In July 2000, three major European aerospace companies (Aerospatiale Matra of France, DaimlerChrysler Aerospace of Germany, and Construcciones Aeronautica of Spain) combined to form the European Aeronautic Defence and Space Company (EADS). As a result of the formation, EADS became an 80% owner of Airbus Industrie (AI) and led the effort for the formation of the Airbus Integrated Company (AIC) in early 2001. The creation of the AIC effectively changes the Airbus role, from that of a marketer/distributor of large commercial airplanes to one including complete manufacturing responsibility. The AIC is incorporated under French law as a privately held corporation owned 80% by EADS and 20% by BAE Systems.

Over the past five years, sales outside the United States have accounted for approximately 53% of the Company’s total Commercial Airplanes’ third-party segment sales; approximately 50% of the Commercial Airplanes segment contractual backlog as of December 31, 2002, was with customers based outside the United States. Continued access to global markets remains vital to the Company’s ability to fully realize its sales potential and projected long-term investment returns.

Summary Although near-term market uncertainties remain, particularly with respect to the recovery post September 11, the long-term market outlook appears favorable. The Company is well positioned in all segments of the commercial jet airplane market, and intends to remain the airline industry’s preferred supplier through emphasis on product offerings and customer service that provide the best overall value in the industry.

Military Aircraft and Missile Systems

Revenues

Military Aircraft and Missile Systems segment revenues were $14.0 billion in 2002, $12.5 billion in 2001 and $11.9 billion in 2000. Increased revenues in 2002 were primarily due to additional deliveries on the C-17 Globemaster, F/A-18E/F Super Hornet, F-15 Eagle, JDAM, AH-64 Apache programs and increased Aerospace Support volume. The Military Aircraft and Missile Systems business segment is broadly diversified, and no program other than the C-17 Globemaster program and the F/A-18E/F Super Hornet program accounted for more than 6% of total 2002 segment revenues. Revenues include amounts attributable to production programs and amounts recognized on a cost-reimbursement basis for developmental programs such as the F/A-22 Raptor, V-22 Osprey, and the RAH-66 Comanche. The increase in revenues between 2001 and 2000 is primarily due to increased aircraft deliveries in 2001, one additional C-17 Globemaster, four 737 C-40A Clippers and four CH-47 Chinook helicopters.

Deliveries of units for principal production programs, including deliveries under operating lease, which are identified by parentheses, were as follows:

Military Aircraft and Missile Systems segment revenues for 2003 are projected to be in the $14 billion range.

Operating Earnings

Military Aircraft and Missile Systems segment operating earnings for 2002, 2001 and 2000 were $1,652 million, $1,346 million and $1,245 million, respectively. The segment operating margins for 2002, 2001 and 2000 were 11.8%, 10.8% and 10.4%, respectively. The 2002 operating results reflect strong profits on major production programs. The segment operating margins for 2002 were 11.2% after adjusting for gains of $64 million related to the divestiture of equity investments and a favorable adjustment of $24 million attributable to F-15 Eagle program charges taken in 1999. Increased earnings in 2001 from 2000 were associated with the additional delivery of one C-17 Globemaster, four 737 C-40A Clippers and four CH-47 deliveries. The segment operating earnings for 2001 include the recognition of $48 million of charges relating to asset reductions attributable to reduced work volume at the Philadelphia site, and $46 million of charges associated with the Joint Strike Fighter program and idle manufacturing assets. The 2001 operating earnings also included a favorable adjustment of $57 million attributable to F-15 Eagle program charges taken in 1999. Exclusive of these items, the segment operating margins for 2001 were 11.1%.

Research and Development

The Company is continuing to invest in business opportunities where it can use its customer knowledge, technical strength and large-scale systems integration capabilities to shape the market. Investments in Unmanned Systems continue to leverage the Company’s capabilities in architectures, system-of-systems integration and weapon systems technologies to provide transformational capabilities for the U.S. military. Investment is continuing in the 767 Tanker programs for the U.S. Air Force and international customers. Company investments in Airborne Electronic Attack and Precision Weapons and advanced Rotorcraft systems are expanding its breadth of products and capabilities enabling it to access larger portions of the combat systems markets.

Military Aircraft and Missile Systems research and development expense in 2002 was $345 million, compared with $258 million in 2001 and $257 million in 2000. Current research and development activities are focused on the international and domestic 767 Tanker program, reflected in the 2002 increased expenditures over 2001. This program represents a large opportunity to provide state of the art tanking capabilities to our potential domestic and international customers. It demonstrates the synergistic value of the diversified Boeing portfolio in providing best value solutions to our customers. Italy recently became the first customer of the 767 Tanker ordering four aircraft with first aircraft delivery scheduled in 2005. 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. Other research and development efforts include upgrade and technology insertions to enhance the capability and competitiveness of current product lines, as well as exploration of new markets such as unmanned air vehicles (UAVs).