Message to the Shareholders and Employees
of The Boeing Company

For decades, Boeing has symbolized discipline and daring in extending the frontiers of aerospace. We have been among the most admired and trusted companies in the world. In 2003, that proud and hard-earned reputation was put at risk.

As the senior leaders of this company, we are acutely aware of a huge disconnect—between the great work and dedication of many, and the misdeeds of a few.

Many things went right in 2003—programs won, remarkable gains in productivity, prelaunch of an exciting new commercial airplane and a Malcolm Baldrige National Quality Award, the highest quality award in U.S. industry.

Unfortunately, a few things went wrong—very wrong. A few people engaged in unethical behavior. In doing so, they caused great damage to Boeing's reputation and the morale of our people.

Apart from contrition, there are two thoughts that we wish to convey in this letter. One, we will fix the things that went wrong, so they don't happen again. And two, we intend to take this company to a new level of performance. Though new to our posts (Chairman and CEO, respectively, since December 1, 2003), we don't start from ground zero. We start with:

1. The right strategy.
2. Great, dedicated people.
3. Excellent financial condition.
4. Strong, well-positioned businesses.

Our task is straightforward. It is to regroup, to refocus and, more than ever, to concentrate intensely on execution and attention to detail. Aside from small pockets of underperforming businesses (chiefly in commercial space), this is not a turnaround situation. Our challenge is to rebuild trust. More than that, it is to reaffirm the tremendous capacity for leadership that exists within Boeing.

Strategy Strategy is about choices, your view of the future and the allocation of precious resources. During the past eight years, the leaders of this company have built an aerospace enterprise of unrivaled balance and breadth. The benefits from this strategy are many: They range from achieving a smoother overall flow of earnings to capitalizing on new opportunities for synergy and growth. Whether the customer is military, civil or commercial, we can pull together the best people, ideas and technology from across a wide array of aerospace businesses.

At the same time, we intend to lead—not to follow or to be an also-ran. We have two core businesses: Boeing Commercial Airplanes and Boeing Integrated Defense Systems. Each has a distinct view of the future and a well-defined strategy. Taken together, they generate substantial cash flow to permit us to invest in the future. Nevertheless, we won't rush, or be rushed, into costly or ill-advised ventures simply to counter the actions of a competitor. This is a strategic consideration, no less than an obligation to shareholders. In business as in war, the ability to defer the joining of battle—choosing the right time and the right place to make a major commitment—is one of the defining marks of strategy. So it will be at Boeing.

People We have great people—throughout this company—who are strongly committed to excellence.

There was a time when the leaders of this company did everything they could to encourage employee involvement. Now we are absolutely dependent upon it. The welling up of ideas and the sharing of them across different work teams continue to inspire us.

Imagine a car company or any other major industrial concern that was forced to cut production by more than 50 percent in a three-year period. Yet that happened to Boeing Commercial Airplanes, which has managed the remarkable feat of staying profitable and cash-flow positive, while improving its productivity and preparing for the market upturn with the development of new products such as the 747- 400ER, 777-300ER, 777-200LR and 7E7. In the face of the most adverse circumstances, people in this business have been incredibly resourceful and resilient.

There has been inspired teamwork as well in the making of F/A-18s, C-17s and other military platforms. At a lean manufacturing site in St. Charles, Missouri, a team of just 18 people produces one of the real game-changers in recent military engagements: electronic guidance kits that turn free-falling bombs into precision-guided munitions. Those munitions made a real difference in the Iraq conflict. Great teamwork also characterizes our service businesses. Aerospace Support, another part of Integrated Defense Systems, was a 2003 Malcolm Baldrige National Quality Award recipient.

Defense Eight years ago, Boeing was not a major defense company. Today, we are the United States' second-largest defense contractor. In 2003, Boeing Integrated Defense Systems accounted for more than half of Boeing's total revenues.

Integrated Defense Systems is more than a collection of defense programs that acts as a counterweight to the cyclical commercial airplane business. It is a dynamic business with an overriding mission and strategy of its own—to establish Boeing as the leading industry partner to our government in developing a "network-centric" view of the world and applying that to a wide array of conventional and nonconventional threats.

In a network-centric environment, there is dramatically increased sharing of information and capabilities. The network connects different platforms (such as aircraft, tanks and ships), sensors (everything from satellites to laser range finders) and forces in the field. This increased connectivity becomes the ultimate force multiplier. The world got an early look at the awesome power of a networked force in Operation Iraqi Freedom. In their march to Baghdad and beyond, U.S. and coalition forces accomplished a far more difficult mission than that of Desert Storm in half the time and with half the troops.

In 2003, Boeing was awarded a contract valued up to $14.8 billion from the U.S. Army to move the transformational, network-oriented Future Combat Systems program from concept into reality. In its first full year of operation as an integrated entity, Integrated Defense Systems booked an unprecedented $50 billion in new business in 2003—or 83 percent more than its annual revenues.

Commercial Despite the longest and deepest slump ever in air travel, we remain bullish on the future of commercial aviation. Over the long term, we believe this is a great growth market. For seven decades, the growth in air traffic has outpaced the world's economic growth by a factor of about 1.5 to 1. For more than a thousand years, ever-increasing travel has stimulated economic growth and facilitated the advancement of knowledge and technology. It is part of the DNA of human progress.

Given the market situation, our lean and profitable commercial airplane business, we submit, is stronger today than it has ever been. Immediately following September 11, we led the way in quickly and decisively reducing production rates to prevent an inevitable glut of new and idle jetliners from being any greater than it was. As the market turns up again, we fully expect to lead—producing the airplanes the market demands while continuing to find new ways to improve efficiency and quality.

On December 16, the eve of the 100th anniversary of powered flight, we announced our decision to offer a brand-new, midsized airplane that will push the envelope of commercial flight like no other airplane since the dawn of the jet age. The first large airliner with a composite fuselage and wing, the Boeing widebody 7E7 Dreamliner is designed for the express purpose of providing economical and comfortable nonstop service between scores of new city pairs. In fact, the Boeing 7E7 will set a new standard for comfort and spaciousness in long-distance travel, while being quieter and more efficient, and having lower emissions than other airplanes.

The line of demarcation between Boeing and Airbus is clearly drawn. Given a choice, we believe that most people will prefer to fly directly to their destinations rather than make lengthy stopovers at major hubs. With the Boeing 7E7, we will give that choice to millions of people and the airlines that serve them. And we will make it affordable and economical.

Transformation In other ways as well, this company is working to transform the experience of flight and to extend the frontiers of aerospace. For many passengers on long-distance flights, Connexion by BoeingSM will make the airplane seem more like the home or office, allowing passengers to be connected in the air no less than on the ground. Lufthansa will begin offering high-speed Connexion service to its long-distance passengers in spring 2004.

In Closing It is no accident that Boeing is playing a leading role in all of these critically important areas. Looking to the future, we intend to lead the great people of Boeing to a new level of performance by putting new emphasis on execution in fulfilling our commitments to all of our constituents. Our goal is to maximize the market penetration afforded by the strength and balance of our business mix, and we will prudently use Boeing's strong balance sheet and cash flow to invest and grow in our market segments. Internal and external investments will always be made with the objectives of advancing our market leadership and maximizing long-term shareholder returns.

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