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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                      to                     

Commission file number 1-442

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      X        No            

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes      X        No            

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.            

As of June 30, 2003, there were 800,099,127 common shares outstanding held by nonaffiliates of the registrant, and the aggregate market value of the common shares (based upon the closing price of these shares on the New York Stock Exchange) was approximately $27.5 billion.

The number of shares of the registrant’s common stock, outstanding as of January 31, 2004 was 801,244,697.

Part I and Part II incorporate information by reference to certain portions of the Company's 2003 Annual Report to Shareholders. Part III incorporates information by reference to the registrant's definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

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THE BOEING COMPANY

FORM 10-K

For the Fiscal Year Ended December 31, 2003

INDEX

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PART 1

Item 1. Business

The Boeing Company, together with its subsidiaries (herein referred to as the “Company”), is one of the world’s major aerospace firms. We are organized based on the products and services we offer. We operate in six principal segments: Commercial Airplanes; Aircraft and Weapon Systems (A&WS), Network Systems, Support Systems and Launch and Orbital Systems (L&OS), collectively Integrated Defense Systems (IDS); and Boeing Capital Corporation (BCC). We also established an Other segment classification which principally includes the activities of Connexion by Boeing^SM, a two-way data communications service for global travelers; Air Traffic Management, a business unit developing new approaches to a global solution to address air traffic management issues; and Boeing Technology, an advanced research and development organization focused on innovative technologies, improved processes and the creation of new products.

Revenues, earnings from operations and other financial data of our business segments for the three years ended December 31, 2003, are set forth on pages 106-111 of this report.

Commercial Airplanes Segment

The Commercial Airplanes segment is involved in developing, producing and marketing commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide. We are a leading producer of commercial aircraft and offer a family of commercial jetliners designed to meet a broad spectrum of passenger and cargo requirements of domestic and foreign airlines. This family of commercial jet aircraft currently includes the 717 and 737 Next-Generation narrow-body models and the 747, 767 and 777 wide-body models. Final delivery of the MD-11 aircraft occurred in 2001. Final delivery of the 757 aircraft is scheduled to occur in the second quarter of 2005.

Commercial jet aircraft are normally sold on a fixed-price basis with an indexed price escalation clause. Our ability to deliver jet aircraft on schedule depends on a variety of factors, including execution of internal performance plans, availability of raw materials, performance of suppliers and subcontractors, and regulatory certification. The introduction of new and derivative commercial aircraft programs involves increased risks associated with meeting development, production and certification schedules.

The commercial jet aircraft market and the airline industry remain extremely competitive. We face aggressive international competitors, including Airbus, that are intent on increasing their market share. To effectively compete, we focus on improving our processes and continuing cost reduction efforts. We continue to leverage our extensive customer support services network for airlines throughout the world to provide a higher level of customer satisfaction and productivity.

The commercial aviation market has been impacted by an economic downturn that began in 2001 and continued through 2003. In addition, the industry suffered a tremendous shock from the terrorist attacks of September 11, 2001. Air travel in most areas of the world has not fully recovered to the volume carried by the airlines in 2000, which has negatively affected profitability for many airlines. Late in 2002, traffic began to recover, and holiday travel indicated that the industry recovery was underway. However, the Iraq war and Severe Acute Respiratory Syndrome (SARS) outbreak in early 2003 caused the industry to again retract and delayed recovery. Overall, the industry produced another year of losses led by full service airlines in the U.S. In contrast, low cost carriers in the U.S. and in Europe are reporting positive financial results and continue to grow operations. European airlines are expected to show better results than their U.S. counterparts for this fiscal year end. Likewise, Asian airlines are expected to fare better overall than their U.S. counterparts because traffic to and from Asia has nearly rebounded to pre-SARS levels.

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We continually evaluate opportunities to improve current models, and assess the marketplace to ensure our family of commercial jet aircraft are well positioned to meet future requirements of the airline industry. Our fundamental strategy is to maintain a broad product line responsive to changing market conditions by maximizing commonality among our family of commercial aircraft. We are determined to continue to lead the industry in customer satisfaction by offering products with the highest standards of quality, safety, technical excellence, economic performance and in-service support.

The major focus of commercial aircraft development activities over the past three years has been the 737 Next-Generation-900 model, the 747-400ER, the 747-400ERF, the 777-200LR, and the 777-300ER. The initial delivery of the 737-900, the largest member of the 737 Next-Generation family, occurred in the second quarter of 2001. Certification and first delivery of the 747-400ER and 747-400ERF occurred during the fourth quarter of 2002. Certification and first delivery of the 777-300ER and 777-200LR is scheduled for 2004 and 2006, respectively.

We are currently focusing our new airplane product development efforts on the 7E7 program, which we expect to seat 200 to 250 passengers. In December 2003, we received Board of Directors approval to offer the new airplane to customers. We began to formally offer the aircraft to airlines in early 2004. Subject to additional Board approval, full development and production is scheduled to begin in 2004, with entry into service targeted for 2008. We have selected Everett, Washington as the final assembly location for the 7E7 aircraft.

Integrated Defense Systems Segments

IDS is involved in the research, development, production, modification and support of the following products and related systems: military aircraft, including fighter, transport and attack aircraft; helicopters; missiles; space systems; missile defense systems; satellites and satellite launching vehicles; rocket engines; and information and battle management systems.

The IDS business environment extends over multiple markets, including defense (A&WS, Network Systems and Support Systems), homeland security (Network Systems), space exploration (L&OS), and launch and satellites (L&OS). IDS derives over 85% of its revenue from sales to the U.S. Government and we are forecasting this business mix will remain at this level into the foreseeable future. Specifically, IDS’s primary customers are the U.S. Department of Defense (DoD) for our products in the defense market, the U.S. Department of Homeland Security for the homeland security market, NASA for the space exploration market, and the U.S. Government for the launch and satellites market.

The major trends that shape the current environment of IDS include significant but relatively flat U.S. Government defense and space budgets; rapid expansion of information and communication technologies; the need for low cost, assured access to space; and a convergence of military, civil and commercial markets.

Recently, President Bush announced a new vision for the U.S. space exploration program within NASA. The plan calls for a commitment to a long-term human and robotic program to explore the solar system starting with a return to the moon that will ultimately enable future exploration of Mars and other destinations. To achieve this plan, three top-level goals have been established. The first is that the U.S. will complete its work on the International Space Station by 2010, fulfilling its commitment to the 15 partner countries. To accomplish this goal, NASA will return the Space Shuttle to flight after satisfying safety concerns and the recommendations of the Columbia Accident Investigation Board. Second, the U.S. will begin developing a new manned exploration vehicle to explore beyond our orbit to other worlds. This so-called Crew Exploration Vehicle will be developed and tested by 2008 and will conduct its first manned mission no later than 2014. Lastly, the U.S. will return to the moon as early as 2015, and use it as a stepping stone for more ambitious missions.

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We are continuing to invest in business opportunities where we can use our customer knowledge, technical strength and large-scale systems integration capabilities to shape the market. Current major developmental programs include the F/A-22 Raptor, V-22 Osprey tiltrotor aircraft, C-130 Avionics Modernization Program (AMP) and the Unmanned Combat Air Vehicle (UCAV) and Future Combat Systems (FCS). Both the V-22 and F/A-22 programs have transitioned to low-rate initial production but also continue developmental activities. The CH-47 Chinook is currently transitioning from development to production of a major new upgrade program. Current products in the tactical missiles market include the Harpoon Block II, SLAM-ER, CALCM and the Joint Direct Attack Munition (JDAM). Future programs include the Small Diameter Bomb. We are aggressively pursuing opportunities that utilize high-speed technology for the next-generation missile.

