collateralized by Airborne on our behalf. These letters of credit relate primarily to our aircraft purchase commitments and are structured to expire near the scheduled delivery of the aircraft in 2004. If a letter of credit expires before the delivery of a related aircraft occurs, we may be required to collateralize a new letter of credit with our unrestricted cash.

Liquidity

At December 31, 2003, we had approximately $63.1 million of unrestricted cash balances. We anticipate that our current cash balances, combined with forecasted cash flows provided by commercial agreements with Airborne and growth in new business will be sufficient to fund our planned operations and capital expenditures for 2004 and beyond. If certain liquidity levels are not maintained, we will be able to request certain cash advances under the commercial agreements to supplement liquidity through 2005. Also, Airborne guarantees our financing obligations for three Boeing 767 aircraft. We are in the process of obtaining a secured line of credit or similar credit facility of approximately $20 million, net of outstanding letters of credit, however, there can be no assurance that we will be able to secure such a credit facility.

The promissory note due to Airborne limits cash dividends that we can pay to $1.0 million annually. We have not declared any cash dividends and intend to retain earnings to finance future growth and cash requirements.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPEs”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2003, we are not involved in any material unconsolidated SPE transactions.

We adopted Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” effective January 1, 2003. The initial recognition and measurement provisions of FIN 45 apply prospectively to guarantees and indemnifications issued or modified after December 31, 2002. Our adoption of FIN 45 did not have any effect on our financial position or results of operations. No amounts have been recognized in our financial statements for the underlying fair value of guarantees and indemnifications. Certain of our operating leases and agreements contain indemnification obligations to the lessor that are considered ordinary and customary (e.g. use and environmental indemnifications), the terms of which range in duration and are often limited. Such indemnification obligations may continue after expiration of the respective lease. In conjunction with certain transactions, we sometimes provide routine indemnifications (e.g. environmental, tax and employee liabilities), the terms of which range in durations and are often limited.

The Company fully and unconditionally guarantees a senior note of Airborne. The senior note issued by Airborne bears interest at a rate of 7.35% and matures in September 2005. Subsequent to Airborne’s merger, DHL paid down this note, such that the remaining amount outstanding is $6.9 million.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as certain disclosures included elsewhere in this report, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to select appropriate accounting policies and make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In certain cases, there are alternative polices or estimation techniques which could be selected. On an on-going basis, we evaluate our selection of policies and the estimation techniques we use, including those related to revenue recognition, post-retirement liabilities, self-insurance reserves, valuation of spare-parts inventory, useful lives, impairment of property and equipment, income taxes, contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, as well as for identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following significant and critical accounting policies involve the more significant judgments and estimations used in the preparation of the consolidated financial statements.

Revenue Recognition

Revenues from Airborne are recognized when the related services are performed. Prior to August 16, 2003, revenues from Airborne were calculated as the sum of pretax net expenses incurred plus 2.00%. Prior to August 16, 2003, net expenses included all operating and interest expenses, including allocated expenses from Airborne, less revenues recorded from charters and services for customers other than Airborne. Since August 16, 2003, revenues from Airborne are determined based on the expenses incurred during a reporting period under the ACMI and Hub Services agreements. Expenses incurred under these agreements are generally subject to a base markup of 1.75%, which is recognized in the period during which the expenses are incurred. Certain costs, the most significant of which include fuel, interest on the promissory note to Airborne, rent, ramp fees and landing fees incurred for performance under the Airborne ACMI agreement are reimbursed and included in revenues without markup.

