Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Consolidated Results of Operations

Sales of $13.9 billion for the second quarter of 2002 were 10.7% lower than sales of $15.5 billion for the comparable period of 2001. Sales of $27.7 billion for the first six months of 2002 were 3.9% lower than sales of $28.8 billion for the comparable period of 2001. Commercial aircraft deliveries for the second quarter of 2002 were 112, compared with 141 for the same period in 2001. For the first six months of 2002, a total of 222 commercial aircraft were delivered, compared with 263 for the same period in 2001. The commercial aircraft delivery projection for the full year of 2002 remains unchanged at 380, compared with 527 in 2001.

Net earnings for the second quarter of 2002 were $779 million, compared with $840 million for the same period in 2001. The second quarter of 2002 net earnings included a $28 million after tax benefit on the sale of Military Aircraft and Missile Systems ordnance business. This compares to a non-recurring after tax benefit of $36 million related to the F-15E program recorded during the comparable period of 2001. Net loss for the first six months of 2002 was $470 million, compared with net earnings of $2,077 million for the same period in 2001. The first six months of 2002 net loss included an after tax charge of $1,827 million recorded as a cumulative effect of accounting change as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Other non-recurring items recorded during the first six months of 2002 included a $28 million after tax benefit on the sale of Military Aircraft and Missile Systems ordnance business; a $15 million after tax benefit related to continuing F-15 program supplier termination negotiations; a $24 million after tax charge related to decreased valuations of commercial aircraft and adverse exposure under certain guarantees and commitments related to the events of September 11; and a $15 million after tax charge recognized on a long-held equity investment. A non-recurring after tax benefit of $475 million related to a research and development tax credit and a $36 million after tax benefit related to the F-15E program were recorded during the comparable period of 2001.

Research and development expense totaled $385 million for the second quarter of 2002, compared with $461 million for the same period in 2001. Commercial Airplanes segment research and development expense of $213 million for the second quarter of 2002 reflected an increase of 12.1% over the $190 million recorded for the same period in 2001, primarily due to increased spending attributable to the development of a longer range 747 (747-400ER) and a quiet longer range 747 (747XQLR). Spending attributable to the two longer-range 777 models (777-300ER and 777-200LR) is still significant, but has decreased from 2001. Military Aircraft and Missile Systems segment research and development expense of $74 million for the second quarter of 2002 is in line with the spending levels for the same period in 2001. Space and Communications segment research and development expense of $58 million decreased 53.6% over the $125 million recorded during the same period in 2001. Airborne Early Warning and Control System research and development program expenses decreased as the effort transitioned to work that was determined to be specifically required for the Australian Wedgetail program and Delta IV research and development spending also decreased as that program nears first flight. Research and development in the Other segment relates principally to Connexion by Boeing^SM and Air Traffic Management. Research and development expense totaled $844 million for the first six months of 2002, compared with $883 million for the same period of 2001.

Income tax expense for the second quarter of 2002 was $345 million, or 30.7% of pretax earnings, compared with $372 million, or 30.7% of pretax earnings, for the same period in 2001. Income tax expense for the first six months of 2002 was $599 million, or 30.6% of pretax earnings, compared with $441 million, or 17.5% of pretax earnings, for the same period in 2001. These rates differ from the federal statutory rate of 35% due primarily to Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion tax benefits, tax credits, and state income taxes, and for 2001 due to a one-time audit settlement benefit for research credits at McDonnell Douglas Corporation.

On July 10, 2002, the Company announced the creation of Integrated Defense Systems (IDS), a business unit merging the Company's total space, defense, government, intelligence and communications into one organization. Prior to the announcement, these operations were contained in the Company's Military Aircraft and Missile Systems and Space and Communications reportable segments. Since the formation of IDS, the composition and review structure of internal financial information related to these operations has remained unchanged. Hence, at present, segment disclosures remain on the same basis. However, the Company is currently studying alternatives for internal reporting of financial information of the operations within IDS. When the new IDS reporting and review model is implemented, the Company will re-evaluate its reportable segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company expects to continue to provide at least the same level of reporting transparency. Disclosures using new reportable segments created by IDS are expected to be reported beginning in the first quarter of 2003.