Investments in Unmanned Systems continue to leverage A&WS capabilities in architectures, system-of-systems integration and weapon systems technologies to provide transformational capabilities for the U.S. military. Investment is continuing in the 767 Tanker programs for the U.S. Air Force and international customers. Our investments in Airborne Electronic Attack and Precision Weapons and advanced Rotorcraft systems are expanding the breadth of products and capabilities enabling access to larger portions of the combat systems markets.

The Network Systems research and development funding has been focused on communications capabilities. In the communications market, we are investing to enable connectivity between existing air/ground platforms, increase communications availability and bandwidth through more robust space systems, and leveraged innovative communications concepts. Investments were made in global situational awareness concepts to develop communication system architectures to support various business opportunities including FCS, Joint Tactical Radio System, FAB-T and Global Missile Defense. A major contributor to our support of these DoD transformation programs is the investment in the Boeing Integration Center where our network-centric operations concepts are developed in partnership with its customers. We also will continue to make focused investments that will lead to the development of next-generation space intelligence systems.

Within the L&OS segment, we continued investing in the new Delta IV heavy lift demonstration expendable launch vehicle, which is scheduled to be launched July 2004. This product gave us greater access to a portion of the launch market that was previously unavailable with the Delta II rocket alone. The Network Systems segment has continued to be the premier provider of Airborne Early Warning and Control Systems (AEW&C) with the execution of the agreement with the Turkish government for four new AEW&C Systems aircraft and continued technical progress on the previously awarded Australian AEW&C contract.

The acquisition and merger related consolidations among U.S. aerospace companies resulted in three principal prime contractors for the DoD and NASA, including ourselves. As a result of the extensive consolidation in the defense and space industry, we along with our major competitors are also partners or major suppliers to each other on various programs. We are in a 50% partnership with Lockheed Martin 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. United Space Alliance operations are performed under cost-type contracts. Our proportionate share of joint venture earnings is recognized as income.

The Sea Launch venture, in which we are a 40% partner with RSC Energia (25%) of Russia, Kvaerner ASA (20%) of Norway, and KB Yuzhnoye/PO Yuzhmash (15%) of Ukraine, provides ocean-based launch services to commercial satellite customers. The venture had three successful launches in 2003, and one successful launch in 2002. Our investment in this venture as of December 31, 2003, is

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reported at zero, which reflects the recognition of losses reported by Sea Launch in prior years. The venture incurred losses in 2003 and 2002 due to the relatively low volume of launches, driven by a depressed satellite market.

Boeing Capital Corporation Segment

Historically, BCC has acted as a captive finance subsidiary by providing market-based lease and loan financing for commercial aircraft as well as commercial equipment. In November 2003, we announced a significant change in BCC’s strategic direction, moving from a focus on growing the portfolio to a focus on supporting our major operating units and managing overall corporate exposures. For our commercial aircraft market, BCC will facilitate, arrange, and selectively provide financing to Commercial Airplanes’ customers. For our defense and space markets, BCC will primarily arrange and structure financing solutions for IDS’s government customers. In addition, BCC will enhance the risk management activities to reduce exposures associated with the current portfolio. BCC expects to satisfy any external funding needs through access to traditional market funding sources.

BCC competes in the commercial equipment leasing and finance markets, primarily in the United States, against a number of competitors, mainly larger leasing companies and banks. BCC’s Commercial Financial Services’ portfolio encompasses multiple industries and a wide range of equipment, including corporate aircraft, machine tools and production equipment, containers and marine equipment, chemical, oil and gas equipment and other equipment types. Historically, approximately 20% of BCC’s portfolio was related to commercial equipment leasing and financing activities. In January 2004, we announced that we are exploring strategic alternatives for the future of BCC’s Commercial Financial Services business. The alternatives being examined include a sale of the operation itself, sale of the portfolio or a phased wind-down of the existing portfolio.

Other Business Information

Our backlog of firm contractual orders (in billions) at December 31 is as follows:

Purchase options and announced orders for which definitive contracts have not been executed are not included in contractual backlog. Additionally, U.S. Government and foreign military firm backlog is limited to amounts obligated to contracts. Unobligated contract funding not included in backlog at December 31, 2003, 2002, and 2001, totaled $50.6 billion, $34.7 billion, and $27.5 billion, respectively.

In evaluating our contractual backlog for commercial customers, certain risk factors should be considered. Approximately 34% of the commercial aircraft backlog units are scheduled for delivery beyond 2005. Changes in the economic environment and the financial condition of airlines sometimes result in customer requests for rescheduling or cancellation of contractual orders.

While we own numerous patents and have licenses under patents owned by others relating to our products and their manufacture, we do not believe that our business would be materially affected by

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the expiration of any patents or termination of any patent license agreements. We have no trademarks, franchises or concessions that are considered to be of material importance to the conduct of our business.

Approximately 18% and 20% of combined accounts receivable and customer and commercial financing consisted of amounts due from customers outside the United States as of December 31, 2003 and 2002, respectively. Substantially all of these amounts are payable in U.S. dollars, and, in management’s opinion, related risks are adequately covered by allowance for losses. We have not experienced materially adverse financial consequences as a result of sales and financing activities outside the United States.

Our total research and development expense amounted to $1.7 billion, $1.6 billion, and $1.9 billion in 2003, 2002, and 2001, respectively. We incurred employment reductions resulting from the decrease in commercial aircraft demand, which directly related to the attacks of September 11, 2001.

As of December 31, 2003, our principal collective bargaining agreements were with the International Association of Machinists and Aerospace Workers (IAM) representing 18% 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 (one agreement which expired in 2003 and covered approximately 2,000 workers has not yet been ratified, current agreements expiring April 2004, and September 2005).

Our workforce level at December 31, 2003 was 157,000, including approximately 1,800 in Canada and 2,500 in Australia.

General information about us can be found at www.boeing.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (SEC).

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Item 2. Properties

The locations and covered areas of our principal occupied operating properties on January 1, 2004, are indicated in the following table:

Floor Area

(Thousands of square feet)

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Most runways and taxiways that we use are located on airport properties owned by others and are used jointly with others. Our rights to use such facilities are provided for under long-term leases with municipal, county or other government authorities. In addition, the U.S. Government furnishes us certain office space, installations and equipment at Government bases for use in connection with various contract activities. Facilities at the major locations support all principal industry segments. Work related to a given program may be assigned to various locations, based upon periodic review of shop loads production capability, workforce availability and technical skills.

The company performs re-evaluations of facilities to consolidate redundant activities. Properties and land that do not meet long-term business requirements will be leased out or sold.

Our principal properties are well maintained and in good operating condition. All existing facilities are sufficient to meet our near-term operating requirements.

Item 3. Legal Proceedings

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

Government investigations

We are subject to various U.S. Government investigations, including those related to procurement activities and the alleged possession and misuse of third-party proprietary data, 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. We believe, based upon current information, that the outcome of any such Government disputes and investigations will not have a material adverse effect on our financial position, except as set forth below.

A-12 litigation

In 1991, the U.S. Navy notified McDonnell Douglas (now one of our subsidiaries) 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 December 31, 2003, inventories included approximately $583 million of recorded costs on the A-12 contract, against which we have 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 best estimate 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. The court did not, however, enter a money judgment for the U.S. Government on its claim for unliquidated progress payments. In 2003, the Court of Appeals for the Federal Circuit, finding that the trial court had applied the wrong legal standard, vacated the trial court's 2001 decision and ordered the case sent back to that court for further proceedings. This follows an earlier trial court decision in favor of the Team and reversal of that initial decision on appeal.

If, after all judicial proceedings have ended, the courts determine contrary to our belief that a termination for default was appropriate, we would incur an additional loss of approximately

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$275 million, consisting principally of remaining inventory costs and adjustments. If contrary to our belief the courts further hold that a money judgment should be entered against the Team, we would be required to pay the U.S. Government one-half of the unliquidated progress payments of $1,350 million plus statutory interest from February 1991 (currently totaling approximately $1,090 million). In that event our loss would total approximately $1,490 million in pre-tax charges. However, should the trial court’s 1998 judgment in favor of the Team be reinstated, we would receive approximately $977 million, including interest.

We believe, supported by an opinion of outside counsel, that the termination for default is contrary to law and fact and 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 December 31, 2003. Final resolution of the A-12 litigation will depend upon the outcome of further proceedings or possible negotiations with the U.S. Government.

EELV litigation

In 1999, two employees were found to have in their possession certain information pertaining to a competitor, Lockheed Martin Corporation, under the Evolved Expendable Launch Vehicle (EELV) Program. The employees, one of whom was a former employee of Lockheed Martin Corporation, were terminated and a third employee was disciplined and resigned. In March 2003, the U.S. Air Force (USAF) notified us that it was reviewing our present responsibility as a government contractor in connection with the incident. On July 24, 2003, the USAF suspended certain organizations in our space launch services business and the three former employees from receiving government contracts for an indefinite period as a direct result of alleged wrongdoing relating to possession of the Lockheed Martin Corporation information during the EELV source selection in 1998. The USAF also terminated 7 out of 21 of our EELV launches previously awarded through a mutual contract modification and disqualified the launch services business from competing for three additional launches under a follow-on procurement. The same incident is under investigation by the U.S. Attorney in Los Angeles, who indicted two of the former employees in July 2003. In addition, in June 2003, Lockheed Martin Corporation filed a lawsuit in the United States District Court for the Middle District of Florida against us and the three individual former employees arising from the same facts. Lockheed’s lawsuit, which includes some 23 causes of action, seeks injunctive relief, compensatory damages in excess of $2 billion and punitive damages. It is not possible at this time to determine whether an adverse outcome would or could have a material adverse effect on our financial position.

Shareholder derivative lawsuits

In September 2003, two virtually identical shareholder derivative lawsuits were filed in Cook County Circuit Court, Illinois, against us as nominal defendant and against each then current member of our Board of Directors. The suits allege that the directors breached their fiduciary duties in failing to put in place adequate internal controls and means of supervision to prevent the EELV incident described above, the July 2003 charge against earnings, and various other events that have been cited in the press during 2003. The lawsuits seek an unspecified amount of damages against each director, the return of certain salaries and other remunerations, and the implementation of remedial measures.

In October 2003, a third shareholder derivative action was filed against the same defendants in federal court for the Southern District of New York. This third suit charges that our 2003 Proxy Statement contained false and misleading statements concerning the 2003 Incentive Stock Plan. The lawsuit seeks a declaration voiding shareholder approval of the 2003 Incentive Stock Plan, injunctive relief and equitable accounting.

It is not possible at this time to determine whether the three shareholder derivative actions would or could have a material adverse effect on our financial position.

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Sears/Druyun investigation and Securities and Exchange Commission (SEC) inquiry

On November 24, 2003, our Executive Vice President and CFO, Mike Sears, was dismissed for cause as the result of circumstances surrounding the hiring of Darleen Druyun, a former U.S. government official. Druyun, who had been vice president and deputy general manager of Missile Defense Systems since January 2003, also was dismissed for cause. At the time of our November 24 announcement that we had dismissed the two executives for unethical conduct, we also advised that we had informed the USAF of the actions taken and were cooperating with the U.S. Government in its ongoing investigation. The investigation is being conducted by the U.S. Attorney in Alexandria, Virginia, and the Department of Defense Inspector General, and concerns this and related matters. Subsequently, the SEC requested information from us regarding the circumstances underlying dismissal of the two employees. We are cooperating with the SEC’s inquiry. It is not possible to predict at this time what actions the government authorities might take with respect to this matter, or whether those actions could or would have a material adverse effect on our financial position.

Employment discrimination litigation

We are a defendant in seven employment discrimination matters filed during the period of June 1998 through February 2002, in which class certification is sought or has been granted. Three matters are pending in the federal court for the Western District of Washington in Seattle; one case is pending in the federal court for the Central District of California in Los Angeles; one case is pending in the federal court in St. Louis, Missouri; one case is pending in the federal court in Tulsa, Oklahoma; and the final case is pending in the federal court in Wichita, Kansas. The lawsuits seek various forms of relief including front and back pay, overtime, injunctive relief and punitive damages. We intend to continue our aggressive defense of these cases. It is not possible to determine whether these actions could or would have a material adverse effect on our financial position.

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

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters*

The principal market for our common stock is the New York Stock Exchange. It is also listed on the Amsterdam, Brussels, London, Swiss and Tokyo Exchanges as well as various regional stock exchanges in the United States. Additional information required by this item is incorporated by reference from the table captioned Quarterly Financial Data (Unaudited) on page 114 and Item 12 on page 122.

The number of holders of common stock as of February 27, 2004, is approximately 135,640.

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Item 6. Selected Financial Data

FIVE-YEAR SUMMARY (UNAUDITED)

Cash dividends have been paid on common stock every year since 1942.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RISK FACTORS

We generally make sales under purchase orders that are subject to cancellation, modification or rescheduling without significant penalties to our customers. Changes in the economic environment and the financial condition of the airline industry could result in customer requests for rescheduling or cancellation of contractual orders. Since a significant portion of our backlog is related to orders from commercial airlines, further adverse developments in the commercial airline industry could cause customers to reschedule or terminate their contracts with us.

We are dependent on the availability of energy sources, such as electricity, at affordable prices. We are also highly dependent on the availability of essential materials, parts and subassemblies from our suppliers and subcontractors. The most important raw materials required for our aerospace products are aluminum (sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites (including carbon and boron). Although alternative sources generally exist for these raw materials, qualification of the sources could take a year or more. Many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies. We are dependent upon the ability of our large number of suppliers and subcontractors to meet performance specifications, quality standards, and delivery schedules at anticipated costs, and their failure to do so would adversely affect production schedules and contract profitability, while jeopardizing our ability to fulfill commitments to our customers. We maintain an extensive qualification and performance surveillance system to control risk associated with such reliance on third parties.

We depend on a limited number of customers, including the U.S. Government and major commercial airlines. We can make no assurance that any customer will purchase additional products or services from us after our contract with the customer has ended. The loss of the U.S. Government or any of the major commercial airlines as customers could significantly reduce our revenues and our opportunity to generate a profit. Several of the commercial airlines, including United Airlines and Hawaiian Holdings, Inc. have filed for bankruptcy protection.

Sales outside the U.S. (principally export sales from domestic operations) by geographic area are included on page 107. Approximately 2% of total sales were derived from non-U.S. operations for the year ended December 31, 2003 and 1% for each year ended December 31, 2001 and 2002. Approximately 41% of our contractual backlog at December 31, 2003, was with non-U.S. customers. Sales outside the United States are influenced by U.S. Government foreign policy, international relationships, and trade policies of governments worldwide. Relative profitability is not significantly different from that experienced in the domestic market.

CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION

We operate in six principal segments: Commercial Airplanes; Aircraft and Weapon Systems (A&WS), Network Systems, Support Systems, and Launch and Orbital Systems (L&OS) collectively Integrated Defense Systems (IDS); and Boeing Capital Corporation (BCC). All other activities fall within the Other segment, principally made up of Boeing Technology, Connexion by Boeing^SM and Air Traffic Management.

Our Commercial Airplanes operations principally involve development, production and marketing of commercial jet aircraft and providing related support services, principally to the commercial airline industry worldwide.

IDS operations principally involve research, development, production, modification and support of the following products and related systems: military aircraft, helicopters and missiles, space systems,

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missile defense systems, satellites and satellite launching vehicles, rocket engines, and information and battle management systems. Although some IDS products are contracted in the commercial environment, the primary customer is the U.S. Government.

BCC is primarily engaged in the financing of commercial and private aircraft and commercial equipment. However, on November 12, 2003, we announced that we will refocus BCC’s strategic direction to concentrate on supporting the operations of our business units. On January 15, 2004, we also announced additional steps, consistent with our new strategy, including the evaluation of strategic alternatives related to BCC’s commercial equipment finance group.

Boeing Technology is an advanced research and development organization focused on innovative technologies, improved processes and the creation of new products. Connexion by Boeing^SM provides two-way broadband data communications service for global travelers. Air Traffic Management develops new approaches to a global solution to address air traffic management issues. Financing activities other than those carried out by BCC are also included within the Other segment classification.

Consolidated Results of Operations

Revenues

Lower revenues in 2003 are primarily due to reduced deliveries of our commercial airplanes. The reduced deliveries are the result of the airline industry’s reduced need for additional new aircraft. However, the overall decrease in commercial airplane revenues is partially offset by increased revenues driven by increased deliveries of Joint Direct Attack Munitions (JDAM); increased volume in homeland security, spares and maintenance, and proprietary programs; and the start up of Future Combat Systems. The lower revenues in 2002 compared to 2001 principally reflect decreased deliveries in the Commercial Airplanes segment, offset by growth in the IDS segment revenues.

Based on current schedules and plans, we project total 2004 revenues to be approximately $52 billion.

Operating Earnings

Lower operating earnings in 2003 reflect lower planned commercial airplane deliveries, charges related to the decision to end production of the 757 program, goodwill impairment charges, charges related to the satellite and launch businesses, lower pension income, and an increase in other expenses, as described below. We delivered 100 fewer commercial airplanes in 2003 compared to 2002, and recognized a $184 million charge associated with the decision to end production of the 757 program. We also recognized $913 million in goodwill charges as a result of a goodwill impairment analysis triggered by the reorganization of our Military Aircraft and Missile Systems and Space and Communications segments into IDS; $572 million recorded at IDS and $341 million recorded at the Commercial Airplanes segment. 2003 operating earnings were negatively impacted by a $1.1 billion charge related to the satellite and launch businesses. We experienced lower pension income due to declining interest rates and negative pension asset returns in 2001 and 2002, the impact of which is amortized into earnings in future periods. We also incurred a charge due to higher estimated cleanup

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costs, increased workers’ compensation claims, and increased legal expense. These factors were partially offset by continued growth and strong operating performance in our portfolio of defense businesses and by continued improvements in operating efficiencies at Commercial Airplanes.

2001 operating earnings were significantly impacted by $935 million of pre-tax special charges related to the events of September 11, 2001. (See Note 3.) Excluding the September 11 special charges of $935 million, operating earnings in 2002 were $1,059 million lower than 2001 operating earnings. This decrease in operating earnings reflected lower commercial airplane deliveries partially offset by production efficiencies in the Commercial Airplanes segment and higher deliveries of IDS products. IDS operating earnings also decreased as commercial satellite losses offset growth and performance on other programs. In addition, $426 million of asset impairment charges and additional valuation reserves related to customer and commercial financing assets were recorded by BCC and the Other segment during 2002.

We generated net periodic benefit income related to pensions of $67 million in 2003, $404 million in 2002 and $920 million in 2001. Not all net periodic pension benefit income or expense is recognized in net earnings in the year incurred because it is allocated to production as product costs, and a portion remains in inventory at the end of a reporting period. Accordingly, the operating earnings for 2003, 2002, and 2001, included $147 million, $526 million and $802 million, respectively, of pension income.

Although our pension plan investment returns were 17 percent for the plan year ended September 30, 2003, interest rates continued to decline. Accordingly, we expect our pension investment returns over the long term to decrease, as reflected in our 25 basis point reduction of the expected long-term asset return rate (from 9.00 percent in 2003 to 8.75 percent in 2004). This is expected to reduce pension income reflected in operating earnings from $147 million in 2003 to pension expense in the range of $350 million to $400 million in 2004. In 2005, the pension impact to earnings will depend on market conditions and discretionary funding, but based upon current assumptions, we expect to recognize non-cash pension expense estimated to range from $600 million to $700 million.

Net Earnings

Other income in 2003 increased over 2002 primarily due to the receipt of $397 million of interest income associated with a $1.1 billion partial settlement of federal income tax audits relating to tax years 1992 through 1997. Interest and debt expense increased due to the debt issuances and repayments in 2003.

The increase in 2003 net earnings over 2002 reflects the federal tax settlement mentioned above, partially offset by lower operating earnings.

Other income in 2001 included $210 million of interest income associated with federal income tax audit settlements; 2002 did not include similar interest income. Also contributing to lower other income in 2002 was $46 million of losses on long-held equity investments. Interest and debt expense increased from 2001 to 2002 due to higher levels of debt, primarily associated with the increased customer and commercial financing activities of BCC. Net earnings in 2002 reflected a $1,827 million charge related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142.

Research and Development

Research and development expenditures involve design, development and related test activities for defense systems, new and derivative commercial jet aircraft, advance space, other company-sponsored product development, and basic research and development. These expenditures are either charged directly against earnings or are included in amounts allocable as reimbursable overhead costs on U.S. Government contracts. In addition, Boeing Technology, our advanced research and

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development organization, focuses on improving our competitive position by investing in certain technologies and processes that apply to multiple business units. Technology investments currently being pursued within Boeing Technology include network-centric operations, affordable structures and manufacturing technology, lean and efficient design processes and tools, lean support and service initiatives, advanced platform systems and safe and clean products.

		Research and development expense increased in 2003, principally reflecting IDS’s continued focus on the 767 Tanker program development as well as the development of communication system architectures in order to support various business opportunities including Future Combat Systems, Joint Tactical Radio System, FAB-T and Global Missile. In 2003, research and development expenses decreased at Commercial Airplanes due to reduced spending on the development of the 747-400ER. Commercial Airplanes’ research and development expenses are expected to increase in 2004 due to spending on the 7E7 program. Research and development highlights for each of the major business segments are discussed in more detail in Segment Results of Operations and Financial Condition.   Income Taxes   The 2003 effective income tax rate of (30.5)% varies from the federal statutory tax rate of 35%, principally due to tax benefits from federal tax refunds, Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) Exclusion tax benefits of $115 million, partially offset by tax charges related to the non-deductibility for tax purposes of significant portions of goodwill impairment charges. This rate also reflects tax credits, state income taxes, charitable donations and tax-deductible dividends.   The effective income tax rates of 27.1% for 2002 and 20.7% for 2001 also vary from the federal statutory tax rate principally due to FSC and ETI benefits of $195 million in 2002 and $222 million in 2001. The 2001 income tax rate also reflects a one-time benefit reflecting a settlement with the Internal Revenue Service (IRS) relating to research credit claims on McDonnell Douglas Corporation fixed price government contracts applicable to the 1986-1992 federal income tax returns.
Beginning in 1999 and continuing through 2002 the European Union (EU) issued a series of objections with the World Trade Organization (WTO) to both U.S. FSC and ETI provisions. The WTO agreed with the EU and ruled that the FSC and ETI provisions constitute prohibited export subsidies. In response the WTO authorized the EU to impose retaliatory tariffs. A list issued by the EU, of products upon which the retaliatory tariff would be imposed, does not include our products. President Bush has stated that the U.S. will bring its tax laws into compliance with the WTO ruling. Both the House Ways and Means Committee and the Senate Finance Committee are continuing to assess alternatives for a replacement of the ETI legislation. 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, our loss of the benefit could be substantial.

Income taxes have been settled with the IRS for all years through 1981, and IRS examinations have been completed through 1997. During 2003 a partial settlement was reached with the IRS for the years

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1992-1997 and we received a $1.1 billion refund (of which $397 million represents interest). Also, in January and February 2004, we received federal tax refunds and a notice of approved refunds totaling $145 million (of which, $40 million represents interest). The refunds related to a settlement of the 1996 tax year and the 1997 partial tax year for McDonnell Douglas Corporation, which we merged with on August 1, 1997. The notice of approved refunds related to the 1985 tax year. These events resulted in a $727 million increase in net earnings for the year ended December 31, 2003. We believe adequate provisions for all outstanding issues have been made for all open years.

Backlog

Contractual backlog of unfilled orders excludes purchase options, announced orders for which definitive contracts have not been executed, and unobligated U.S. and foreign government contract funding. The increase in contractual backlog from 2002 to 2003 related to increases in contractual backlog for A&WS and Network Systems, offset by decreases for Commercial Airplanes. A&WS obtained orders for the Apache helicopters from Greece and Kuwait, the F/A-18 E/F Multi Year II contract and the initial funding for the EA-18G from the U.S. Navy while Network Systems obtained orders for the Ground-Based Midcourse Defense program and Turkey 737 AEW&C programs coupled with the initial funding of the Future Combat Systems (FCS) program. Commercial Airplanes’ decrease in contractual backlog reflects the impact that the economic downturn has had on the airline industry.

The decrease in contractual backlog from 2001 to 2002 related to higher delivery volumes on all airplane programs relative to new orders.

Unobligated backlog includes U.S. and foreign government definitive contracts for which funding has not been appropriated. The FCS and F/A-18 programs were the primary contributors for the increase in unobligated backlog in 2003.

For segment reporting purposes, we report Commercial Airplanes contractual backlog for airplanes built and sold to other segments. Commercial Airplanes relieves contractual backlog upon the sale of these airplanes to other segments.

IDS contractual backlog includes the modification performed on intracompany airplane purchases from Commercial Airplanes. IDS relieves contractual backlog for the modification performed on airplanes received from Commercial Airplanes upon delivery to the customer or at the attainment of performance milestones.

Liquidity and Capital Resources

Primary sources of our liquidity and capital resources include cash flow from operations and substantial borrowing capacity through commercial paper programs and long-term capital markets, as well as unused borrowing on revolving credit line agreements. The primary factors that affect our investment requirements and liquidity position, other than operating results associated with current sales activity, include the following: timing of new and derivative programs requiring both high developmental expenditures and initial inventory buildup; growth and contractions in business cycles, including growth and expansion requirements and requirements associated with reducing sales levels; customer financing assistance; the timing of federal income tax payments/refunds as well as interest and dividend payments; our stock repurchase plan; internal investments; and potential acquisitions and divestitures.

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Cash Flow Summary

Non-cash items

Non-cash items in earnings primarily include depreciation, amortization, share-based plans expense, impairments, valuation provisions, and pension income. Non-cash items and corresponding amounts are listed in our Consolidated Statements of Cash Flows.

Working capital

During 2003, our investment in working capital decreased, principally due to the following items:

Net cash provided by operations includes intracompany cash of $1.7 billion, $2.7 billion and $3.0 billion for 2003, 2002 and 2001, respectively, resulting from the sale of aircraft by the Commercial Airplanes segment for customers who received financing from BCC. An offsetting use of cash was reported as an investing activity.

Pensions

2003 operating cash flow included $1.7 billion of cash funding to the pension plans. Almost all of the contributions were voluntary to improve the funded status of our plans. We expect pension funding requirements to be approximately $100 million in 2004. However, we are evaluating a discretionary contribution to our plans in the range of $1.0 billion (pre-tax) during the first quarter of 2004, and will consider making additional contributions later in the year.

We measure our pension plan using a September 30 year-end for financial accounting purposes. Although in 2003, actual investment returns were well in excess of the expected rate of 9.0%, we reduced our expected rate of return on plan assets by 25 basis points to 8.75% beginning in 2004

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which reflects expected performance over the long-term. The expected long-term rate of return on plan assets is based on long-term target asset allocations of 56% equity, 28% fixed income, 7% real estate, and 9% other. Current allocations are within 1 to 10% of each of the long-term targets. Historically low interest rates (a key factor when estimating plan liabilities), caused us to recognize a $358 million increase to the accrued pension plan liability and a $226 million after-tax decrease to the accumulated other comprehensive income account within shareholders’ equity in the fourth quarter of 2003. This non-cash charge did not impact earnings or cash flow, and could reverse in future periods if interest rates increase or market performance and plan returns increase. We use a discount rate that is based on a point-in-time estimate as of each annual September 30 measurement date. Although future changes to the discount rate are unknown, had the discount rate increased or decreased by 25 basis points, pension liabilities in total would have decreased $1.2 billion or increased $1.3 billion, respectively.

Investing activities

The majority of BCC’s customer financing is funded by debt and cash flow from its own operation. As of December 31, 2003, we had outstanding irrevocable commitments of approximately $1.5 billion to arrange or provide financing related to aircraft on order or under option for deliveries scheduled through the year 2007. Not all of these commitments are likely to be used; however, a significant portion of these commitments are with parties with relatively low credit ratings. (See Notes 19 and 20.)

In 2003, there was a significant decrease in cash used for investing activities compared to 2002. In 2002, BCC made investments of $408 million in Enhanced Equipment Trust Certificates (EETCs), while no such investments were made in 2003 or 2001. EETCs are investment trusts widely used in the airline industry as a method of financing aircraft. In 2003, we received $360 million in cash related to the settlement of purchase price contingencies associated with our acquisition of Hughes’ satellite manufacturing operations. Additions to Property, Plant, and Equipment in 2003 were approximately $250 million less than 2002. The BCC portfolio continued to grow in 2003 but compared to 2002 additions to customer financing and properties on lease were approximately $650 million less. The change related to customer financing reductions is mainly due to the receipt of customer payments.

Financing activities

Debt maturities, which include BCC amounts, were $1.8 billion in 2003, $1.3 billion in 2002, and $0.5 billion in 2001. We issued approximately $1.0 billion of debt in 2003 to refinance corporate debt that matured in 2002 and 2003. Additionally, BCC issued $1.0 billion of debt in 2003, $2.8 billion in 2002 and $3.9 billion in 2001. In 2003 and 2002, BCC debt issuance was generally used for growth in the customer financing portfolio. BCC’s debt issuance in 2001 was performed in conjunction with the transfer of a significant portion of our customer financing assets to BCC, as well as growth in BCC’s customer financing portfolio. Additionally, we have a share repurchase program, but there were no share repurchases in 2003 or 2002. In 2001, we repurchased 40,734,500 shares. (See Note 17.)

Credit Ratings

Our credit ratings are summarized below:

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On December 17, 2003, Moody’s resolved the negative watch they had on us and BCC. Moody’s downgraded our long-term rating from A2 to A3 and our short-term rating from P-1 to P-2. Moody’s confirmed BCC’s ratings, largely because we put a support agreement in place in which we commit to maintain certain financial metrics at BCC. All of Moody’s ratings for Boeing and BCC now have a stable outlook.

Capital Resources

Boeing and BCC each have a commercial paper program that continues to serve as a significant potential source of short-term liquidity. As of December 31, 2003, neither Boeing nor BCC had any outstanding commercial paper issuances.

We have consolidated debt obligations of $14.4 billion, which are unsecured. Approximately $1.1 billion will mature in 2004, and the balance has a weighted average maturity of approximately 13 years. Excluding non-recourse debt of $0.5 billion and BCC debt of $9.2 billion total debt represents 43% of total shareholders’ equity plus debt. Our consolidated debt, including BCC, represents 64% of total shareholders’ equity plus debt.

We have substantial borrowing capacity. Currently, $3.4 billion remains available to BCC from shelf registrations filed with the SEC and $4.0 billion ($2.0 billion exclusively available for BCC) of unused borrowing on revolving credit line agreements with a group of major banks. (See Note 14.) We believe our internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year.

Disclosures about Contractual Obligations and Commitments

The following table summarizes our known obligations to make future payments pursuant to certain contracts as of December 31, 2003, as well as an estimate of the timing in which these obligations are expected to be satisfied.

Contractual obligations

Purchase obligations

Purchase obligations represent contractual agreements to purchase goods or services that are legally binding; specify a fixed, minimum or range of quantities; specify a fixed, minimum, variable, or indexed price provision; and approximate timing of the transaction. In addition, the agreements are not cancelable without a substantial penalty. Long-term debt, capital leases, and operating leases are

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shown in the above table regardless of whether they meet the characteristics of purchase obligations. Purchase obligations include both amounts that are and are not recorded on the statements of financial position. Approximately 20% of the purchase obligation amounts disclosed above are reimbursable to us pursuant to cost-type government contracts.

Purchase obligations – not recorded on the statement of financial position

Pension and other postretirement benefits

Pension funding is an estimate of our minimum funding requirements through 2005 to provide pension benefits for employees based on service provided through 2003 pursuant to the Employee Retirement Income Security Act, although we may make additional discretionary contributions. Obligations relating to other postretirement benefits are based on both our estimated future benefit payments, since the majority of our other postretirement benefits are not funded through a trust, and the estimated contribution to the one plan that is funded through a trust through 2008. Our estimate may change significantly depending on the actual rate of return on plan assets, discount rates, discretionary pension contributions, regulatory rules, and medical trends.

Production related

Production related purchase obligations include agreements for production goods, tooling costs, electricity and natural gas contracts, property, plant and equipment, and other miscellaneous production related obligations. The most significant obligation relates to inventory procurement contracts. We have entered into certain significant inventory procurement contracts that specify determinable prices and quantities, and long-term delivery timeframes. These agreements require suppliers and vendors to be prepared to build and deliver items in sufficient time to meet our production schedules. The need for such arrangements with suppliers and vendors arises due to the extended production planning horizon for many of our products, including commercial aircraft, military aircraft and other products where delivery to the customer occurs over an extended period of time. A significant portion of these inventory commitments are either supported by firm contracts from customers, or have historically resulted in settlement through either termination payments or contract adjustments should the customer base not materialize to support delivery from the supplier.

Industrial participation agreements

We have entered into various industrial participation agreements with certain customers in foreign countries to effect economic flow back and/or technology transfer to their businesses or government agencies, as the result of their procurement of goods and/or services from us. These commitments may be satisfied by our placement of direct work, placement of vendor orders for supplies, opportunities to bid on supply contracts, transfer of technology, or other forms of assistance to the foreign country. However, in certain cases, our commitments may be satisfied through other parties (such as our vendors) who purchase supplies from our foreign customers. We do not commit to industrial participation agreements unless a contract for sale of our products or services is signed. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. During 2003, we incurred no such penalties. As of December 31, 2003, we have outstanding industrial participation agreements totaling $8.6 billion that extend through 2015. In cases where we satisfy our commitments through the purchase of supplies and the criteria described in “purchase obligations” is met, amounts are included in the table above. To be eligible for such a purchase order commitment from us, the foreign country or customer must have sufficient capability and capacity and must be competitive in cost, quality and schedule.

Purchase obligations recorded on the statement of financial position

Purchase obligations recorded on the statement of financial position primarily include accounts payable and certain other liabilities including accrued compensation, supplier penalties, accrued property taxes, and dividends payable.

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Off-Balance Sheet Arrangements

We are a party to certain off-balance sheet arrangements including certain guarantees and variable interests in unconsolidated entities.

Guarantees

The following tables provide quantitative data regarding our third-party guarantees. The maximum potential payment amounts represent “worst-case scenarios” and do not necessarily reflect our expected results. Estimated proceeds from collateral and recourse represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees. The carrying amount of liabilities recorded on the balance sheet reflects our best estimate of future payments we may incur as part of fulfilling our guarantee obligations.

In conjunction with signing a definitive agreement for the sale of new aircraft (Sale Aircraft), we have entered into specified-price trade-in commitments with certain customers that give them the right to trade in used aircraft for the purchase of Sale Aircraft. Additionally, we have issued contingent repurchase commitments with certain customers wherein we agree to repurchase the Sale Aircraft at a specified price at a future point in time, generally ten years after delivery of the Sale Aircraft, if the customer wishes to sell it to us at that time. Our repurchase of the Sale Aircraft is contingent upon a future, mutually acceptable agreement for the sale of additional new aircraft. If, in the future, we execute an agreement for the sale of additional new aircraft, and if the customer exercises its right to sell the Sale Aircraft to us, a contingent repurchase commitment would become a trade-in commitment. Contingent repurchase commitments and trade-in commitments are now included in our guarantees discussion based on our current analysis of the underlying transactions. Based on our historical experience, we believe that very few, if any, of our outstanding contingent repurchase commitments will ultimately become trade-in commitments. During 2003, we recorded no expense and made no net cash payments related to our contingent repurchase commitments.

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Exposure related to the trade-in of used aircraft resulting from trade-in commitments may take the form of: (1) adjustments to revenue related to the sale of new aircraft determined at the signing of a definitive agreement, and/or (2) charges to cost of products and services related to adverse changes in the fair value of trade-in aircraft that occur subsequent to signing of a definitive agreement for new aircraft but prior to the purchase of the used trade-in aircraft. The trade-in aircraft exposure included in accounts payable and other liabilities in the tables above is related to item (2) above.

There is a high degree of uncertainty inherent in the assessment of the likelihood of trade-in commitments. The probability that trade-in commitments will be exercised is determined by using both quantitative information from valuation sources and qualitative information from other sources and is continually assessed by management. During 2003, we recorded expense of $11 million and made net cash payments totaling $746 million related to our trade-in commitments.

We have issued various asset-related guarantees, principally to facilitate the sale of certain commercial aircraft. Under these arrangements, we are obligated to make payments to a guaranteed party in the event the related aircraft fair values fall below a specified amount at a future point in time. No aircraft have been delivered with these types of guarantees in several years. Recent declines in asset values of commercial aircraft increase the risk of future payment by us under these guarantees. During 2003, we recorded expense of $15 million and made no net cash payments related to our asset-related guarantees.

We have previously issued credit guarantees to creditors of the Sea Launch venture, of which we are a 40% partner, to assist the venture in obtaining financing. In the event we are required to perform on these guarantees, we have the right to recover a portion of the loss from other venture partners and have collateral rights to certain assets of the venture.

In addition, we have issued other credit guarantees to facilitate the sale of certain commercial aircraft. Under these arrangements, we are obligated to make payments to a guaranteed party in the event that lease or loan payments are not made by the original debtor or lessee. Our commercial aircraft credit-related guarantees are collateralized by the underlying commercial aircraft. A substantial portion of these guarantees have been extended on behalf of original debtors or lessees with less than investment-grade credit. Recent financial weakness in certain airlines further exposes us to loss under our credit guarantees. During 2003, we recorded expense of $2 million and made net cash payments totaling $13 million related to our credit guarantees.

As a liquidity provider for equipment trust certificate (ETC) pass-through arrangements, we have certain obligations to investors in the trusts, which require funding to the trust to cover interest due to such investors resulting from an event of default by United Airlines. In the event of funding, we would receive a first priority position in the ETC collateral in the amount of the funding. On February 7, 2003, we advanced $101 million to the trust perfecting our collateral position and terminating our liquidity obligation. The trust currently has collateral value that significantly exceeds the amount due to us.

Also relating to an ETC investment, we have potential obligations relating to shortfall interest payments in the event that the interest rates in the underlying agreements are reset below a certain level. These obligations would cease if United Airlines were to default on our interest payments to the trust. There were no significant payments made by us during 2003.

We have outstanding performance guarantees issued in conjunction with joint venture investments. Pursuant to these guarantees, we would be required to make payments in the event a third-party fails to perform specified services. We have made no significant payments in relation to these performance guarantees.

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Material variable interests in unconsolidated entities

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarified the application of Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial Statements, relating to consolidation of variable interest entities (VIEs). FIN 46 requires identification of our participation in VIEs, which are defined as entities with a level of invested equity insufficient to fund future activities to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. For entities identified as VIEs, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party, if any, bears a majority of the exposure to the expected losses, or stands to gain from a majority of the expected returns. FIN 46 also sets forth certain disclosures regarding interests in VIEs that are deemed significant, even if consolidation is not required. In December 2003, the FASB revised and re-released FIN 46 as “FIN 46(R).” The provisions of FIN 46(R) are effective beginning in first quarter 2004, however we elected to adopt FIN 46(R) as of December 31, 2003.

One of the significant modifications made by the revised interpretation includes a scope exception for certain entities that are deemed to be “businesses” and meet certain other criteria. Entities that meet this scope exception are not subject to the accounting and disclosure rules of FIN 46(R), but are subject to the pre-existing consolidation rules under ARB 51, which are based on an analysis of voting rights. This scope exception applies to certain operating joint ventures that we previously disclosed as VIEs, such as the Sea Launch venture and other military aircraft-related ventures. Under the applicable ARB 51 rules, we are not required to consolidate these ventures.

Our investments in ETCs and EETCs continue to be included in the scope of FIN 46(R), but do not require consolidation. However, we will continue to make certain disclosures about these entities, as required by FIN 46(R).

We have investments in ETCs and EETCs, which are trusts that passively hold debt investments for a large number of aircraft to enhance liquidity for investors, who in turn pass this liquidity benefit directly to airlines in the form of lower coupon and/or greater debt capacity. ETCs and EETCs provide investors with tranched rights to cash flows from a financial instrument, as well as a collateral position in the related asset. As of December 31, 2003, our investment balance in ETCs and EETCs was $433 million. During the year ended December 31, 2003, we recorded revenues of $39 million and cash flows of $94 million.

We are a subordinated lender to certain SPEs that are utilized by the airlines, lenders, and loan guarantors, including, for example, the Export-Import Bank of the United States. All of these SPEs are included in the scope of FIN46(R), however only certain SPEs require consolidation. SPE arrangements are utilized to isolate individual transactions for legal liability or tax purposes, or to perfect security interests from our perspective, as well as, in some cases, that of a third-party lender in certain leveraged lease transactions. As of December 31, 2003, our investment balance in non-consolidated SPE arrangements that are VIEs was $201 million. During the year ended December 31, 2003, we recorded revenues of $17 million and cash flows of $62 million.

Commercial commitments

The following tables summarize our commercial commitments outstanding as of December 31, 2003, as well as an estimate of the timing in which these commitments are expected to expire.

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Related to the issuance of certain standby letters of credit and surety bonds included in the above table, we received advance payments of $1.0 billion and $608 million as of December 31, 2003 and 2002, respectively.

Other commercial commitments include irrevocable financing commitments related to aircraft on order and commercial equipment financing. (See Note 19.)

SEGMENT RESULTS OF OPERATION AND FINANCIAL CONDITION

Commercial Airplanes

Business Environment and Trends

Airline Industry Environment

Commercial aviation has been impacted by an economic downturn that began in 2001 and continued through 2003. In addition, the industry suffered a tremendous shock from the terrorist attacks of September 11, 2001.

Air travel worldwide has not fully recovered to the volume carried by the airlines in 2000, which has negatively affected profitability for many airlines. Late in 2002 traffic began to recover, and holiday travel indicated that the industry recovery was underway. However, the Iraq War and Severe Acute Respiratory Syndrome (SARS) outbreak in early 2003 caused the industry to again retract and delayed recovery. Overall, the industry produced another year of losses led by full service airlines in the U.S. In contrast, low-cost carriers in the U.S. and in Europe are reporting positive financial results and continue to grow operations. European network airlines are expected to show better results than their U.S. counterparts for their fiscal year end. Likewise, Asian airlines are expected to fare better overall than their U.S. counterparts because traffic to and from Asia has nearly rebounded to pre-SARS levels.

Our estimated timetable for industry recovery has been delayed. We presently expect the recovery in air traffic that started in 2003 to result in renewed demand for capacity in 2004. Overall, airlines are expected to generate another year of losses in 2003 before producing a small profit in aggregate for 2004. The projection of sustained profitability in 2004 is expected to lead to an order recovery in 2005, with delivery growth expected to begin in 2006. The major uncertainty facing the industry is the impact of any additional unforeseen exogenous shocks similar to the 2003 SARS outbreak and the Iraq War. The industry could also face unexpected consequences of events that have already occurred, such as the terrorist attacks of September 11, 2001.

Our 20-year forecast of the average long-term growth rate in passenger traffic is 5.1% annually, based on projected average worldwide annual economic real growth of 3.2%. Based on global economic growth projections over the long term, and taking into consideration an increasingly competitive environment, increasing utilization levels of the worldwide airplane fleet and requirements to replace older airplanes, we project a $1.9 trillion market for new airplanes over the next 20 years. This is a long-term forecast; historically, while factors such as the Gulf War and increased ticket charges for security have had significant impact over the span of several years, they have not dramatically affected the longer-term trends in the world economy, and therefore, our market outlook.

Inherent Business Risks

Commercial jet aircraft are normally sold on a firm fixed-price basis with an indexed price escalation clause. Our ability to deliver jet aircraft on schedule is dependent upon a variety of factors, including execution of internal performance plans, availability of raw materials, performance of suppliers and subcontractors, and regulatory certification. The introduction of new commercial aircraft programs and major derivatives involves increased risks associated with meeting development, production and certification schedules.

The worldwide market for commercial jet aircraft is predominately driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic

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growth, both in developed and emerging countries, and political stability. Demand for our 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.

Industry competitiveness

The commercial jet aircraft market and the airline industry remain extremely competitive. We expect the existing long-term downward trend in passenger revenue yields worldwide (measured in real terms) to continue into the foreseeable future. The market liberalization in Europe has continued to enable low-cost airlines to rapidly gain market share. These airlines have increased the downward pressure on airfares, making it similar to the competitive environment in the U.S. This results in both near-term and continued price pressure on our products. Major productivity gains are essential to ensure a favorable market position at acceptable profit margins.

Continued access to global markets remains vital to our ability to fully realize our sales potential and long-term investment returns. Approximately half of Commercial Airplanes’ third-party sales and contractual backlog are from customers based outside the U.S.

We face aggressive international competitors that are intent on increasing their market share. They offer competitive products and have access to most of the same customers and suppliers. Airbus has historically invested heavily to create a family of products to compete with ours. They plan to deliver the first A380, with more capacity than a 747, in early 2006. Regional jet makers Embraer and Bombardier, coming from the less than 100-seat commercial jet market, continue to develop larger and more capable airplanes. This market environment has resulted in intense pressures on pricing and other competitive factors.

Worldwide, airplane sales are generally conducted in U.S. dollars. Fluctuating exchange rates affect the profit potential of our major competitors, all of whom have significant costs in other currencies. The recent decline of the U.S. dollar relative to their local currencies is putting unusual pressure on their future revenues and profits. While this may seem like an advantage to us, it contains a potential threat in that competitors may react by aggressively reducing costs, potentially improving their longer-term competitive posture. Airbus has indicated that they are adopting this approach, and plan more than 10% reduction in costs by 2006. If the dollar strengthens by then, Airbus could use the extra efficiency to gain market share and develop new products.

We are focused on improving our processes and continuing cost-reduction efforts. We continue to leverage our extensive customer support services network for airlines throughout the world to provide a higher level of customer satisfaction and productivity. (See Fleet Support discussion on page 31.) As an example, we have made on-line access available to all airline customers for engineering drawings, parts lists, service bulletins and maintenance manuals. These efforts enhance our ability to pursue pricing strategies that enable us to maintain leadership at satisfactory margins. While we are focused on improving our processes and continuing cost reduction activities, events may occur that will prevent us from achieving planned results.

Summary

Recent signs of recovery and the continued expectation for long-term growth in air travel are encouraging. For example, December 2003 air traffic levels matched the air traffic levels of December 2000. This is the first time passenger demand returned to pre-September 11 levels. This is somewhat offset by the increasing levels of competition in both airlines and airplane manufacturing. Overall, the commercial airplane market has great potential. We are well positioned in the 100-seat and above

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commercial jet airplane market, and intend to remain the airline industry’s preferred supplier through emphasis on product offerings and customer service that provide the best overall value in the industry.

Operating Results

Revenues

Commercial Airplanes revenue is derived primarily from commercial jet aircraft deliveries. The decline in revenue in 2003 compared to 2002 and 2002 compared to 2001 was primarily due to the decline in the commercial aviation market, as discussed above in the “Business Environment and Trends” section, resulting in fewer commercial jet aircraft deliveries.

Commercial jet aircraft deliveries as of December 31, including deliveries under operating lease, which are identified by parentheses, were as follows:

The cumulative number of commercial jet aircraft deliveries as of December 31 were as follows:

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The undelivered units under firm order* as of December 31 were as follows:

Total commercial jet aircraft deliveries for 2004 are currently projected to approximate 285 aircraft. For 2005, commercial jet aircraft deliveries are currently projected to be in the same range as 2004. As of January 29, 2004, the delivery forecast for 2004 is essentially sold out and approximately 90% sold for 2005. Commercial Airplanes segment revenues for 2004 are projected to be approximately $20 billion.

Operating earnings

Beginning in the first quarter of 2003, Commercial Airplanes segment operating earnings are presented based on the program accounting method. Prior year amounts, based on unit costing, have been revised to reflect the program method of accounting. (See Note 23.) This revision has no impact on amounts reported in our Consolidated Statements of Operations.

During the third quarter of 2003, we decided to end production of the 757 program, with the final aircraft scheduled to be produced in late 2004 and delivered in the second quarter of 2005. The decision was based on a thorough assessment of market demand for the airplane. The decision resulted in a pre-tax earnings charge of $184 million.

The decline in operating earnings in 2003 compared to 2002 was primarily due to the reduction in revenue as a result of lower delivery volume, a goodwill impairment charge of $341 million, a $184 million charge resulting from the decision to end production of the 757 program, and increased pension expense, all of which was partially offset by improved operating efficiency and reduced research and development expense. The decline in operating earnings in 2002 compared to 2001 was primarily due to the reduction in revenue as a result of lower delivery volume driven by the decline in the commercial aviation market; offset by improved operating efficiency and reduced research and development expense. In general, the commercial aviation market decline has resulted in the lengthening of the time needed to produce the accounting quantities, which is described below in the “Accounting Quantity” section.

Accounting quantity

For each airplane program, we estimate the quantity of airplanes that will be produced for delivery under existing and anticipated contracts. We refer to this estimate as the “accounting quantity.” The accounting quantity for each program is a key determinant of gross margins we recognize on sales of individual airplanes throughout the life of a program. See “Application of Critical Accounting Policies-Program accounting.” Estimation of the accounting quantity for each program takes into account several factors that are indicative of the demand for the particular program, such as firm orders, letters of intent from prospective customers, and market studies. We review and reassess our program accounting quantities on a quarterly basis in compliance with relevant program accounting guidance.

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Commercial aircraft production costs include a significant amount of infrastructure costs, a portion of which do not vary with production rates. As the amount of time needed to produce the accounting quantity increases, the average cost of the accounting quantity also increases as these infrastructure costs are included in the total cost estimates, thus reducing the gross margin and related earnings provided other factors do not change.

In general, the market for commercial aircraft has adversely affected all of our commercial aircraft programs and extended the time frame for production and delivery of the accounting quantities used for program accounting.

The estimate of total program accounting quantities and changes, if any, as of December 31 were: