Beginning in 1999 and continuing through 2002 the European Union (EU) has issued a series of objections with the World Trade Organization (WTO) to both U.S. FSC and ETI provisions. The WTO has agreed with the EU and ruled that the FSC and ETI provisions constitute prohibited export subsidies. In response the WTO has authorized the EU to impose retaliatory tariffs. A list of products upon which the retaliatory tariff would be imposed is not yet final, but at this point no Boeing products have been included on the list. President Bush has stated that the U.S. will bring its tax laws into compliance with the WTO ruling that the Extraterritorial Income regime constitutes a prohibited export subsidy. Both the House Ways and Means Committee and the Senate Finance Committee are continuing to assess alternatives for a replacement of the ETI legislation. It is not possible to predict what impact this issue will have on future earnings pending final resolution of these matters. If ETI is repealed and replacement legislation is not enacted, the loss of benefit to the Company could be substantial.

Income taxes have been settled with the IRS for all years through 1978, and IRS examinations have been completed through 1991. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The IRS examination for McDonnell Douglas Corporation for the years 1993 through 1995 has been settled and the Company received a refund of $102 million in 2002. The Company believes adequate provision for all outstanding issues has been made for all open years.

Backlog

Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated U.S. and foreign government contract funding. Total contractual backlog balances were $104.2 billion at December 31, 2002, $106.6 billion at December 31, 2001, and $120.6 billion at December 31, 2000. The decreases in contractual backlog from 2001 to 2002 and 2000 to 2001 were related to decreases in contractual backlog for Commercial Airplanes offset by increases in contractual backlog for both Space and Communications and Military Aircraft and Missile Systems.

Unobligated backlog includes U.S. and foreign government definitive contracts for which funding has not been appropriated. Unobligated backlog totaled $34.7 billion, $27.5 billion and $31.3 billion at December 31, 2002, 2001 and 2000, respectively. The increase in unobligated backlog from 2001 to 2002 is primarily related to Military Aircraft and Missile Systems, partially offset by Space and Communications. Overall, unobligated backlog decreased from 2000 to 2001 due to a decrease in unobligated backlog for Military Aircraft and Missile Systems, which was partially offset by an increase in unobligated backlog for Space and Communications.

Liquidity and Capital Resources

The primary factors that affect the Company’s investment requirements and liquidity position, other than operating results associated with current sales activity, include the following: timing of new and derivative programs requiring both high developmental expenditures and initial inventory buildup; cyclical factors, including growth and expansion requirements and requirements associated with reducing sales levels; customer financing assistance; the timing of federal income tax payments; the Company’s stock repurchase plan; and potential acquisitions.

Cash flow summary The Company has generated strong cash flow from operating activities with $4.4 billion provided in 2002, $3.9 billion in 2001 and $6.2 billion in 2000. Earnings, adjusted for non-cash items, continue to be the primary source of operating cash flow with over $4 billion provided in each of the last three years.

Non-cash items Non-cash items in earnings primarily include depreciation, amortization, share-based plans expense, impairments, valuation provisions and the cumulative effect of accounting change relating to the adoption of SFAS No. 142. Non-cash items and corresponding amounts are listed in the Company’s Consolidated Statements of Cash Flows.

Working capital Working capital from operations excluding cash contributions for pensions generated approximately $0.5 billion of net cash in 2002. Due to the decline in the airline industry, lower inventory balances and production rates resulted in a $1.5 billion increase in cash flow. The amount of customer advance payments received in excess of costs was $0.9 billion less in 2002 than the previous year due primarily to lower advance payments received. There was also a substantial reduction in vendor payables. The reduction in tax payments in 2002 resulted principally from lower earnings and a $0.1 billion tax refund from settlements of several tax audits.

The working capital trend as reflected in the Five-Year Summary indicates that the Company has been able to use lower amounts of working capital to support the volume of business transacted and is using capital more efficiently. This trend does not reflect a change in the Company’s ability to meet obligations.