Missile Defense Funding for the missile defense market is primarily driven by the U.S. Government Missile Defense Agency (MDA) budget. The primary thrusts in this market are the continued development and deployment of theater missile defense systems and the Ground-based Missile Defense (GMD) program. The overall MDA missile defense budget is approximately $8 billion. There is continued Congressional support for development of strong missile defense capabilities as evidenced by the fact that the fiscal year 2003 budgets were fully funded in all four defense committees by Congress.

In January 2002, a new GMD Program Strategy was released in which the MDA stated their objective to put a Test Bed capability in place by September 2004. This Test Bed would allow critical testing of the Ground-based Midcourse Defense segment along with the addition of other systems and sensors into the test scenario. These new requirements for a Test Bed and Development Program were baselined by the Company and the U.S. Government in 2002. The resulting contract change was finalized in December 2002. Additionally on December 17, 2002, President George W. Bush called for our nation’s missile defense capabilities to move from the test only category into a deployed system. The Company, in conjunction with MDA, has initiated efforts to fulfill the direction of the President.

Through our leadership position on the Missile Defense National Team and our prime contractor role on the Ground-based Midcourse Defense segment program and on the Airborne Laser program, Space and Communications is positioned to maintain its role as MDA’s #1 contractor.

Homeland Security Since the events of September 11, 2001, the world has permanently changed. The President quickly issued an executive order establishing an Office of Homeland Security. This office was officially designated as a cabinet level department led by Governor Tom Ridge on January 24, 2003. This department will be responsible for a budget of nearly $40 billion annually with a workforce of 170,000 consolidating from 22 disparate agencies. Over the past year, the Company has aligned internally to meet the challenges of the new threat. In June 2002, the Company was chosen to lead the team that installed explosive detection technology for baggage screening in all U.S. airports by December 31, 2002. This was the largest Homeland Security contract awarded to date, representing one of the largest short-term projects in government history. The Company is focusing on the federal Homeland Security marketplace, and will leverage its experience and capabilities in network centric operations to enhance the solutions for Homeland Security opportunities.

Human Space Flight and Exploration The total human space flight and exploration market is forecasted to be relatively flat over the next ten years. This forecast is based on budget projections for NASA, the primary customer in this market. But within this flat forecast the Company is observing changes in direction and emphasis with the establishment of a new vision and mission. Over the past year, NASA has developed a new Integrated Space Transportation Plan (ISTP) to implement their new vision. This plan is designed to benefit the International Space Station, Space Shuttle program, and the agency’s science and research objectives. The new ISTP dedicates more resources to the space station program, provides additional funding to extend the life and enhance the safety and reliability of the agency’s orbiter fleet, boosts funding for science-based payloads and research, and restructures NASA’s Space Launch Initiative. The Space Launch Initiative will now focus on the development of a crew transport vehicle to ferry space station crewmembers, along with a continued technology effort to identify future reusable launch vehicle technologies. The Company is well positioned to join with NASA to help realize their vision using the expertise the Company has gained from its prime contractor role on the Space Shuttle program and the International Space Station and an integral player in the Space Launch Initiative program.

As NASA’s investigation of the Columbia accident continues the Company may see some budget reprioritizing, but it is far too early in the investigation to speculate on that. What we do know is that this administration is committed to finding the cause of the accident, fixing it, and successfully returning the Space Shuttle fleet back to operational status. We will participate fully in these efforts.

Commercial Launch and Satellite The commercial market has softened significantly since the late 1990s in conjunction with the downturn in the telecommunications industry. These markets are now characterized by overcapacity, commodity pricing and limited near term opportunities. The recovery in the commercial satellite market may take several years at which time we believe the market will stabilize in the 15-20 satellites per year range. This recovery in satellite orders should also produce new opportunities in the launch services business. We have taken aggressive actions to right size and restructure our organizations to meet the future commercial demand, while continuing to meet our government customer requirements. In addition, we have worked diligently over the last year to improve processes in our quality, engineering and manufacturing disciplines. We believe Boeing Satellite Systems and Boeing Launch Services (Delta II, III, IV and Sea Launch) are positioned to bring unique and competitive offerings to our commercial customers as their requirements for new or replacement satellites resurfaces.

Boeing Capital Corporation

Revenues

Revenues for BCC consisted principally of income earned on portfolio assets (direct finance leases, operating leases, notes receivable and investments). The major revenue components include commercial aircraft and commercial equipment financing. Interest expense on debt is not included in BCC’s operating earnings as the Company reports interest expense below operating earnings on the consolidated statements of operations. However, interest expense of $410 million, $324 million, and $229 million was associated with debt relating to BCC financing activities for the years ended December 31, 2002, 2001 and 2000. Beginning in 2003, interest expense will be reported as a component of operating earnings for BCC.