In addition to a base markup of 1.75%, both the ACMI and Hub Services agreements provide for an incremental markup potential based on our ability to achieve specified cost and service goals. The ACMI agreement provides for a maximum potential incremental markup of 1.60%, with 1.35% based on cost performance and 0.25% based on service performance. The Hub Services agreement provides for a maximum potential incremental markup of 2.10%, with 1.35% based on cost performance and 0.75% on service performance. Both contracts call for 40% of any incremental markup earned from cost performance to be recognized based on quarterly results, with 60% measured against annual results. Accordingly, any incremental cost markup that we may achieve based on quarterly results (i.e., 40% of the 1.35% maximum potential) would be recognized in our quarterly revenues. The 60% of the incremental cost markup potential measured against annual performance (i.e., 60% of the 1.35% maximum potential) would be recognized during fourth quarter, when full year results are known. Incremental markup potential associated with the service goals (0.25% in the ACMI agreement and 0.75% in the Hub Services agreement) is measured annually and any revenues earned, if any, from our attainment would be recognized during the fourth quarter, when full year results are known.

Charter service revenues are recognized for scheduled and non-scheduled flights performed for customers other than Airborne. Revenues are recognized when the specific flight has been completed. Other revenues, primarily for aircraft parts and fuel sales, are recognized when the parts and fuel are delivered. Revenues earned providing aircraft-related maintenance repair services or technical maintenance services are recognized in the period in which the services are completed.

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Depreciation

Depreciation of property and equipment is provided on a straight-line basis over the lesser of the asset’s useful life or lease term. We periodically evaluate the estimated service lives and residual values used to depreciate our property and equipment. The acceleration of depreciation expense or the recording of significant impairment losses could result from changes in the estimated useful lives of our assets. We may change the estimated useful lives due to a number of reasons, such as the existence of excess capacity in our air system or ground networks, or changes in regulations grounding or limiting the use of aircraft. In 2003, as a result of the separation from Airborne, ABX recorded an impairment loss and changed the useful lives of its aircraft.

Self-Insurance

We self-insure certain claims relating to workers compensation, aircraft, automobile and employee healthcare. We record a liability for reported claims and an estimate for incurred claims that have not yet been reported. Accruals for these claims are estimated utilizing historical paid claims data, recent claims trends and, in the case of employee healthcare, an independent actuarial report. Changes in claim severity and frequency could result in actual claims being materially different than the amounts provided for in our annual results of operations.

Contingencies

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

Postretirement Obligations

We sponsor qualified defined benefit plans for our pilots and other eligible employees. We also sponsor unfunded postretirement healthcare plans for our pilot and non-pilot employees. Additionally, we sponsor unfunded excess plans for certain employees in a non-qualified plan which includes our executive management, that provide benefits in addition to amounts permitted to be paid under provisions of the tax law to participants in our qualified plans.

The accounting and valuation for these postretirement obligations are determined by prescribed accounting and actuarial methods that consider a number of assumptions and estimates. The selection of appropriate assumptions and estimates is significant due to the long time period over which benefits will be accrued and paid. The long-term nature of these benefit payouts increases the sensitivity of certain estimates on our postretirement costs. In actuarially valuing our pension obligations and determining related expense amounts, assumptions we consider most sensitive are discount rates, expected long-term investment returns on plan assets and future salary increases. Additionally, other assumptions concerning retirement ages, mortality and employee turnover also affect the valuations. For our postretirement healthcare plans, consideration of future medical cost trend rates is a critical assumption in valuing these obligations. Actual results and future changes in these assumptions could result in future costs significantly higher than those recorded in our annual results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

A number of new accounting pronouncements were enacted in 2003. None of these new pronouncements had a material effect on our financial position or results of operations during 2003 and are not expected to have a material effect on future operations or financial position. See Note B to the accompanying financial statements for discussion of these recent accounting pronouncements.

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RISKS FACTORS ASSOCIATED WITH ABX’S BUSINESS

We rely on a single customer for substantially all of our revenue and operating cash flows.

We expect revenues from our ACMI agreement and Hub Services agreement with Airborne to account for nearly all of our revenues and cash flows during 2004. If Airborne experiences a decline in its business, our own business volume would experience a corresponding decline.

