Management’s Discussion and Analysis

Management’s Discussion and Analysis

Military Aircraft and Missile Systems The Military Aircraft and Missile Systems segment continues to pursue business opportunities where it can use its customer knowledge, technical strength and large-scale integration capabilities. The segment’s level of research and development expenditures is consistent with this approach, and reflects the recent business environment, which has presented few major new-start opportunities. Current research and development activities focus on near and long-term customer needs. Research and development activities are providing system upgrade and technology insertions to enhance the capability and competitiveness of existing product lines including Apache, C-17, F-15E, F/A-18E/F, and the Joint Direct Attack Munition (JDAM). Research and development initiatives to bring new capabilities and products to the market include the Canard Rotor Wing (CRW), RAH-66 Comanche, Advanced Tactical Transport (ATT), Multimission Maritime Aircraft (MMA), the E/A-18 Electronic Attack Aircraft, the Small Diameter Bomb (SDB) and the 767 Tanker program. Military Aircraft & Missiles is conducting extensive research and development on the unmanned systems including the U.S. Air Force’s Unmanned Combat Air Vehicle (UCAV) and its Naval counterpart (UCAV-N).

Space and Communications Space and Communications research and development expense, excluding in-process research and development, was 526 million in 2001 and 2000, and $492 million in 1999. Significant investment in development programs at the Space and Communications segment continued during 2001. Company-sponsored research and development expenditures supported the development of the Delta IV launch vehicle and the 737-based Airborne Early Warning & Control aircraft. Delta IV development expense has been reduced by the U.S. Government’s participation in developing the Evolved Expendable Launch Vehicle (EELV).

Company-sponsored research and development levels are expected to decline in 2002 due to the transition of the Delta IV launch vehicle into production.

In-process research and development recognized in 2000 The fair value amount of $500 million of inprocess research and development (IPR&D) attributed to the Hughes acquisition in 2000 discussed below was determined by an independent valuation using the income approach.

Thirteen projects were included in the valuation, of which the principal projects were based on the following: technologies associated with high-efficiency solar cells and satellite battery technology ($189 million), phased array and digital processing technology to provide high-speed broadband service ($89 million), and xenon-ion systems for satellite engine propulsion ($82 million). The fair value of identifiable intangibles was also determined by an independent valuation primarily using the income approach. The following risk-adjusted discount rates were used to discount the project cash flows: solar cells and satellite battery technology, 17%; phased array and digital processing technology to provide high-speed broadband service, 18%; xenon-ion systems for satellite engine propulsion, 18%; all other projects, 18.2% weighted average. Operating margins were assumed to be similar to historical margins of similar products. The size of the applicable market was verified for reasonableness with outside research sources. The projects were in various stages of completion ranging from approximately 31% to 92% complete as of the valuation date. As of December 31, 2001, the percentages complete by project were as follows: solar cells and satellite battery technology, 80%; phased array and digital processing technology, 95%; xenon-ion systems for satellite engine propulsion, 90%. The stage of completion for each project was estimated by evaluating the cost to complete, complexity of the technology and time to market. The projects are anticipated to be completed between 2002 and 2004. The estimated cost to complete the projects is $50 million.

The discount rates stated previously are higher than the Company’s weighted average cost of capital due to the inherent uncertainties in the estimates described previously, including the uncertainty surrounding the successful completion of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology and the uncertainty of the timing of the related product introduction and then-existing competing products. If these projects are not successfully developed, the future revenue and profitability of Boeing Satellite Systems may be adversely affected. Additionally, the value of the other intangible assets acquired may become impaired.

The fair value amount of $45 million of IPR&D attributed to the acquisition of Jeppesen Sanderson, Inc., was determined by an independent valuation. The acquired IPR&D technology consists primarily of three software projects that will work together to store information and extract it for use in various products sold by Jeppesen.

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20