Management's Discussion and Analysis pg3

Management’s Discussion and Analysis
Results of Operations, Financial Condition and Business Environment (continued)

Liquidity and Capital Resources

The primary factors that affect the Company’s investment requirements and liquidity position, other than operating results associated with current sales activity, include the timing of new and derivative programs requiring both high developmental expenditures and initial inventory buildup; cyclical growth and expansion requirements; customer financing assistance; the timing of federal income tax payments; and the Company’s stock repurchase plan.

Cash Flow Summary
Following is a summary of Company cash flows based on changes in cash and short-term investments. This cash flow summary is not intended to replace the Consolidated Statements of Cash Flows that are prepared in accordance with generally accepted accounting principles, but is intended to highlight and facilitate understanding of the principal cash flow elements.

(a)	Non-cash charges to earnings as presented here consist of depreciation, amortization, retiree health care accruals, share-based plans, and the special charges in 1997 for Douglas products programs. The Company has not funded retiree health care accruals and, at this time, has no plan to fund these accruals in the future. The share-based plans do not impact current or future cash flow, except for the associated positive cash flow tax implications. The special charges associated with the Douglas products programs principally involved inventory balance valuation adjustments.
(b)	Inventory associated with the 777 program increased substantially in 1996 and 1997, and declined in 1998 due to amortization of initial tooling and deferred production costs. Inventory balances on the 747, 757 and 767 commercial jet programs increased in 1997 and 1998 due to increased production rates. Additionally, production and tooling inventory increased on the new 737-600/700/800/900 program in 1996, 1997 and 1998.
(c)	The increases and decreases in commercial customer advances during 1996, 1997 and 1998 were broadly distributed among the commercial jet programs, and generally correspond to orders and production rate levels. With regard to Information, Space and Defense Systems segment activity, the ratio of progress billings to gross inventory did not significantly change during this period.
(d)	Over the three-year period 1996-1998, changes in accounts receivable, accounts payable, other liabilities and deferred taxes resulted in a net increase in cash of $0.6 billion. This was largely attributable to increases in accounts payable and other liabilities of $1.2 billion, mostly as a result of increased business activity, partially offset by income taxes payable and deferred of $0.4 billion. Excluding potential tax claim settlements discussed in Note 11 to the financial statements, federal income tax payments over the next three years are projected to substantially exceed income tax expense due to anticipated completion of contracts executed under prior tax regulations.
(e)	The changes in customer financing balances have been largely driven by commercial aircraft market conditions and the ability of the Company to sell customer financing assets. Over the three-year period 1996-1998, the Company generated $3.9 billion of cash from principal repayments and by selling customer financing receivables and operating lease assets. Over the same period, additions to customer financing amounted to $5.8 billion. As of December 31, 1998, the Company had outstanding commitments of approximately $6.2 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through the year 2004. Not all these commitments are likely to be used; however, a significant portion of these commitments is with parties with relatively low credit ratings. See Note 19 to the financial statements concerning concentration of credit risk. The Company will continue to sell financing assets from time to time when capital markets are favorable in order to maintain maximum capital resource flexibility. Outstanding loans and commitments are primarily secured by the underlying aircraft.
(f)	Debt amounting to $301 million matured in 1998, and $300 million was added with maturity in 2038. In 1997, debt amounting to $637 million matured, and the Company also retired $230 million of debt through a tender offer for the 9.25% notes due April 1, 2002. Additionally, Boeing Capital Corporation, a corporation wholly owned by the Company, issued $511 million of debt in 1998 and $225 million in 1997.
(g)	In the third quarter of 1998, the Company announced a share repurchase program to buy up to 15% of the Company’s outstanding shares of common stock. In 1998 the Company repurchased 35.2 million shares of stock (approximately 3.5% of outstanding stock) for $1.3 billion.
(h)	Total funding of the ShareValue Trust was $1.7 billion; however, a portion of the funding was accomplished through the transfer of treasury shares and the issuance of new shares.

Capital Resources
The Company has unsecured long-term debt obligations of $6.1 billion. Approximately $650 million matures in 1999, and the balance has an average maturity of 16 years. Total long-term debt as of year-end 1998 amounted to 33% of total capital (shareholders’ equity plus borrowings). The Company has substantial additional long-term borrowing capability. Revolving credit line agreements with a group of major banks, totaling $2.64 billion, remain available but unused.

The Company believes its internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise, and to continue to repurchase Company stock per the share repurchase program.

