As of December 31, 2002, the Company had cumulatively delivered 113 717 program aircraft. The Company will record 717 deliveries on a break-even basis until such time as program reviews indicate changes to the gross margin. The Company has potentially material exposures related to the 717 program, principally attributable to termination costs that could result from a lack of longer-term market acceptance.

The Company is anticipating an order from the U.S. Air Force for 100 767 tankers, which will have a long-term positive impact on the 767 program. This order has been incorporated into the program estimates to the extent the aircraft fall within the current accounting quantity. Based on the anticipated delivery schedule and forecasted production rates most of these aircraft fall beyond the current accounting quantity. The order from the U.S. Air Force for 100 767 tankers is anticipated to become a firm contract during 2003.

Deferred Production Costs

Inventory production costs incurred on in-process and delivered units in excess of the estimated average cost of such units determined as described in Note 1 represent deferred production costs. As of December 31, 2002 and 2001, there were no significant excess deferred production costs or unamortized tooling costs not recoverable from existing firm orders for the 737 Next-Generation and 777 programs.

The unamortized tooling and deferred production costs included in inventory at December 31 are summarized in the following table:

As of December 31, 2002 and 2001, the balance of deferred production costs and unamortized tooling related to the 717, 747, 757 and 767 programs was insignificant.

Fleet Support

The Company provides the operators of all its commercial airplane models assistance and services to facilitate efficient and safe aircraft operation. Collectively known as fleet support services, these activities and services include flight and maintenance training, field service support costs, engineering services and technical data and documents. Fleet support activity begins prior to aircraft delivery as the customer receives training, manuals and technical consulting support, and continues throughout the operational life of the aircraft. Services provided after delivery include field service support, consulting on maintenance, repair, and operational issues brought forth by the customer or regulators, updating manuals and engineering data, and the issuance of service bulletins that impact the entire model’s fleet. Field service support involves Company personnel located at customer facilities providing and coordinating fleet support activities and requests. The costs for fleet support are expensed as incurred and have been historically less than 1.5% of total consolidated costs of products and services. This level of expenditures is anticipated to continue in the upcoming years. These costs do not vary significantly with current production rates.

Research and Development

The Company continually evaluates opportunities to improve current aircraft models, and assesses the marketplace to ensure that its family of commercial jet aircraft are well positioned to meet future requirements of the airline industry. The fundamental strategy is to maintain a broad product line that is responsive to changing market conditions by maximizing commonality among the Boeing family of commercial aircraft. Additionally, the Company is determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in-service support.

Commercial Airplanes segment research and development expense was $768 million in 2002, $858 million in 2001 and $574 million in 2000. The decrease in 2002 from 2001 was due primarily to reduced spending on the development of the 777-300ER and 747-400ER. The increase in 2001 over 2000 was due primarily to increased spending on the development of the 777-300ER, 777-200LR, 747-400ER and a sonic cruiser airplane.

The initial delivery of the 747-400ER and the rollout of the first 777-300ER occurred in the fourth quarter of 2002. The initial delivery of the 777-300ER is expected to occur in 2004. The initial delivery of the 737-900, the largest member of the 737 Next-Generation family occurred in the second quarter of 2001. The initial delivery of the 767-400ER, a stretched version of 767-300ER, occurred in the third quarter of 2000.

In the fourth quarter of 2002, the Company announced it will focus its product development efforts on the development of an efficient 200- to 250-seat airplane that will fly 7,000 to 8,000 nautical miles with 15 to 20 percent lower fuel usage at the top end of today’s commercial jet speeds. The market potential for a new airplane of this size is forecasted at up to 3,000 units over the next 20 years. The Company expects to formally offer the new airplane to customers in early 2004, with entry into service targeted for 2008.

The following chart summarizes the time horizon between go-ahead and certification/initial delivery for major Commercial Airplanes derivatives and programs.