Net Earnings

Net earnings of $492 million for 2002 were $2,335 million lower than 2001 earnings of $2,827 million. The decrease in net earnings principally reflected a $1,827 million charge recorded in 2002 upon the adoption of SFAS No. 142, decreased commercial airplane deliveries, increased customer financing charges and higher commercial satellite production costs. Other income decreased $276 million in 2002, to $42 million in 2002 from $318 million in 2001. Other income in 2001 included $210 million of interest income associated with federal income tax audit settlements; 2002 did not include similar interest income. Also contributing to lower other income in 2002 was $46 million of losses on long-held equity investments. Interest and debt expense increased $80 million in 2002, to $730 million in 2002 from $650 million in 2001. The increased interest expense resulted from increased debt, primarily associated with the increased customer and commercial financing activities of BCC. Interest expense is expected to increase concurrent with increasing future financing activity.

Net earnings of $2,827 million for 2001 were $699 million higher than 2000 net earnings of $2,128 million. The increase in net earnings principally reflected increased operating earnings associated with the increase in revenue for 2001. Net earnings in 2001 were significantly reduced by $935 million of pre-tax special charges ($633 million after tax) related to the events of September 11, 2001. The increase in net earnings for 2001 over 2000 also reflected the in-process research and development expense of $557 million ($348 million after tax) that was recognized in 2000, of which $500 million was associated with the acquisition of the Hughes space and communications businesses, which were renamed Boeing Satellite Systems. Other income decreased $68 million in 2001, to $318 million in 2001 from $386 million in 2000. The decrease in other income in 2001 principally reflected lower interest income from cash, but was partially offset by higher interest income associated with federal income tax audit settlements ($210 million in 2001, compared with $73 million in 2000). Other income in 2000 also included a $42 million gain on sale of a long-held equity investment. Interest and debt expense increased $205 million in 2001, to $650 million in 2001 from $445 million in 2000. The increased interest expense resulted from increased debt, primarily associated with the increased customer and commercial financing activities of BCC.

Research and Development

Research and development expenditures involve design, development and related test activities for defense systems, new and derivative commercial jet aircraft, advance space, other company- sponsored product development, and basic research and development. These expenditures are either charged directly against earnings or are included in amounts allocable as reimbursable overhead costs on U.S. Government contracts. Research and development highlights for each of the major business segments are discussed in Segment Results of Operations and Financial Condition. In addition, Boeing Technology, the advanced research and development organization of the Company, focuses on improving its competitive position by investing in certain technologies and processes that apply to multiple business units. Technology investments currently being pursued within Boeing Technology include network centric operations, affordable structures and manufacturing technology, lean and efficient design processes and tools, lean support and service initiatives, advanced platform systems and safe and clean products.

Total research and development expense in 2002 was $1,639 million, compared with $1,936 million in 2001 and $1,998 million in 2000. Excluding the $557 million of inprocess research and development expense in 2000, research and development expense increased $495 million in 2001, principally reflecting increases in the Commercial Airplanes segment and the Other segment, which includes activities relating to Connexion by Boeing^SM.

Income Taxes

The effective income tax rate for 2002 was 27.1% compared with 20.7% in 2001 and 29.0% in 2000. The 2002 effective income tax rate of 27.1% varies from the federal statutory tax rate of 35%, principally due to Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) Exclusion tax benefits of $195 million. This rate also reflects tax credits, state income taxes and favorable resolution of certain audit issues.

The effective income tax rates of 20.7% for 2001 and 29.0% for 2000 also vary from the federal statutory tax rate principally due to FSC benefits of $222 million in 2001 and $291 million in 2000. The 2001 income tax rate also reflects a one-time benefit of $343 million reflecting a settlement with the Internal Revenue Service (IRS) relating to research credit claims on McDonnell Douglas Corporation fixed price government contracts applicable to the 1986-1992 federal income tax returns.

In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 million in federal income taxes and related interest. If the Company were to prevail, the refund of the amount in dispute would include interest computed to the payment date. However, the Company cannot predict the likelihood of a favorable outcome. The suit challenged the IRS method of allocating research and development costs for the purpose of determining tax incentive benefits on export sales through the Company’s Domestic International Sales Corporation (DISC) and its FSC for the years 1979 through 1987. The Company prevailed with the District Court, but lost an appeals decision with the Ninth Circuit Court of Appeals. The Company appealed to the Supreme Court and is awaiting their decision, which is expected in the first half of 2003. The Company’s financial statements will not be negatively impacted as a result of the suit’s outcome.