Contingent Items
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 conservative estimates of investigation, cleanup and monitoring costs to be incurred.

The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material impact to the Company’s financial position. With respect to results of operations, related charges have averaged less than 2% of annual net earnings exclusive of special charges. Such accruals as of December 31, 1998, without consideration for the related contingent recoveries from insurance carriers, are less than 2% of total liabilities.

Because of the regulatory complexities and risk of unidentified contaminated sites and circumstances, the potential exists for environmental remediation costs to be materially different from the estimated costs accrued for identified contaminated sites. However, based on all known facts and expert analyses, the Company believes it is not reasonably likely that identified environmental contingencies will result in additional costs that would have a material adverse impact to the Company’s financial position or operating results and cash flow trends.

The Company is subject to U.S. Government investigations of its practices from which civil, criminal or administrative proceedings could result. Such proceedings could involve claims by the Government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company, or one or more of its operating divisions or subdivisions, can also be suspended or debarred from government contracts, or lose its export privileges, based on the results of investigations. The Company believes, based upon all available information, that the outcome of any such government disputes and investigations will not have a material adverse effect on its financial position or continuing operations.

In 1991 the U.S. Navy notified the Company and General Dynamics Corporation (the Team) that it was terminating for default the Team’s contract for development and initial production of the A-12 aircraft. The Team filed a legal action to contest the Navy’s default termination, to assert its rights to convert the termination to one for “the convenience of the Government,” and to obtain payment for work done and costs incurred on the A-12 contract but not paid to date. At December 31, 1998, inventories included approximately $581 million of recorded costs on the A-12 contract, against which the Company has established a loss provision of $350 million. The amount of the provision, which was established in 1990, was based on the Company’s belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, that the Team would establish a claim for contract adjustments for a minimum of $250 million, that there was a range of reasonably possible results on termination for convenience, and that it was prudent to provide for what the Company then believed was the upper range of possible loss on termination for convenience, which was $350 million.

On December 19, 1995, the U.S. Court of Federal Claims ordered that the Government’s termination of the A-12 contract for default be converted to a termination for convenience of the Government. On December 13, 1996, the court issued an opinion confirming its prior no-loss adjustment and no-profit recovery order. On December 5, 1997, the Court issued an opinion confirming its preliminary holding that plaintiffs were entitled to certain adjustments to the contract funding, increasing the plaintiffs’ possible recovery to $1,200 million. On March 31, 1998, the Court entered a judgment, pursuant to a March 30, 1998, opinion and order, determining that plaintiffs were entitled to be paid that amount, plus statutory interest from June 26, 1991, until paid.

Although the Government has appealed the resulting judgment, the Company believes the judgment will be sustained. Final resolution of the A-12 litigation will depend on such appeals and possible further litigation, or negotiations, with the Government. If sustained, however, the expected damages judgment, including interest, could result in pretax income that would more than off-set the $350 million loss provision established in 1990.

On October 31, 1997, a federal securities lawsuit was filed against the Company in the U.S. District Court for the Western District of Washington in Seattle. The lawsuit names as defendants the Company and three of its executive officers. Additional lawsuits of a similar nature have been filed. The plaintiffs in each lawsuit seek to represent a class of purchasers of Boeing stock between July 21, 1997, and October 22, 1997, (the “Class Period”), including recipients of Boeing stock in the McDonnell Douglas merger. July 21, 1997, was the date on which the Company announced its second quarter results, and October 22, 1997, was the date on which the Company announced charges to earnings associated with production problems being experienced on commercial aircraft programs. The lawsuits generally allege that the defendants desired to keep the Company’s share price as high as possible in order to ensure that the McDonnell Douglas shareholders would approve the merger and, in the case of two of the individual defendants, to benefit directly from the sale of Boeing stock during the Class Period. The plaintiffs seek compensatory damages and treble damages. The Company believes that the allegations are without merit and that the outcome of these lawsuits will not have a material adverse effect on its earnings, cash flow or financial position.

On June 6, 1998, sixteen African American employees of The Boeing Company, previously employed at several distinct units of The Boeing Company, McDonnell Douglas Corporation and Rockwell International Corporation, filed a complaint in the U.S. District Court for the Western District of Washington (Washington Class Action) alleging, on the basis of race, discrimination in promotions and training. The plaintiffs also allege retaliation and harassment and seek, among other things, an order certifying a class of all African American employees who are currently working or have worked for the three companies during the past few years. Also, on July 31, 1998, seven African American employees of the helicopter division of the Military Aircraft and Missile Systems Group in Philadelphia filed an action in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia Class Action) alleging, on the basis of race, discrimination in compensation, promotions and terminations. The complaint also alleges retaliation at that division. Plaintiffs are seeking an order certifying a class of all African American employees of The Boeing Company. In September 1998, the Court denied plaintiffs’ motion seeking class certification, but allowed plaintiffs to renew their motion upon completion of class discovery.

On January 25, 1999, the U.S. District Court in the Western District of Washington entered an order preliminarily approving a proposed Consent Decree, which settles both the Washington Class Action and the Philadelphia Class Action, along with a multi-plaintiff racial discrimination lawsuit. The order, inter alia, conditionally certified a nationwide class of 20,000 current and former African American Boeing (including all U.S. subsidiaries and former McDonnell Douglas Corporation and Rockwell International) employees. If approved by the Court, the Company will pay $15 million allocated in a manner described in the proposed Consent Decree. The Company will devise systems changes that will inform hourly employee class members about the promotion selection process, and which employee was awarded a certain promotion; provide training and other programs to assist employees with career development; employ a consultant to assess these system changes; implement across the system a revised first-level management selection process and revised internal complaint process; and implement enforcement procedures to maintain a harassment-free workplace.

A hearing is set for May 26, 1999, to determine the fairness of the proposed Consent Decree and, if so determined, for the Court to approve the Consent Decree. The Company believes that the proposed Consent Decree, if approved, will not have a materially adverse effect on its earnings, cash flow or financial position.

In December 1996, The Boeing Company filed suit in the U.S. District Court for the Western District of Washington for the refund of over $400 million in federal income taxes and related interest. The suit challenged the IRS method of allocating research and development costs for the purpose of determining tax incentive benefits on export sales through the Company’s Domestic International Sales Corporation and its Foreign Sales Corporation for the years 1979 through 1987. In September 1998, the District Court granted the Company’s motion for summary judgment. The U.S. Department of Justice has appealed this decision. If the Company were to prevail, the refund would include interest computed to the payment date. The issue could affect tax computations for subsequent years; however, the financial impact would depend on the final resolution of audits for those years.

Income taxes have been settled with the Internal Revenue Service (IRS) for all years through 1978, and IRS examinations have been completed through 1987. In connection with these examinations, the Company disagrees with IRS proposed adjustments, and the years 1979 through 1987 are in litigation. The Company has also filed refund claims for additional research and development tax credits, primarily in relation to its fixed-price government development programs. Successful resolutions will result in increased income to the Company.

Year 2000 (Y2K) Date Conversion
The Y2K issue exists because many computer systems, applications and assets use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the year 2000 as the year 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process financial and operations information incorrectly.

State of readiness: The Company recognized this challenge early, and major operating units started work in 1993. The Company’s Y2K strategy to make systems “Y2K-ready” includes a common companywide focus on policies, methods and correction tools, and coordination with customers and suppliers. This focus has been on all systems potentially impacted by the Y2K issue, including information technology (“IT”) systems and non-IT systems, such as embedded systems, facilities and factory floor systems. Each operating unit has responsibility for its own conversion, in line with overall guidance and oversight provided by a corporate-level steering committee.

The Company has largely completed remediation of systems to meet safety and business continuity concerns and has a plan in place that targets deployment of Y2K-ready systems companywide by July 31, 1999. The Company is continuing to emphasize the safety and quality of Boeing products and to clarify that Y2K is a business challenge and not limited to computers. The Company is capitalizing on its history of integrating complex systems, has an experienced Y2K team in place headed by the Company’s chief information officer, and is working to ensure supplier and customer readiness as appropriate.

The Company has identified approximately 14,000 computing systems and assessed them for Y2K readiness. More than 90% of the systems were made Y2K-ready by December 31, 1998. The status of each of the remaining systems will be specifically tracked and monitored. The schedule is for IT and non-IT systems to complete conversion, testing and deployment by July 31, 1999.

A companywide, coordinated process to assess supplier readiness began in the second quarter of 1998. The Company is unable to definitively determine that all major suppliers will reach a Y2K-ready status that will ensure no production disruption from suppliers.

Costs to address Y2K issues: The Company’s Y2K conversion efforts have not been budgeted and tracked as separate projects, but have occurred in conjunction with normal sustaining activities. Total application-sustaining IT costs have averaged approximately $350 million per year over the last three years. Y2K conversion efforts have averaged approximately 10% of total sustaining IT costs for these years, and are expected to represent a lower percentage in 1999. In addition to these sustaining costs, discretely identifiable costs associated with Y2K conversion activities are expected to total $16 million. The costs of non-IT conversion efforts have also been incurred in conjunction with normal sustaining activities. The Company does not expect a reduction in the costs of these sustaining activities when Y2K conversion activities are completed because normal sustaining activities will be ongoing. Reprioritizing sustaining activities to support Y2K conversion activities has not had, and is not expected to have, an adverse impact on operations.

Risks associated with Y2K issues: The Company believes there is low risk of any internal critical system, embedded system, or other critical asset not being Y2K-ready by the end of 1999. The Company continues to assess its risk exposure attributable to external factors and suppliers, including suppliers outside the United States. Although the Company has no reason to conclude that any specific supplier represents a risk, the most reasonably likely worst-case Y2K scenario would entail production disruption due to inability of suppliers, some of whom represent the sole source for certain items, to deliver critical parts. The Company is unable to quantify such a scenario, but it could potentially result in a material adverse impact on results of operations, liquidity or financial position of the Company. Contingency plans for suppliers and mission critical systems impacted by Y2K issues are currently being developed. Where appropriate, these plans will include leveraging the existing communications and transportation infrastructure created by the Company’s Disaster Preparedness Program, which is designed to respond to disaster scenarios caused by natural, technological and manmade factors.

Boeing continues to work closely with local, state and federal emergency management organizations to ensure that coordinated plans are in place in case infrastructure problems occur in the year 2000.

Market Risk Exposure
The Company has financial instruments that are subject to interest rate risk, principally short-term investments, fixed-rate notes receivable attributable to customer financing, and debt obligations issued at a fixed rate. Historically, the Company has not experienced material gains or losses due to interest rate changes when selling short-term investments or fixed-rate notes receivable. Additionally, the Company uses interest rate swaps to manage exposure to interest rate changes. Based on the current holdings of short-term investments and fixed-rate notes, as well as underlying swaps, the exposure to interest rate risk is not material. Fixed-rate debt obligations issued by the Company are generally not callable until maturity.

The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. As a general policy, the Company substantially hedges foreign currency commitments of future payments and receipts by purchasing foreign currency-forward contracts. As of December 31, 1998, the notional value of such derivatives was $395 million, with a net unrealized gain of $2 million. Less than 1% of receipts and expenditures are contracted in foreign currencies, and the Company does not consider the market risk exposure relating to currency exchange to be material.

Commercial Airplanes Business
Environment and Trends

The worldwide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth, both in developed and emerging countries, and political stability. Demand for the Company’s commercial aircraft is further influenced by airline industry profitability, world trade policies, government-to-government relations, environmental constraints imposed upon aircraft operations, technological changes, and price and other competitive factors.

Global Economic and Passenger Traffic Trends
As the world economy improved in this decade, airline passenger traffic increased. For the five-year period 1994-1998, the average annual growth rate for worldwide passenger traffic was approximately 6.0%. The Company’s 20-year forecast of the average long-term growth rate in passenger traffic is approximately 4.7% annually, based on projected average worldwide annual economic real growth of 2.9% over the 20-year period.

Based on global economic growth projections over the long term, and taking into consideration increasing utilization levels of the worldwide aircraft fleet and requirements to replace older aircraft, the Company projects the total commercial jet aircraft market over the next 20 years at more than $1,000 billion in 1998 dollars.

Asia-Pacific Economies
Results in 1998 for Asia-Pacific airlines were mixed. Recessions are now under way throughout Asia, impacting the economies of Japan, Malaysia, the Philippines, Hong Kong, Singapore, Indonesia, Thailand and South Korea. Air travel declined in a number of regional markets. Passenger load factors declined and some airlines reported net losses. With growth in the region lower than past forecasts, airlines, including those in China, are reassessing the number and timing of aircraft contracted to deliver during the next several years.

Airline Profitability
Through a combination of passenger traffic growth, improved revenue, lower fuel costs and aggressive cost control measures, the airline industry as a whole significantly improved operating profitability and net earnings over the past few years. The industry realized a substantial positive level of earnings over the four-year period 1995-1998. The outlook for passenger traffic growth in 1999 is generally positive, especially in the United States, Europe, Latin America and for trans-Atlantic flights. Continued profitability levels depend on sustained economic growth, limited wage increases, and capacity additions in line with traffic increases.

The Boeing Company and Subsidiaries