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. If the Company were to prevail, the refund of the amount in dispute would include interest computed to the payment date. The suit challenged the Internal Revenue Service (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 (DISC) 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 appealed this decision. On August 2, 2001, the United States Court of Appeals for the Ninth Circuit reversed the District Court's summary judgment. The Company filed a petition for rehearing with the Ninth Circuit Court of Appeals and was denied such rehearing. The Company then filed a petition for writ of certiorari with the United States Supreme Court. On May 28, 2002, the United States Supreme Court granted the Company's petition for writ of certiorari and will hear arguments during its term that begins in October 2002. The Company will not have a negative earnings impact as a result of the suit's outcome.

In February 2000, the World Trade Organization (WTO) Appellate Body upheld a panel decision that U.S. FSC tax provisions constituted a prohibited export subsidy. In response, in November 2000, the United States enacted legislation to repeal the FSC tax provisions, subject to transition rules, and enacted replacement legislation (the Extraterritorial Income Exclusion Act of 2000). The European Union objected to this ETI exclusion, and in November 2001 asked the WTO to authorize trade sanctions on a list of goods, including aircraft, produced in the United States. In January 2002, the Appellate Body of the WTO upheld a ruling that the United States had failed to withdraw the prohibited FSC export subsidy. President Bush has stated that the U.S. will bring its tax laws into compliance with the WTO ruling that the Extraterritorial Income regime constitutes a prohibited export subsidy. A WTO arbitration body will determine the level of retaliation that can be asserted by the European Union if the U.S. rules are not brought into compliance. The Administration and Congress have not reached a solution for this issue. In July 2002, Representative Bill Thomas, Chairman of the House Ways and Means Committee, introduced the American Competitiveness and Corporate Accountability Act of 2002. If enacted, that bill would repeal ETI and introduce broad-based international reform. These international provisions would have no application to the Company. It is not possible to predict what impact this issue will have on future earnings pending final resolution of these matters. If ETI is repealed and replacement legislation is not enacted, the loss of benefit to the Company could be significant.

Segment Results of Operations

The Company operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and Boeing Capital Corporation. All other activities fall within the Other segment, principally made up of Boeing Technology, Connexion by Boeing^SM and Air Traffic Management.

Commercial Airplanes

Commercial Airplanes segment revenues were $7.7 billion in the second quarter of 2002 compared with $9.3 billion for the same period in 2001. For the first six months of 2002, revenues totaled $16.0 billion compared to $17.8 billion for the same period in 2001. The decline in revenue for the second quarter and first six months of 2002 was due primarily to the decline in aircraft deliveries and impacts to the spare parts market resulting from the events of September 11, 2001.

Commercial jet aircraft deliveries were as follows:

Commercial jet aircraft deliveries included deliveries under operating lease, which are identified by parentheses in the table above. Aircraft accounted for as operating leases have minimal revenues recorded at the time of delivery.

As of June 30, 2002, the Company had cumulatively delivered 101 717 program aircraft. The Company will record 717 deliveries on a break-even basis until such time as program reviews indicate positive gross profit within the program accounting quantity. Such program reviews may result in revised assumptions of revenues and costs. The Company has potentially material exposures related to the 717 program, principally attributable to vendor termination costs that could result from a lack of longer-term market acceptance. During the second quarter of 2002, AMR Corporation returned 24 717 aircraft to the Company. Although these returns increase the Company's exposure on 717 aircraft, the Company is in active negotiations to place this equipment back in service and believe the risk associated with this exposure is minimal. See Note 9.

The Commercial Airplanes segment is projecting lower deliveries in the near term and the resulting downsizing that began in 2001 and is projected to continue through the balance of 2002 and early 2003 will add to the complexity of achieving estimated cost targets. The Company believes that these complexities have been adequately considered in projecting cost estimates that are inherent in margins determined under the program method of accounting, however, such cost estimates remain subject to potential adverse future adjustments.

Commercial Airplanes segment second quarter 2002 operating earnings, based on the unit cost of airplanes delivered, were $790 million, compared with $955 million for the same period in 2001. The overall Commercial Airplanes segment operating profit margin was 10.3% for the second quarter of 2002, compared with 10.3% for the same period in 2001. The second quarter of 2002 margin was unchanged from 2001 primarily reflecting favorable cost performance offset by the reduction in revenue. For the six months ended June 30, 2002, Commercial Airplanes segment earnings were $1,763 million, compared with $1,815 million for the same period in 2001, and segment operating margins were 11.0% and 10.2% for the first six months of 2002 and 2001. The improved margins in 2002 reflect favorable cost performance offset by the reduction in revenue.

Commercial Airplanes segment earnings, as determined under generally accepted accounting principles (GAAP) and including intercompany transactions, reflect the program method of accounting and incorporate a portion of the 'Accounting differences/eliminations' caption as discussed in Note 19. Commercial Airplanes segment earnings under GAAP were $560 million and $887 million for the second quarter of 2002 and 2001. The GAAP determined segment margin of 7.3% in 2002 compares with 9.5% for the same period in 2001. Commercial Airplanes earnings, as determined under GAAP, were $1,199 million for the first six months of 2002, compared with $1,636 million for the same period in 2001, and the related six month margins were 7.5% and 9.2% for 2002 and 2001. The decline in GAAP determined margins is primarily due to the reduction in revenue as a result of lower delivery volume and model mix. In addition, the GAAP margins have been adversely impacted compared to 2001 due to the near-term aircraft market decline resulting from the events of September 11, 2001. This has resulted in the lengthening of the time needed to produce the accounting quantity.

The favorable cost performance reflected in the current period earnings and margin based on unit cost of sales is recognized over current and future deliveries under the program method of accounting. For segment reporting purposes, the favorable cost performance is a cumulative adjustment over current and prior deliveries.

The Company has a policy that determines what the appropriate accounting quantity is for each commercial aircraft program. This policy takes into account several factors influenced by the demand for the particular product. During the second quarter of 2002, the 717 program accounting quantity was increased from 135 units to 140 units due to increased orders compared with 200 units as of June 30, 2001. The Next-Generation 737 program accounting quantity was increased to 2,000 units as of June 30, 2002, compared to 1,800 units as of June 30, 2001. The 777 program accounting quantity was 600 units as of June 30, 2002, unchanged from June 30, 2001. The accounting quantities for the 747 program, 757 program and 767 program remain unchanged.

As of June 30, 2002, the Commercial Airplanes segment had a small quantity of airplanes that were completed but unsold. The Company believes that these aircraft can be sold in an orderly fashion in the near-term.

The Company offers aircraft fleet support for all its aircraft models. Fleet support includes flight and maintenance training, field service support costs, engineering services and technical data and documents. Costs for fleet support are expensed as incurred and do not vary significantly with current production rates. The costs incurred to sustain this support are historically less than 1.5% of total costs of products and services.

Military Aircraft and Missile Systems

Military Aircraft and Missile Systems segment revenues for the second quarter of 2002 increased 5.4% to $3.5 billion compared to $3.3 billion for the same period in 2001. For the first six months of 2002, revenues totaled $6.4 billion compared to $5.7 billion for the same period in 2001. The higher revenues in this year's first six months were driven by additional airlift and tactical aircraft, rotorcraft and tactical weapons program deliveries, along with increased military aerospace support volume. Rotorcraft and tactical weapons program deliveries were all higher in this year's second quarter.

Military Aircraft and Missile Systems segment deliveries included the following:

Second quarter 2002 segment earnings and operating margins totaled $458 million and 13.2%. This compares to segment earnings and operating margins of $410 million and 12.5% during the second quarter of 2001. For the six months ended June 30, 2002, Military Aircraft and Missile Systems segment earnings were $821 million, compared with $656 million for the same period in 2001, and segment operating margins were 12.7% and 11.5% for the first six months of 2002 and 2001. The increase in earnings from 2001 is primarily due to the additional delivery volume, delivery mix, and production program performance improvements. Research and development expense in the second quarter of 2002 was $74 million compared to $70 million during the second quarter of 2001, primarily driven by the 767 Tanker development program.

Military Aircraft and Missile Systems continues to take steps in securing significant growth opportunities in domestic and international markets while also pursuing new markets. On May 22, 2002, the X-45A Unmanned Combat Air Vehicle (UCAV) completed its first flight at NASA Dryden Flight Research Center. The first of ten new F-15E Strike Eagles was delivered on June 21, 2002, and the F-15K contract for 40 aircraft and associated support was signed with the Korean Ministry of National Defense on June 25, 2002. The 767 Tanker program is expected to complete negotiations this summer with the U.S. Air Force for the lease of 100 Tanker/Transports, which will begin the replacement of its aging tanker fleet. The C-17 Multi-Year II contract for 60 aircraft, which deliver through calendar year 2008, is expected to be received in August 2002.

Space and Communications

Space and Communications segment revenues were $2.7 billion in the second quarter of 2002 compared with $2.5 billion for the same period in 2001. For the first six months of 2002, revenues totaled $5.0 billion compared to $4.8 billion for the same period in 2001. Segment revenue growth was in the Missile Defense and Integrated Battlespace markets partially offset by lower revenue from the Satellite and Launch markets.

Space and Communications segment deliveries included the following:

Space and Communications segment operating earnings for the second quarter of 2002 were $181 million compared with $130 million in the second quarter of 2001. Operating margins were 6.8% for the second quarter of 2002 compared to 5.2% for the second quarter of 2001. The improved earnings and margin were a result of revenue growth and program mix. For the six months ended June 30, 2002, Space and Communications segment earnings were $223 million, compared with $214 million for the same period in 2001, and segment operating margins were 4.4% and 4.5% for the first six months of 2002 and 2001. The improved earnings were a result of the revenue growth with a minor change in margins due to program mix.

In February 2002, Space and Communications undertook a reorganization of their commercial satellite manufacturing activities in response to poor performance compounded by unfavorable market conditions. The commercial satellite program performance stabilized in the second quarter due to the effects of the restructuring actions. Increased cost estimates in the second quarter were offset by a favorable contract restructure. The net impact was a $16 million reduction in earnings. We expect these actions to yield favorable results when the commercial communications satellite market returns.

Various satellite contracts contain technical performance criteria that require ongoing execution to achieve. The Company believes that costs and performance estimates used to record program profit are appropriate; however, failure to achieve technical specifications in a timely manner could put certain contracts at risk, including risk of cost overruns and risk of contract default.

Certain Space and Communications segment launch and satellite contracts include provisions for replacement launch services or hardware if specified performance criteria are not met. The Company has historically purchased insurance to cover these obligations when allowed under the terms of the contract. Due to recent events, the current insurance market reflects unusually high premium rates and also suffers from a lack of capacity to handle all insurance requirements. The Company may therefore elect to forgo the procurement of third-party insurance and, instead, retain such risks internally. Management believes the contract cost estimates have sufficient provisions to cover the expected value for these risks.

Major events during the second quarter of 2002 included the successful launch of a Boeing built satellite on-board the Sea Launch vehicle. The Delta II program had a successful NASA launch in May. Space and Communications continued in their role as Systems Integration Lead for the Missile Defense Agency national industry team. Additionally, another significant milestone was achieved in the Integrated Battlespace growth strategy when Space and Communications was awarded the Army contract for the first cluster of Joint Tactical Radio System radios. In June, the Transportation Security Administration awarded Space and Communications the Explosive Detection System contract which will provide enhanced security at U.S. airports.

Significant risk remains related to work in process inventory and supplier commitments for the Delta III program. Space and Communications continues to actively work to mitigate much of this risk, primarily through the conversion of Delta IIIs to Delta IIs. This risk assessment remains closely monitored, and additional opportunities for conversions are under review.

The Sea Launch program in which Boeing is a 40% partner with RSC Energia (25%) of Russia, Kvaerner ASA (20%) of Norway, and KB Yuzhnoye/PO Yuzhmash (15%) of Ukraine had one launch in the second quarter of 2002. Several launches are planned for the year. Boeing's investment in this venture as of June 30, 2002, is reported at zero, which reflects the prior recognition of losses reported by Sea Launch. Boeing has financial exposure with respect to the venture, which relates to guarantees by the Company provided to certain Sea Launch creditors, performance guarantees provided by the Company to a Sea Launch customer and financial exposure related to accounts receivable/inventory. Net of liabilities established, the Company's maximum exposure to credit-related losses associated with credit guarantees is $342 million as of June 30, 2002. Financial exposure related to performance guarantees and accounts receivable/inventory amounted to $230 million at June 30, 2002.

The Company and Lockheed Martin are 50-50 partners in United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the U.S. Air Force. United Space Alliance also performs modifications, testing and checkout operations that are required to ready the Space Shuttle for launch. The joint venture operations are not included in the Company's consolidated statements; however, the Company's proportionate share of joint venture earnings is recognized as income. Included in Space and Communications operating earnings for the second quarter of 2002 was $16 million compared to $15 million in the second quarter of 2001 related to United Space Alliance operations.

Boeing Capital Corporation

Revenues for Boeing Capital Corporation (BCC) consisted principally of income earned on portfolio assets (direct finance leases, operating leases, notes receivable, assets held for sale or re-lease and investments). Earnings are net of depreciation on leased equipment and operating expenses. No interest expense on debt is included in BCC's operating earnings as reflected in Note 19; however, interest expense of $99 million and $92 million was associated with debt relating to financing activities for the second quarter ended June 30, 2002 and 2001, and $189 million and $164 million for the six months ended June 30, 2002 and 2001.

Operating earnings for BCC were $172 million for the second quarter ended June 30, 2002, compared with $179 million for the second quarter ended June 30, 2001, and were $327 million for the six months ended June 30, 2002, compared with $292 million for the six months ended June 30, 2001, exclusive of interest expense.

During the six months ended June 30, 2002, $242 million of financing assets secured by aircraft operated by United Airlines were transferred from the Company to BCC. BCC received an equity contribution of $150 million from the Company ($105 million during first quarter 2002 and $45 million during second quarter 2002) and paid for the remaining balance of $92 million in cash. The transfer was recorded in BCC's financial statements at book value.

Effective April 1, 2002, Boeing Capital Services Corporation (BCSC), an indirect wholly owned subsidiary of the Company and parent of BCC, transferred certain assets and liabilities in the net amount of $67 million to BCC. BCC received an equity contribution of $45 million from BCSC and paid for the remaining balance of $22 million in cash. The transfer was recorded in BCC's financial statements at book value.

In the second quarter of 2002, the Company transferred certain operating leases and associated liabilities to BCC in the net amount of $72 million, which BCC paid for in cash. This transfer was recorded in BCC's financial statements at book value.

BCC's largest customer, United Airlines ("United"), accounted for $1,274 million and $742 million of customer financing and other assets at June 30, 2002 and December 31, 2001. Investments in United equipment trust certificates and other trust-related interests of $79 million and $76 million at June 30, 2002 and December 31, 2001, are included in the United portfolio. Based on publicly available reports, United experienced a net loss of $850 million for the six months ended June 30, 2002. As a result of continued losses and scheduled debt repayments at United, the Company will continue to assess its exposure based on underlying collateral values supporting transactions and the general allowance for losses on receivables. United has applied for a $2 billion loan administered by the Airline Transportation Stabilization Board. As of the filing date hereof, United is current on all of its payment obligations to the Company. There could be a material adverse effect on the Company's earnings, cash flows or financial position if United were to default on its obligations to the Company.

If the economy and airline industry recover as expected by the Company, the effects of the September 11, 2001, terrorist attacks are not likely to have a material adverse impact on BCC's earnings, cash flows or financial position.

BCC has utilized certain special purpose entities in connection with certain aircraft financing transactions. The Company believes it has appropriately followed accounting pronouncements regarding consolidation of such entities. If accounting pronouncements are amended in accordance with recent public comments made by the Financial Accounting Standards Board (FASB) on an exposure draft of a proposed interpretation of SFAS No. 94, Consolidation of all Majority-Owned Subsidiaries, and Accounting Research Bulletin No. 51, Consolidated Financial Statements, it is possible that an estimated $1.1 billion of assets and non-recourse liabilities could be added to the Condensed Consolidated Statements of Financial Position. Other transactions are subject to this exposure draft, but the Company's interpretation and analysis is that these transactions will not qualify for consolidation. The actual treatment is subject to change once the final pronouncement is published.

Other

Other segment earnings were a loss of $45 million in the second quarter of 2002 and a loss of $69 million for the same period in 2001. The decrease in losses between periods was primarily due to research and development activity related to Connexion by Boeing^SM. Other segment earnings were a loss of $96 million and $91 million for the first six months of 2002 and 2001. Research and development expense attributable to the Other segment was $40 million in the second quarter of 2002 and $76 million for the same period in 2001. For the six months ended June 30, 2002 and 2001, research and development expense was $66 million and $127 million. As noted above, the decrease in research and development expense between periods was primarily due to Connexion by Boeing^SM, which revised its business approach to focus on government services and military activities with low research and development costs. Also included in the Other segment for the second quarter of 2002 were operating earnings of $11 million attributable to financing assets not intended to be transferred to BCC. As of June 30, 2002, these financing assets consisted of four C-17 transport aircraft leased to the United Kingdom Royal Air Force.

The Company entered into certain transactions with BCC in the form of intercompany guarantees and other subsidies. In the second quarter of 2002 and 2001, the Other segment recognized losses of $57 million and $12 million related to transactions with BCC. For the six months ended June 30, 2002 and 2001, losses of $88 million and $15 million were recognized in the Other segment. See Note 19.

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 2.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of June 30, 2002, the Company's cash position totaled $816 million.

Excluding non-recourse debt and Boeing Capital Corporation (BCC), a financing subsidiary wholly owned by the Company, total debt represents 32% of total shareholders' equity plus debt. The consolidated debt, including BCC and non-recourse, represents 56% of total shareholders' equity plus debt.

Revolving credit line agreements with a group of major banks, totaling $4.5 billion, remain available but unused. The Company also has available $4.0 billion under commercial paper programs, of which $2.0 billion is attributable to BCC, and which are backed by the $4.5 billion revolving credit line agreements. As of the end of the second quarter of 2002, the Company had an outstanding commercial paper balance of $340 million, all of which is related to BCC.

On April 15, 2002, the Company contributed $325 million to three of its defined benefit plans. These three plans, like all of the Company's major domestic plans, remain fully funded under the Internal Revenue Code. The Company elected to contribute enough funds to ensure that each of its plans would have assets that were at least approximately equal to (and in most cases greater than) the liability for vested benefits as measured by the Pension Benefit Guaranty Corporation.

The Company continuously monitors the performance of its defined pension plans and those factors which may have an impact on that performance. As part of this process, the Company annually reviews actuarial assumptions including discount rate, expected return on plan assets in future years and rate of compensation increases. The Company considers its actuarial assumptions generally to be conservative and, in prior years coupled with investment performance, to have resulted in contributions to income and achievement and a positive funded status. Due to the recent performance of the financial markets and the current low interest rate environment, contributions to income are expected to be less going forward and it may be necessary for the Company to consider making additional cash contributions to the plans, which may be significant. At this time, the Company is unable to determine whether additional contributions will be made or the extent of such contributions and, therefore, is unable to assess any impact such contributions might have on its liquidity and capital resources.

The Company has the following Standard & Poor's credit ratings: short-term, A-1; senior debt, A+. BCC has the following Standard & Poor's credit ratings: short-term, A-1; senior debt, A+. The Company has the following Moody's credit ratings: short-term, P-1; senior debt, A2. BCC has the following Moody's credit ratings: short-term, P-2; senior debt, A3. The Company has the following Fitch's credit ratings: short-term, F-1; senior debt, A+. BCC has the following Fitch's credit ratings: short-term, F-1; senior debt, A+.

Other than bank facilities, which contain pricing grids that are dependent upon the Company's long-term rating, the Company has not identified any other material rating triggers which could require a cash payment over the near-term.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk include financing commitments, credit guarantees, asset value guarantees, and interest rate guarantees. See Note 17.

US Airways Group, Inc. filed for bankruptcy-court protection under Chapter 11 in August 2002. This event is not expected to have a material adverse effect on the Company's earnings, cash flows or financial position.

Backlog

Contractual backlog of unfilled orders (which excludes purchase options and announced orders for which definitive contracts have not been executed, and unobligated U.S. Government contract funding) was as follows (dollars in billions):

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, effective for the Company on January 1, 2003. The Company does not believe that the implementation of this standard will have a material impact on its financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This standard does not contain provisions that are material to the Company's financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires costs associated with exit or disposal activities to be recognized when they are incurred and applies prospectively to such activities that are initiated after December 31, 2002.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 related swaps, the unhedged 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. Less than two percent of receipts and expenditures are contracted in foreign currencies, and the market risk exposure relating to unhedged currency exchange is not material.

The Company is subject to commodity price risk relating principally to energy used in production. The Company uses commodity derivatives, such as fixed-price purchase commitments, to hedge against potentially unfavorable price changes of commodities. Commodity price exposure related to unhedged contracts is not material.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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 U.S. Government investigations 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 McDonnell Douglas (now a subsidiary of 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. As of June 30, 2002, inventories included approximately $583 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 McDonnell Douglas's belief, supported by an opinion of outside counsel, that the termination for default would be converted to a termination for convenience, and that the upper range of possible loss on termination for convenience was $350 million.

On August 31, 2001, the U.S. Court of Federal Claims issued a decision after trial upholding the Government's default termination of the A-12 contract on the ground that the Team could not meet the revised contract schedule unilaterally imposed by the Government after the Government had waived the original schedule. The court did not, however, enter a judgment for the Government on its claim that the Team be required, as a consequence of the alleged default, to repay progress payments that had not been formally liquidated by deliveries at the time of termination. These unliquidated progress payments total $1,350 million. On October 4, 2001, the court confirmed that it would not be entering judgment in favor of the Government in the amount of these unliquidated progress payments. This is the latest decision relating to long-running litigation resulting from the A-12 contract termination in 1991, and follows an earlier trial court decision in favor of the contractors and reversal of that initial decision on appeal.

The Company believes, supported by an opinion of outside counsel, that the trial court's rulings with respect to the enforceability of the unilateral schedule and the termination for default are contrary to law and fact. The Company believes the decision raises valid issues for appeal and is pursuing its appeal.

If, contrary to the Company's belief, the decision of the trial court on termination were sustained on appeal, the Company would incur an additional loss of approximately $275 million, consisting principally of remaining inventory costs and adjustments. And if, contrary to the Company's belief, the appeals court further held that a money judgment should be entered against the Team in the amount of the unliquidated progress payments, the Team would be required to pay the Government $1,350 million plus statutory interest from February 1991 (currently totaling approximately $1,000 million). Under this outcome, the Company would be obligated to pay one half of these amounts. The additional loss to the Company would total approximately $1,450 million in pretax charges, consisting principally of the repayment obligations and the remaining inventory costs and adjustments.

The Company believes that the loss provision established by McDonnell Douglas in 1990 continues to provide adequately for the reasonably possible reduction in value of A-12 net contracts in process as of June 30, 2002. Final resolution of the A-12 litigation will depend upon the outcome of further proceedings or possible negotiations with the Government.

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 named as defendants the Company and three of its then executive officers. Additional lawsuits of a similar nature were filed in the same court and were consolidated. The lawsuits generally alleged 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 of Boeing and McDonnell Douglas and, in the case of the individual defendants, to benefit directly from the sale of Boeing stock. The Court certified two subclasses of plaintiffs in the action. The plaintiffs sought compensatory damages and treble damages. On September 17, 2001, the Company reached agreement with class counsel to settle the lawsuit for $92.5 million. The settlement, which will have no effect on the Company's earnings, cash flow or financial position, as it is within insurance limits, was approved by the Court in February 2002.

On February 25, 2000, a purported class action lawsuit alleging gender discrimination and harassment was filed against The Boeing Company, Boeing North American, Inc., and McDonnell Douglas Corporation. The complaint, filed with the United States District Court in Seattle, alleges that the Company has engaged in a pattern and practice of unlawful discrimination, harassment and retaliation against females over the course of many years. The complaint, Beck v. Boeing, names 28 women who have worked for Boeing in the Puget Sound area; Wichita, Kansas; St. Louis, Missouri; and Tulsa, Oklahoma. On March 15, 2000, an amended complaint was filed naming an additional 10 plaintiffs, including the first from California. The lawsuit attempts to represent all women who currently work for the Company, or who have worked for the Company in the past several years.

The Company has denied the allegation that it has engaged in any unlawful "pattern and practice." Plaintiffs' motion for class certification was filed in May 2001. The class they sought included salaried employees in Puget Sound, Wichita, St. Louis, and Long Beach, and hourly employees in Puget Sound, Wichita, and St. Louis.

On October 19, 2001, the court granted class certification to a segment of the population sought by the plaintiffs. The court ruled that the action could proceed on the basis of two limited subclasses: a. all non-executive salaried women (including engineers) in the Puget Sound area, and b. all hourly women covered by the Machinists' Bargaining Agreement in the Puget Sound area. The claims to be litigated are alleged gender discrimination in compensation and promotion. The court also held that the plaintiffs could not seek back pay. Rather, should liability be found, the potential remedies include some form of injunctive relief as well as punitive damages. The U.S. Ninth Circuit Court of Appeals has accepted the Company's interlocutory appeal of the class certification decision, particularly the ruling that leaves open the possibility of punitive damages.

In January 2002 and March 2002, four other gender discrimination class actions were filed in locations that were originally part of the Beck case but subsequently excluded from the class certified by the district court. The four new cases cover females employed in California, Missouri, Kansas, and Oklahoma. Many of the named plaintiffs in these new cases were also named plaintiffs in Beck. Like Beck, these new cases focus on compensation and promotion decisions.

The Company intends to continue its aggressive defense of these cases. It is not possible to predict what impact, if any, these cases could have on the financial statements.

Item 4. Submission of Matters to a Vote of Security Holders

This item has been amended to correct minor rounding errors in the percentages reported of Eligible Votes, Votes Present and Votes For or Against Proposals 2 through 13 submitted to a vote of Shareholders at the Company's Annual Meeting of Shareholders on April 29, 2002 appearing in the tables under "Submission of Matters to a Vote of Security Holders" in Item 4 of Part II in the Company's Form 10-Q for the quarterly period ended March 31, 2002.