Our success is highly dependent upon the level of business activity and overall economic conditions in the U.S. An economic downturn in the U.S. is likely to adversely affect demand for delivery services offered by Airborne, in particular expedited services shipped via aircraft. During an economic slowdown customers generally use ground based delivery services instead of more expensive air delivery services. A prolonged economic slowdown may increase the likelihood that Airborne would reduce the scope of services we provide under the ACMI contract.

Certain terms of the ACMI agreement and Hub Services agreement with Airborne may adversely affect ABX’s operating results.

The ACMI and Hub Services agreements expire in August 2010 and August 2006, respectively. Beginning in August 2004 however, Airborne may reduce the level of services we provide under these agreements. If Airborne reduces the service levels, our revenues, net income and cash flows would likely decline.

Under the ACMI agreement and the Hub Services agreement, if we do not meet certain performance standards, after a cure period, Airborne may terminate the ACMI agreement and the Hub Services agreement prior to the end of their respective terms.

Although the ACMI agreement and Hub Services agreement with Airborne are structured as cost plus arrangements, the costs for which we can be reimbursed are subject to certain limitations. For instance, labor rate increases are capped at predetermined levels and certain other costs are non-reimbursable. Accordingly, if labor costs sharply increase or we incur excessive non-reimbursable costs, there can be no assurance that the revenues from these agreements will generate sufficient income to recover our costs.

The ACMI agreement with Airborne may limit our ability to provide services to third parties.

The ACMI agreement limits our ability to use the aircraft designated for use under the ACMI agreement to perform services for parties other than Airborne by permitting such use only if (1) it does not interfere in any material respect with ABX’s performance of ACMI services for Airborne, (2) ABX does not solicit Airborne’s customers in competition with Airborne, (3) it does not involve ABX providing air cargo transportation services to major integrated international air express delivery companies with annual revenues in excess of $5 billion (other than the United States Postal Service or any affiliate of Airborne or DHL) and (4) an ABX event of default stemming from the commercial agreements shall not have occurred and be continuing. The restrictions on our aircraft not designated for use under the ACMI agreement are less restrictive and prevent services only if it would interfere in any material respect with our performance of ACMI services for Airborne.

If insurance coverage becomes unavailable, it would adversely affect our ability to operate.

Following the terrorist attack of September 11, 2001, commercial insurance providers initially cancelled war risk liability insurance coverage and thereafter began offering such coverage on a more limited basis and at substantially higher rates. For this reason, the U.S. government has been and is continuing to offer war risk insurance to United States airlines at rates below the commercial insurance market. The U.S. government has committed to offer war risk insurance to airlines through August 31, 2004, after which it may be necessary to procure war risk insurance in the commercial market. The war risk insurance available to airlines in the commercial market may be more limited in coverage and/or may not be available on commercially reasonable terms. If we do not maintain certain insurance coverage, our fleet may be grounded.

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Although we believe that our insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that we will not be forced to bear substantial losses from accidents. Substantial claims resulting from an accident could have a material adverse effect on our financial condition and could affect our ability to obtain insurance in the future.

Our inability to comply with, or the costs of complying with, government regulations could negatively affect our results of operations.

Our operations are subject to complex aviation, transportation, environmental, labor, employment and other laws and regulations. These laws and regulations generally require us to maintain and comply with a wide variety of certificates, permits, licenses and other approvals. Our inability to maintain required certificates, permits or licenses, or to comply with applicable laws, ordinances or regulations, could result in substantial fines or, in the case of DOT and FAA requirements, possible revocation of our authority to conduct our operations.

As of December 31, 2003, all aircraft in our in-services fleet of 115 aircraft were manufactured prior to 1990. Manufacturer Service Bulletins and the Federal Aviation Administration Airworthiness Directives issued under its “Aging Aircraft” program cause aircraft operators of such aged aircraft to be subject to extensive aircraft examinations and require such aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue at specified times. Airworthiness Directives have been issued that require inspections and both major and minor modifications to such aircraft. It is possible that additional Service Bulletins or Airworthiness Directives applicable to the types of aircraft or engines included in our fleet could be issued in the future. The cost of compliance with Airworthiness Directives and of following Service Bulletins cannot currently be reasonably estimated, but could be substantial.

Failure to maintain ABX’s operating certificate and authorities would adversely affect its business.

We have the necessary authority to conduct flight operations within the United States and maintain a Domestic All-Cargo Air Service Certificate for our domestic services, a Certificate of Public Convenience and Necessity for Route 377 for our Canada service, and an Air Carrier Operating Certificate issued to ABX by the FAA. The continued effectiveness of such authority is subject to our compliance with applicable DOT and FAA statutes, rules and regulations pertaining to the airline industry, including any new rules and regulations that may be adopted in the future.

Under United States laws, non-U.S. citizens may not own more than 25% of, or have actual control of, a U.S. air carrier. The separation of ABX from Airborne required us to file a notice of a substantial change with the DOT. In connection with the filing, the DOT will determine whether ABX continues to be fit, willing and able to engage in air transportation of cargo and is a U.S. citizen. The DOT may determine that DHL indirectly controls ABX as a result of the commercial arrangements (in particular, the ACMI agreement and the Hub Services agreement) between ABX and Airborne. If the DOT determined that ABX was controlled by DHL, the DOT could bring an enforcement action against ABX to revoke its certificates. The DOT could take action requiring ABX to show cause that it is a U.S. citizen, that is fit, willing and able to engage in air transportation of cargo, or requiring amendments or modifications of the ACMI agreement, the Hub Services agreement or the other transaction documents. If we were unable to modify such agreements to the satisfaction of the DOT, the DOT may seek to suspend, modify or revoke our air carrier certificates and/or authorities.

The loss of our authority, including in the situation described above, would materially and adversely affect our operations and would effectively eliminate our ability to operate the air services.

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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of our business, we are exposed to market risk for changes in the price of jet and diesel fuel, however, this risk is largely mitigated by reimbursement through the ACMI agreement.

We have interest rate risk as a result of debt obligations. As of December 31, 2003, $128.6 million of fixed interest rate exposure and $60.5 million of variable interest rate exposure were outstanding on debt arrangements.

Variable interest rate debt exposes us to differences in future cash flows resulting from changes in market interest rates. This risk is largely mitigated, however, because our interest expense for the debt with variable rate risk is marked up and charged to Airborne under our ACMI agreement. Variable interest rate risk can be quantified by estimating the change in annual cash flows resulting from a hypothetical 20% increase in interest rates. A hypothetical 20% increase in interest rates would have resulted in an increase in interest expense of approximately $1.2 million for the year ended December 31, 2003.

The debt issued at fixed interest rates is exposed to fluctuations in fair value resulting from changes in market interest rates. Fixed interest rate risk can be quantified by estimating the increase in fair value of our long-term debt through a hypothetical 20% decrease in interest rates. As of December 31, 2003, a 20% decrease in interest rates would have increased the fair value of our fixed interest rate debt by approximately $9.0 million.

The Company did not have any derivative financial instruments at December 31, 2003.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of ABX Air, Inc.

We have audited the accompanying consolidated balance sheets of ABX Air, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index of item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note A to the consolidated financial statements, in 2003 the Company changed its estimated useful lives of aircraft.

As discussed in Note A to the consolidated financial statements, the Company determined that the carrying value of its long-lived assets had been impaired during 2003. In accordance with Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company recorded an impairment charge of approximately $600.9 million for the year ended December 31, 2003.

As discussed in Note C, prior to August 16, 2003, the Company operated as a wholly-owned subsidiary of Airborne, Inc. Accordingly, the accompanying consolidated financial statements may not necessarily be representative of the results of operations that would have been attained if the Company would have operated as an unaffiliated entity. Certain expenses prior to August 16, 2003 represent allocations made from and applicable to Airborne, Inc. as a whole.

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ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

See notes to consolidated financial statements.

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ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See notes to consolidated financial statements.

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ABX AIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS