Airlines regularly utilize a special purpose entity (SPE) known as a Pass Through Trust. The Pass Through Trust enables the airline to aggregate a large number of aircraft secured notes into one trust vehicle, facilitating the issuance of larger bonds called Pass Through Certificates (PTCs). The most common form of PTCs issued by airlines is the EETCs. EETCs provide investors with tranched rights to cash flows from a financial instrument, as well as a collateral position in the related asset. While the underlying classes of equipment notes vary by maturity and/or coupon depending upon tenor or level of subordination of the specific equipment notes and their corresponding claim on the aircraft, the basic function of the Pass Through Trust in an EETC remains: to passively hold separate debt investments to enhance liquidity for investors, whom in turn pass this liquidity benefit directly to the airline in the form of lower coupon and/or greater debt capacity. BCC participates in several EETCs as an investor. The EETC investments are related to customers the Company believes have less than investment-grade credit.

BCC also utilizes certain SPEs to isolate individual transactions for legal liability, perfect security interest from the perspective of the Company and a third-party lender in certain leveraged transactions, and realize certain income and sales tax benefits. These SPEs are fully consolidated in the Company’s financial statements.

In December 2002, BCC completed an asset securitization that raised $299 million of secured debt through the use of a bank-sponsored Commercial Paper Conduit (C/P Conduit). As collateral for the debt, BCC transferred $331 million of assets from its portfolio to the C/P Conduit. These portfolio assets consisted of the cash flows associated with specific financing leases, notes and other receivables and operating leases. BCC also assigned to the C/P Conduit perfected security interests in $278 million of collateral underlying the transferred portfolio assets. The collateral pledged indirectly provides the C/P Conduit with additional protection in the event that the cash flows from the leases and notes are insufficient to cover the total debt outstanding under the transaction. The secured debt and securitized assets remain on BCC’s balance sheet.

Other

Other segment earnings were $(424) million in 2002, $(354) million in 2001, and $43 million in 2000. As of December 31, 2002 and 2001, operating earnings of $44 million and $23 million were attributable to four C-17 transport aircraft on lease to the United Kingdom Royal Air Force. These leases began in 2001. Offsetting the operating earnings of the C-17 leases were increases in losses during both 2002 and 2001 primarily due to increases in intercompany guarantees and asset impairments, lease accounting differences and other subsidies related to BCC. See Note 24. Research and development expense attributable to the Other segment was $129 million in 2002, $294 million in 2001, and $84 million in 2000. Research and development activities in the Other segment relate primarily to Connexion by BoeingSM and, to a lesser extent, Air Traffic Management.

Astro Ltd., a wholly-owned subsidiary of the Company, operates as a captive insurance company. This subsidiary enables the Company’s exposures to be insured at the lowest possible cost to the Company regardless of whether the market is overpriced. In addition, it provides flexibility to the Company in handling its changing risk financing needs and provides access to the reinsurance markets. Currently, Astro Ltd. insures aviation liability, workers compensation, general liability, property, as well as various smaller risk liability insurances.

Events of September 11, 2001

On September 11, 2001, the United States was the target of severe terrorist attacks that involved the use of U.S. commercial aircraft manufactured by the Company. These attacks resulted in a significant loss of life and property and caused major disruptions in business activities and in the U.S. economy overall. See Note 3.

Employees and Labor Relations

As of December 31, 2002, the Company’s principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM) representing 20% of employees (current agreements expiring in May 2004, and September and October 2005); the Society of Professional Engineering Employees in Aerospace (SPEEA) representing 13% of employees (current agreements expiring February 2004 and December 2005); and the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) representing 4% of employees (current agreements expiring May 2003, April 2004, and September 2005).

The Company’s workforce level was 166,000 at December 31, 2002.

Contingent Items

Various legal proceedings, claims and investigations related to products, contracts and other matters are pending against the Company. Most significant legal proceedings are related to matters covered by insurance. Major contingencies are discussed below.

The Company is subject to federal and state requirements for protection of the environment, including those for discharge of hazardous materials and remediation of contaminated sites. Due in part to their complexity and pervasiveness, such requirements have resulted in the Company being involved with related legal proceedings, claims and remediation obligations since the 1980s.

The Company routinely assesses, based on in-depth studies, expert analyses and legal reviews, its contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. The Company’s policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on estimates of investigation, cleanup and monitoring costs to be incurred.