10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-442

THE BOEING COMPANY

(Exact name of registrant as specified in its charter)

Delaware	91-0425694
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 N. Riverside, Chicago, IL	60606-1596
(Address of principal executive offices)	(Zip Code)

(312) 544-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 Exchange Act). Yes x No ¨

As of July 26, 2004, there were 839,434,130 shares of common stock, $5.00 par value, issued and outstanding.

(This number includes 42 million outstanding shares held by the ShareValue Trust which are not eligible to vote and not included in earnings per share calculations.)

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THE BOEING COMPANY

FORM 10-Q

For the Quarter Ended June 30, 2004

INDEX

Part I. Financial Information (Unaudited)			Page
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Financial Position	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
	Item 4.	Controls and Procedures	62
Part II. Other Information
	Item 1.	Legal Proceedings	62
	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	63
	Item 4.	Submission of Matters to a Vote of Security Holders	64
	Item 6.	Exhibits and Reports on Form 8-K	66
	Review by Independent Registered Public Accountants		67
	Report of Independent Registered Public Accounting Firm		68
	Signature		69
	Exhibit (15) – Letter from Independent Registered Public Accounting Firm Regarding Unaudited Interim Financial Information		70
	Exhibit (31.1) – Section 302 Certification – CEO		71
	Exhibit (31.2) – Section 302 Certification – CFO		72
	Exhibit (32.1) – CEO Section 906 Certification		73
	Exhibit (32.2) – CFO Section 906 Certification		74

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in millions except per share data)	Six months ended June 30						Three months ended June 30
	2004			2003			2004			2003
Sales and other operating revenues	$	25,991		$	24,916		$	13,088		$	12,717
Cost of products and services		(21,586	)		(22,137	)		(10,875	)		(11,621	)
Boeing Capital Corporation interest expense		(173	)		(179	)		(89	)		(90	)
		4,232			2,600			2,124			1,006
Income/(loss) from operating investments, net		40			15			27			9
General and administrative expense		(1,528	)		(1,393	)		(824	)		(788	)
Research and development expense		(996	)		(798	)		(522	)		(437	)
Gain/(loss) on dispositions, net		6			12			6			5
Share-based plans expense		(283	)		(233	)		(164	)		(119	)
Goodwill impairment		(3	)		(913	)		(3	)
Impact of September 11, 2001, recoveries/(charges)					15						12
Earnings (loss) from continuing operations		1,468			(695	)		644			(312	)
Other income/(expense), net		225			33			66			17
Interest and debt expense		(169	)		(185	)		(85	)		(92	)
Earnings (loss) before income taxes		1,524			(847	)		625			(387	)
Income tax (expense)/benefit		(324	)		161			(39	)		187
Net earnings (loss) from continuing operations		1,200			(686	)		586			(200	)
Income from discontinued operations, net of taxes		16			16			7			8
Net gain on disposal of discontinued operations, net of taxes		14						14
Net earnings (loss)	$	1,230		$	(670	)	$	607		$	(192	)
Basic earnings (loss) per share from continuing operations	$	1.49		$	(0.86	)	$	0.72		$	(0.25	)
Income from discontinued operations, net of taxes		0.02			0.02			0.01			0.01
Net gain on disposal of discontinued operations, net of taxes		0.02						0.02
Basic earnings (loss) per share	$	1.53		$	(0.84	)	$	0.75		$	(0.24	)
Diluted earnings (loss) per share from continuing operations	$	1.48		$	(0.86	)	$	0.72		$	(0.25	)
Income from discontinued operations, net of taxes		0.02			0.02			0.01			0.01
Net gain on disposal of discontinued operations, net of taxes		0.02						0.02
Diluted earnings (loss) per share	$	1.52		$	(0.84	)	$	0.75		$	(0.24	)
Cash dividends paid per share	$	0.37		$	0.34		$	0.20		$	0.17
Average diluted shares (millions)		811.2			800.1			812.3			800.1

See notes to condensed consolidated financial statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Financial Position

(Unaudited)

(Dollars in millions except per share data)	June 30 2004			December 31 2003
Assets
Cash and cash equivalents	$	6,184		$	4,633
Accounts receivable		4,598			4,466
Current portion of customer financing		732			857
Income taxes receivable					199
Deferred income taxes		1,729			1,716
Inventories, net of advances and progress billings		4,255			5,338
Assets of discontinued operations		571			2,135
Total current assets		18,069			19,344
Customer financing		10,823			10,052
Property, plant and equipment, net		8,252			8,339
Goodwill		1,923			1,913
Other acquired intangibles, net		1,006			1,035
Prepaid pension expense		10,416			8,542
Deferred income taxes		1,352			1,242
Other assets		2,442			2,519
	$	54,283		$	52,986
Liabilities and Shareholders’ Equity
Accounts payable and other liabilities	$	14,198		$	13,514
Advances in excess of related costs		3,473			3,464
Income taxes payable		725			277
Short-term debt and current portion of long-term debt		2,575			1,144
Total current liabilities		20,971			18,399
Accrued retiree health care		5,847			5,745
Accrued pension plan liability		6,629			6,629
Deferred lease income		803			775
Long-term debt		11,084			13,299
Shareholders’ equity:
Common shares, par value $5.00 –
1,200,000,000 shares authorized;
Shares issued – 1,011,870,159 and 1,011,870,159		5,059			5,059
Additional paid-in capital		3,212			2,880
Treasury shares, at cost – 171,344,867 and 170,388,053		(8,359	)		(8,322	)
Retained earnings		15,300			14,407
Accumulated other comprehensive income/ (loss)		(4,152	)		(4,145	)
ShareValue Trust Shares – 41,537,823 and 41,203,694		(2,111	)		(1,740	)
Total shareholders’ equity		8,949			8,139
	$	54,283		$	52,986

See notes to condensed consolidated financial statements.

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The Boeing Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in millions)	Six months ended June 30
	2004			2003
Cash flows – operating activities:
Net earnings/(loss)	$	1,230		$	(670	)
Adjustments to reconcile net earnings/(loss)
to net cash (used)/provided by operating activities:
Non-cash items:
Impairment of goodwill		3			913
Share-based plans expense		283			233
Depreciation		634			713
Amortization of other acquired intangibles		46			46
Amortization of debt discount/premium and issuance costs		8			8
Pension expense/(income)		150			(99	)
Investment/asset impairment charges, net		60			56
Customer financing valuation provision		39			179
Net gain on disposal of discontinued operations		(21	)
Gain on dispositions, net		(6	)		(21	)
Other charges and credits, net		(5	)		49
Non-cash adjustments related to discontinued operations		26			37
Changes in assets and liabilities –
Accounts receivable		(119	)		82
Inventories, net of advances, progress billings and reserves		276			(331	)
Accounts payable and other liabilities		435			392
Advances in excess of related costs		9			(155	)
Income taxes receivable, payable and deferred		483			(503	)
Deferred lease income		28			(42	)
Prepaid pension expense		(2,013	)		(479	)
Goodwill		(2	)
Other acquired intangibles, net		(1	)
Accrued retiree health care		102			151
Other		(101	)		(142	)
Net cash provided by operating activities		1,544			417
Cash flows – investing activities:
Customer financing and properties on lease, additions		(395	)		(1,035	)
Customer financing and properties on lease, reductions		150			446
Discontinued operations customer financing, reductions		106			117
Property, plant and equipment, net additions		(294	)		(303	)
Acquisitions, net of cash acquired		(36	)		(71	)
Proceeds from dispositions of discontinued operations		1,581
Proceeds from dispositions		90			100
Contributions to investment in strategic and non-strategic operations		(38	)		(78	)
Proceeds from investment in strategic and non-strategic operations		119			67
Net cash (used)/provided by investing activities		1,283			(757	)
Cash flows – financing activities:
New borrowings					1,143
Debt repayments		(728	)		(991	)
Stock options exercised, other		(32	)		20
Common shares repurchased		(204	)
Dividends paid		(312	)		(286	)
Net cash (used) by financing activities		(1,276	)		(114	)
Net increase/(decrease) in cash and cash equivalents		1,551			(454	)
Cash and cash equivalents at beginning of year		4,633			2,333
Cash and cash equivalents at end of period	$	6,184		$	1,879

See notes to condensed consolidated financial statements.

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The Boeing Company and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in millions)

(Unaudited)

Note 1 – Basis of Presentation

The condensed consolidated interim financial statements included in this report have been prepared by The Boeing Company and its subsidiaries. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation are reflected in the interim financial statements. The results of operations for the period ended June 30, 2004, are not necessarily indicative of the operating results for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2003 Annual Report on Form 10-K. Certain reclassifications have been made to prior periods to conform with current reporting.

Our condensed consolidated financial statements and related footnote disclosures reflect the Commercial Financial Services business as discontinued operations for all periods, as discussed in Note 7. In addition, unless specifically noted, amounts disclosed in the notes to condensed consolidated financial statements are from continuing operations.

Note 2 – Goodwill and Acquired Intangibles

On May 4, 2004, we acquired a developer of unmanned aerial vehicles into our Aircraft and Weapon Systems segment which is reported within Integrated Defense Systems (IDS). This resulted in $11 of goodwill.

On March 3, 2004, we announced that effective April 1, 2004, Air Traffic Management (ATM) was absorbed into Phantom Works advanced research and development division which is included within Boeing Technology and is reported in our ‘Other’ segment. On April 1, 2004, we performed annual impairment testing on our goodwill and indefinite-lived intangible assets which resulted in an impairment of the $3 of goodwill previously assigned to ATM.

On January 1, 2003, we reorganized our Military Aircraft and Missile Systems and Space and Communications segments into IDS which triggered a goodwill impairment analysis. Our analysis took into consideration the lower stock price as of April 1, 2003, to include the impact of the required annual impairment test. As a result of this impairment analysis, we recorded a goodwill impairment charge during the three months ended March 31, 2003 of $913 ($818 net of tax).

The changes in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2004, were as follows:

	December 31 2003		Goodwill Adjustment(1)		New Acquisition		Impairment Loss			June 30 2004
Commercial Airplanes	$	282								$	282
Aircraft and Weapon Systems		317			$	11					328
Network Systems		1,194	$	2							1,196
Support Systems		117									117
Launch and Orbital Systems
Other		3					$	(3	)
	$	1,913	$	2	$	11	$	(3	)	$	1,923

(1) The goodwill adjustment represents goodwill related to a post-acquisition purchase price adjustment.

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The gross carrying amounts and accumulated amortization of our acquired finite-lived intangible assets as of June 30, 2004 and December 31, 2003, were as follows:

	June 30, 2004				December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Developed technology	$	582	$	225	$	566	$	195
Product know-how		308		38		308		33
Customer base		106		26		106		22
Other		145		43		144		36
	$	1,141	$	332	$	1,124	$	286

Amortization expense for acquired finite-lived intangible assets for the six months ended June 30, 2004 and 2003 was $46. Estimated amortization expense for the five succeeding full years is as follows:

2005	$	89
2006		82
2007		82
2008		82
2009		82

As of June 30, 2004 and December 31, 2003, we had one indefinite-lived intangible asset, a trademark, with a carrying amount of $197.

Note 3 – Earnings Per Share

The weighted average number of shares outstanding (in millions) used to compute earnings per share is as follows:

	Six months ended June 30		Three months ended June 30
	2004	2003	2004	2003
Weighted average shares outstanding	801.3	800.1	801.4	800.1
Participating securities	6.0		6.4
Basic weighted average shares outstanding	807.3	800.1	807.8	800.1
Diluted potential common shares	3.9		4.5
Diluted weighted average shares outstanding	811.2	800.1	812.3	800.1

During the second quarter of 2004, we adopted Emerging Issues Task Force Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per Share, which did not have a material effect on our earnings per share.

Basic earnings per share is calculated based on the weighted average number of shares outstanding as well as participating securities that reduce basic earnings per share and excludes treasury shares and the outstanding shares held by the ShareValue Trust not committed for distribution. Participating securities consist of vested stock units associated with our deferred compensation plans. Diluted earnings per share is calculated based on that same number of shares plus dilutive potential common shares. Dilutive potential common shares may include shares distributable under stock option, stock unit, Performance Shares and ShareValue Trust plans. These potential common shares are included in

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the computation of diluted shares outstanding if they would reduce earnings per share. As a result of incurring a loss from continuing operations for the six and three months ended June 30, 2003, no such shares are included in the calculation of basic and diluted earnings per share because the effect would have been antidilutive.

The weighted average number of shares outstanding (in millions), included in the table below, is excluded from the computation of diluted earnings per share because the average market price did not exceed the exercise/threshold price. However, these shares may be dilutive potential common shares in the future.

	Six months ended June 30		Three months ended June 30
	2004	2003	2004	2003
Stock options	16.7	24.6	13.5	24.5
Stock units		0.2		0.2
Performance Shares	30.2	24.6	30.2	24.6
ShareValue Trust	38.7	40.8	38.2	40.8

Note 4 – Income Taxes

The effective income tax rate of 21.3% of pre-tax income for the six months ended June 30, 2004 differed from the federal statutory rate of 35% due to Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion tax benefits, tax credits, state income taxes, and tax benefits associated with a settlement with the Internal Revenue Service (IRS) of the years 1986-1997. The effective income tax rate of 19.0% of pre-tax loss for the six months ended June 30, 2003 differed from the federal statutory rate of 35% due primarily to the non-deductibility for tax purposes of certain portions of goodwill impairment charges, FSC and ETI exclusion tax benefits, tax credits, and state income taxes.

For the six months ended June 30, 2004 and 2003, net income tax refunds/(payments) were $149 and $(343). Income taxes have been settled with the IRS for The Boeing Company for all years through 1996 and for McDonnell Douglas Corporation for all years through 1992, and IRS examinations have been completed through 1997.

During the six months ended June 30, 2004, we received federal tax refunds totaling $368. $142 related to a settlement of the 1996 tax year and the 1997 partial tax year for McDonnell Douglas Corporation and $223 related to a settlement of the 1983 through 1987 tax years. The remainder of the $368 related to the 1985 tax year. Of the total $368 in refunds received, $154 was reflected as interest income in the first quarter of 2004.

In June 2004, we received notice and made accruals for approved federal income tax refunds totaling $230 (of which $65 represents interest). The refunds related to a settlement of the 1986 through 1997 tax years. This event resulted in a $188 increase to net earnings for the three months ended June 30, 2004. We believe adequate provisions for all outstanding issues have been made for all open years.

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Note 5 – Accounts Receivable

Accounts receivable consisted of the following:

	June 30 2004			December 31 2003
U.S. Government contracts	$	2,791		$	2,493
Commercial and customers		847			866
Other		1,055			1,202
Less valuation allowance		(95	)		(95	)
	$	4,598		$	4,466

Included in the Other category is $106 related to an advance to an equipment trust certificate (ETC) in relation to our obligation as liquidity provider. The advance which is supported by collateral, resulted from actions we took to satisfy liquidity obligations. Our obligation was terminated with the advance, which may not be received in the next twelve months; however, we believe there is sufficient collateral to ensure collectibility. See Note 17.

Note 6 – Inventories

Inventories consisted of the following:

	June 30 2004			December 31 2003
Long-term contracts in progress	$	10,528		$	10,117
Commercial aircraft programs		5,441			6,448
Commercial spare parts, used aircraft, general stock materials and other, net of reserves		2,839			2,707
		18,808			19,272
Less advances and progress billings		(14,553	)		(13,934	)
	$	4,255		$	5,338

As a normal course of our Commercial Airplanes segment production process, our inventory may include a small quantity of airplanes that are completed but unsold. As of June 30, 2004 and December 31, 2003, the value of completed but unsold aircraft in inventory was insignificant. Inventory balances included $233 subject to claims or other uncertainties primarily relating to the A-12 program as of June 30, 2004 and December 31, 2003.

Included in commercial aircraft program inventory and directly related to the sales contracts for the production of aircraft are amounts paid or credited in cash or other consideration, to airline customers totaling $693 and $543 at June 30, 2004 and December 31, 2003. These amounts are referred to as early issue sales consideration. Early issue sales consideration is recognized as a reduction to revenue when the delivery of the aircraft under contract occurs. In the unlikely situation that an airline customer was not able to perform and take delivery of the contracted aircraft we believe that we would have the ability to recover amounts paid through retaining amounts secured by advances. As of June 30, 2004 and December 31, 2003, the amount of early issue sales consideration net of advance of deposits included in commercial aircraft program inventory amounted to $137 and $154.

Commercial aircraft inventory production costs incurred on in-process and delivered units in excess of the estimated average cost of such units, determined as described in Note 1 of our 2003 Annual Report on Form 10-K, represent deferred production costs. As of June 30, 2004 and December 31, 2003, there were no significant excess deferred production costs or unamortized tooling costs not

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recoverable from existing firm orders for the 777 program. The deferred production costs and unamortized tooling included in the 777 program’s inventory are summarized in the following table:

	June 30 2004		December 31 2003
Deferred production costs	$	905	$	837
Unamortized tooling	$	519	$	582

During the six months ended June 30, 2004 and the year ended December 31, 2003, we purchased $140 and $741 of used aircraft. Used aircraft in inventories totaled $242 and $819 as of June 30, 2004 and December 31, 2003.

When we are unable to immediately sell used aircraft, we may place the aircraft on operating leases. Additionally, we may finance the sale of new aircraft with a short-term note receivable. The net change in the gross carrying amount of aircraft on operating lease, or sales financed under a note receivable, totaled $649 and $144 for the six months ended June 30, 2004 and the year ended December 31, 2003 and resulted in a decrease to Inventories and an offsetting increase to Customer financing. These changes in the Condensed Consolidated Statements of Financial Position are non-cash transactions and, therefore, are not reflected in the Condensed Consolidated Statements of Cash Flows.

The Department of Defense (DoD) is currently reviewing the United States Air Force (USAF)/Boeing agreement for the purchase/lease combination of 100 767 Tankers. On February 20, 2004, we announced the slow down of development efforts on the USAF 767 Tanker program. This slow down resulted in the redeployment of labor resources in order to continue working on only critical path items to reduce company spending until the DoD reviews are complete. Our current expectation is that it is probable we will receive the USAF tanker order in 2005. If approved, delivery of the pre-modified aircraft from Commercial Airplanes to IDS is scheduled to begin in 2006. In the event the program is not contracted, we would expense tanker related inventoried costs, and incur supplier termination charges. As of June 30, 2004, the Commercial aircraft programs and Long-term contracts in progress categories above contained $160 (Commercial Airplanes) and $41 (IDS) related to the USAF Tanker inventoriable precontract costs. As of December 31, 2003, the Commercial aircraft programs and Long-term contracts in progress categories above contained $113 (Commercial Airplanes) and $28 (IDS) related to the USAF Tanker inventoriable precontract costs.

Note 7 – Discontinued Operations – Commercial Financial Services

On May 2, 2004, our Board of Directors approved a plan to sell all of the assets and business operations of Boeing Capital Corporation’s (BCC) Commercial Financial Services business. This plan was approved by BCC’s Board of Directors on May 21, 2004. On May 24, 2004, BCC entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to its Commercial Financial Services business. The assets to be sold to GECC consist of leases and financing arrangements having a carrying value of $1,900 as of May 31, 2004. The purchase agreement called for the sale of the assets to take place in a series of closings commencing on May 31, 2004 and ending no later than July 30, 2004. Final closing may occur subsequent to July 30, 2004, subject to mutual agreement between the parties.

As of June 30, 2004, BCC had received $1,581 in cash proceeds from this sale, and BCC expects to receive approximately $450 in additional cash proceeds through the date of the completion of the sales. The purchase price to be paid for the assets transferred at each closing is determined based on the net asset value of the assets, plus a total premium of $140. The purchase price is subject to adjustment after closing based on an independent audit of our determination of net asset value, and further adjustments based on gains or losses after closing.

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Based upon an analysis that considered collateral values and the creditworthiness of the counterparties, BCC had established a liability of $90 as of June 30, 2004 attributable to the assets sold, which included $54 previously reported as an allowance for losses on receivables transferred to GECC. Future adjustments may be taken as circumstances dictate.

BCC intends to dispose of the remaining assets identified to its Commercial Financial Services business that are not subject to the purchase and sale agreement with GECC. As a result, our condensed consolidated financial statements and related footnote disclosures reflect the Commercial Financial Services business as discontinued operations. Income associated with the Commercial Financial Services business, net of applicable income taxes, is shown as income from discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In addition, the assets of this business have been reclassified and presented as assets of discontinued operations. There are no liabilities related to the Commercial Financial Services business that will be assumed by GECC or other buyers.

In the second quarter of 2004, BCC recognized a net gain on the disposal of discontinued operations of $21 ($14 net of tax). This was comprised of a gain of $38 ($25 net of tax) related to the sale of assets to GECC and a loss of $17 ($11 net of tax) related to the revaluation of the remaining Commercial Financial Services assets to the lower of carrying value or fair value less costs to sell. This revaluation loss related principally to two 737 Boeing Business Jets (BBJs).

Upon completion of the sale to GECC, BCC expects to recognize a total gain of approximately $42 ($27 net of tax).

Operating results of the discontinued operations were as follows:

	Six Months Ended June 30,						Three Months Ended June 30,
	2004			2003			2004			2003
Revenues	$	96		$	114		$	40		$	55
Income from discontinued operations		25			25			11			12
Provision for income taxes		(9	)		(9	)		(4	)		(4	)
Income from discontinued operations, net of taxes	$	16		$	16		$	7		$	8
Net gain on disposal of discontinued operations	$	21					$	21
Provision for income taxes		(7	)					(7	)
Net gain on disposal of discontinued operations, net of taxes	$	14					$	14

The major classes of assets related to discontinued operations, all of which were held for sale, were as follows:

	June 30 2004		December 31 2003
Investment in sale-type/financing leases	$	135	$	724
Notes receivable		167		727
Valuation allowance of receivables				(48	)
Operating lease equipment, at cost, less accumulated depreciation		195		639
Property, plant and equipment, net		74		93
Assets of discontinued operations	$	571	$	2,135

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Note 8 – Customer Financing

Customer financing does not include assets associated with commercial financing due to BCC’s agreement to sell a significant portion of our Commercial Financial Services business to GECC, as discussed in Note 7. Customer financing consisted of the following:

	June 30 2004			December 31 2003
Aircraft financing
Notes receivable	$	2,425		$	2,289
Investment in sales-type/financing leases		3,897			4,022
Operating lease equipment, at cost, less accumulated depreciation of $751 and $647		5,331			4,628
Other equipment financing
Notes receivable		35			97
Operating lease equipment, at cost, less accumulated depreciation of $10 and $3		283			277
Less valuation allowance of receivables		(416	)		(404	)
	$	11,555		$	10,909

The change in the valuation allowance of receivables, for the six months ended June 30, 2004 and 2003, consisted of the following:

	Six months ended June 30
	2004			2003
Beginning balance	$	(404	)	$	(310	)
Provision for losses		(44	)		(170	)
Write-offs, net of recoveries		32			42
Ending balance	$	(416	)	$	(438	)

During the six months ended June 30, 2004 and 2003, we recorded $9 and $10 to increase the valuation allowance due to the normal provision for losses in the customer financing portfolio. Additionally, during the six months ended June 30, 2004 and 2003, an additional charge of $35 ($34 recognized at the Other segment) and $160 ($130 recognized at BCC), respectively, was recorded to increase the valuation allowance due to deteriorated airline credit ratings and depressed aircraft values based on our quarterly assessment of the adequacy of customer financing reserves.

For the six months ended June 30, 2004, we recorded charges related to customer financing activities of $27 in operating earnings, which included impairment charges of $16 recorded by BCC and a charge of $11 recorded in the Other segment relating to the reduction of anticipated lease rates on specific aircraft. During the six months ended June 30, 2003, we recorded charges related to customer financing activities of $92 in operating earnings, which consists of impairment charges of $53 ($49 recognized at BCC), charges of $21 related to the write-off of forward-starting interest rate swaps related to Hawaiian Holdings, Inc. and charges of $18 related to a termination fee associated with a lease contract subject to intercompany guarantees. The impairments resulted from deteriorated aircraft values and reduced estimated cash flows for operating lease assets.

Aircraft financing is collateralized by security in the related asset; we have not experienced problems in accessing such collateral. However, the value of the collateral is closely tied to commercial airline

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performance and may be subject to reduced valuation with market decline. Our financing portfolio has a concentration of 757, 717 and MD-11 model aircraft that have valuation exposure. As of June 30, 2004 and December 31, 2003, notes receivable, sales-type/financing leases and operating leases attributable to aircraft financing included $1,561 and $1,378 attributable to 757 model aircraft ($491 and $511 accounted for as operating leases) and $2,211 and $2,109 attributable to 717 model aircraft ($552 and $467 accounted for as operating leases) and $868 and $895 attributable to MD-11 model aircraft ($713 and $732 accounted for as operating leases).

The operating lease aircraft category primarily includes new and used jet and commuter aircraft. As of June 30, 2004 and December 31, 2003, aircraft financing operating lease equipment included $185 and $270 of equipment available for release. As of June 30, 2004 and December 31, 2003, we had firm lease commitments for $70 and $122 of this equipment.

Note 9 – Property, Plant and Equipment

Property, plant and equipment consisted of the following:

	June 30 2004			December 31 2003
Land	$	451		$	457
Buildings		9,410			9,171
Machinery and equipment		10,583			10,731
Construction in progress		1,026			943
		21,470			21,302
Less accumulated depreciation		(13,218	)		(12,963	)
	$	8,252		$	8,339

Note 10 – Investments

Joint ventures and other investments

All investments are recorded in Other assets. As of June 30, 2004 and December 31, 2003, Other assets included $153 and $161 attributable to investments in joint ventures and other non-marketable securities.

Investments in debt and equity securities

Investments consisted of the following:

	June 30, 2004								December 31, 2003
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
Available-for-Sale
Equity	$	4	$	7			$	11	$	4	$	7			$	11
Debt		11			$	2		9		20		1				21
Held-to-Maturity(1)
Debt(2)		422				108		314		453			$	57		396
	$	437	$	7	$	110	$	334	$	477	$	8	$	57	$	428

(1) The unrealized gains/losses of held-to-maturity securities are not recorded in the condensed consolidated financial statements.

(2) These securities have been in a continuous unrealized loss position for 12 months or longer.

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Included in held-to-maturity investments carried at amortized cost as of June 30, 2004 and December 31, 2003, were $400 and $412 of Enhanced Equipment Trust Certificates (EETCs). EETCs are secured by aircraft on lease to commercial airlines. EETCs provide investors with tranched rights to cash flows from a financial instrument, as well as a collateral position in the related asset. While the underlying classes of equipment notes vary by maturity and/or coupon depending upon tenor or level of subordination of the specific equipment notes and their corresponding claim on the aircraft, the basic function of an EETC remains: to passively hold separate debt investments to enhance liquidity for investors, whom in turn pass this liquidity benefit directly to the airline in the form of lower coupon and/or greater debt capacity. BCC participates in several EETCs as an investor. Our EETC investments are related to customers we believe have less than investment-grade credit.

Our largest holding of EETC investments with a single customer at June 30, 2004, was $185 with Delta Air Lines, Inc. (Delta). Due to the commercial aviation market downturn, this EETC investment has been in a continuous unrealized loss position for twelve months or longer. Despite the unrealized loss position of this security, we have concluded that this investment is not other-than-temporarily impaired. This assessment was based on both internal and third-party credit reviews and analyses of Delta and the duration until maturity.

Our other EETC investments have also been in a continuous unrealized loss position for twelve months or longer. Despite the unrealized loss position of these securities, we have concluded that these investments are not other-than-temporarily impaired. This assessment was based on the strength of the underlying collateral to the securities, the duration of the maturity, and both internal and third-party credit reviews and analyses of the counterparties, principally major domestic airlines. Accordingly, we have concluded that it is probable that we will be able to collect all amounts due according to the contractual terms of these EETCs.

Also included in held-to-maturity investments carried at amortized cost as of June 30, 2004 and December 31, 2003, were $22 and $41 of investments in preferred stock. At June 30, 2004, this included investments in mandatorily redeemable preferred stock in ATA Holdings Corp. (ATA) of $17 that has been in a continuous unrealized loss position for twelve months or longer. ATA’s continued financial difficulties led us to conclude that the investment maturing in 2015 is other-than-temporarily impaired. Accordingly, during the second quarter of 2004, we lowered the carrying value of this investment to its fair value, resulting in a pre-tax non-cash charge to asset impairment expense of $29. Of this amount, $17 of pre-tax unrealized loss ($11 net of tax) was reclassified from accumulated other comprehensive income/loss to asset impairment expense due to the other-than-temporary impairment of the held-to-maturity investment.

Maturities of available-for-sale and held-to-maturity securities as of June 30, 2004, were as follows:

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due from 1 to 5 years					$	317	$	226
Due from 5 to 10 years	$	11	$	9		57		45
Due after 10 years						48		43
	$	11	$	9	$	422	$	314

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Note 11 – Accounts Payable and Other Liabilities

Accounts payable and other liabilities consisted of the following:

	June 30 2004		December 31 2003
Accounts payable	$	4,289	$	3,822
Accrued compensation and employee benefit costs		3,068		2,804
Pension liabilities		1,162		1,138
Product warranty liabilities		823		825
Lease and other deposits		354		316
Dividends payable		168		143
Other		4,334		4,466
	$	14,198	$	13,514

Accounts payable included $354 and $289 as of June 30, 2004 and December 31, 2003, attributable to checks written but funds not yet transferred by the bank.

The Other category in the table above contains $694 and $799 as of June 30, 2004 and December 31, 2003, related to our wholly-owned captive insurance companies, Astro Inc. and Astro Ltd. Also included in the Other category is $1,416 and $1,233 as of June 30, 2004 and December 31, 2003, attributable to liabilities we have established for legal, environmental, and other contingencies we deem probable and estimable. Payments associated with these liabilities may occur in periods significantly beyond the next twelve months. See Note 18 — Contingencies. The Other category included forward loss recognition related primarily to launch and satellite contracts of $1,048 and $1,164 as of June 30, 2004 and December 31, 2003.

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Note 12 – Debt

Debt consisted of the following:

	June 30 2004		December 31 2003
Boeing Capital Corporation debt:
Non-recourse debt and notes
2.219% – 5.790% notes due through 2013	$	82	$	84
Senior debt securities
1.730% – 7.375% due through 2013		5,420		5,476
Senior medium-term notes
1.590% – 7.640% due through 2023		1,702		2,240
Euro medium-term notes
3.440% due in 2004		51		61
Subordinated notes
3.560% – 8.310% due through 2012		24		24
Capital lease obligations
1.670% – 7.350% due through 2015		303		329
Retail notes
3.150% – 6.750% due through 2017		874		874
Commercial paper securitized due 2009				89
Subtotal Boeing Capital Corporation debt	$	8,456	$	9,177
Other Boeing debt:
Non-recourse debt and notes
Enhanced equipment trust	$	518	$	538
Unsecured debentures and notes
200, 7.875% due Feb. 15, 2005		201		202
199, 0.000% due May 31, 2005*		190		185
300, 6.625% due Jun. 1, 2005		299		298
250, 6.875% due Nov. 1, 2006		250		249
175, 8.100% due Nov. 15, 2006		175		175
350, 9.750% due Apr. 1, 2012		349		349
600, 5.125% due Feb. 15, 2013		597		597
400, 8.750% due Aug. 15, 2021		398		398
300, 7.950% due Aug. 15, 2024**		300		300
250, 7.250% due Jun. 15, 2025		247		247
250, 8.750% due Sep. 15, 2031		248		249
175, 8.625% due Nov. 15, 2031		173		173
400, 6.125% due Feb. 15, 2033		393		393
300, 6.625% due Feb. 15, 2038		300		300
100, 7.500% due Aug. 15, 2042		100		100
175, 7.875% due Apr. 15, 2043		173		173
125, 6.875% due Oct. 15, 2043		125		125
Senior medium-term notes
7.060% – 7.460% due through 2006		45		45
Capital lease obligations due through 2005		23		70
Other notes		99		100
Subtotal other Boeing debt	$	5,203	$	5,266
Total debt	$	13,659	$	14,443

* The $199 note due May 31, 2005, is a promissory note to FlightSafety International for the purchase of its 50% interest in Alteon, formerly FlightSafety Boeing Training International (FSBTI). The promissory note carries a zero percent interest rate.

** The $300 debentures due August 15, 2024, are puttable at the holder’s option on August 15, 2012. All other debentures and notes are not puttable prior to maturity.

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Additional disclosure information

We have $4,000 currently available under credit line agreements with a group of commercial banks. BCC is named a subsidiary borrower for up to $2,000 under these arrangements. Total debt interest, including amounts capitalized, was $378 and $400 for the six months ended June 30, 2004 and 2003. Interest expense recorded by BCC is reflected as a separate line item on our Condensed Consolidated Statements of Operations, and is included in earnings from operations. Total company interest payments were $338 and $374 for the six months ended June 30, 2004 and 2003.

Short-term debt, and current portion of long-term debt, consisted of the following:

	June 30, 2004				December 31, 2003
	Consolidated Total		BCC Only		Consolidated Total		BCC Only
Commercial Paper conduit					$	15	$	15
Senior debt securities	$	999	$	999
Senior medium-term		704		679		921		896
Subordinated notes		20		20		20		20
Unsecured debentures and notes		690
Capital lease obligations		70		51		88		49
Non-recourse debt and notes		36		4		34		4
Euro medium-term notes		51		51		61		61
Other notes		5				5
	$	2,575	$	1,804	$	1,144	$	1,045

On March 23, 2004, we filed a shelf registration with the Securities and Exchange Commission (SEC) for $1,000 for the issuance of debt securities and underlying common stock. The entire amount remains available for potential debt issuance.

On December 23, 2003, we put in place a support agreement in which we committed to maintain certain financial metrics at BCC.

On July 26, 2004, BCC redeemed $1,000 face value of its outstanding senior notes, which had a carrying value of $999. This redemption will include the entire principal amount, equal to $500 face value, of its 7.10% senior notes due 2005 at a redemption price equal to 105.30% of the principal amount of the notes together with interest accrued to the redemption date. BCC also plans to redeem $500 face value of its 5.65% senior notes due 2006 at a redemption price equal to 104.81% of the principal amount of the notes together with interest accrued to the redemption date. We expect to recognize a loss of $52 related to this transaction, which will be reflected in our September 30, 2004 condensed consolidated financial statements.

Note 13 – Postretirement Plans

We have various pension plans covering substantially all employees. We also have postretirement benefits other than pensions which consist principally of health care coverage for eligible retirees and qualifying dependents, and to a lesser extent, life insurance to certain groups of retirees.

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The components of net periodic benefit cost/(income) were as follows:

	Six months ended June 30						Three months ended June 30
	2004			2003			2004			2003
Components of net periodic benefit cost/(income) – pensions
Service cost	$	416		$	382		$	208		$	191
Interest cost		1,188			1,160			594			580
Expected return on plan assets		(1,688	)		(1,702	)		(844	)		(851	)
Amortization of prior service costs		89			84			44			42
Recognized net actuarial loss		189			42			95			21
Settlement/curtailment					24						27
Net periodic benefit cost/(income) – pensions	$	194		$	(10	)	$	97		$	10

	Six months ended June 30						Three months ended June 30
	2004			2003			2004			2003
Components of net periodic benefit cost – other postretirement benefits
Service cost	$	81		$	80		$	40		$	40
Interest cost		250			266			122			133
Expected return on plan assets		(3	)		(2	)		(2	)		(1	)
Amortization of prior service costs		(49	)		(30	)		(24	)		(15	)
Recognized net actuarial loss		97			88			43			44
Net periodic benefit cost – other postretirement benefits	$	376		$	402		$	179		$	201

In the second quarter of 2004, we adopted Financial Accounting Standards Board Staff Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (which superceded FSP No. FAS 106-1). This FSP provides authoritative guidance on the accounting for the federal subsidy and other provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The effects of these provisions resulted in a reduction of $439 in our accumulated postretirement obligation for our other postretirement benefits related to benefits attributed to past service. In addition, our net periodic benefit cost for our other postretirement benefits decreased by $16 for the second quarter. The federal government will begin making the subsidy payments to employers in 2006.

We previously disclosed in our 2003 Annual Report on Form 10-K that we expect our required pension contributions under Employee Retirement Income Security Act (ERISA) regulations to be approximately $100 in 2004 and that we were evaluating a discretionary contribution to our plans in the range of $1,000 (pre-tax) during the first quarter of 2004, and would consider making additional contributions later in the year. During the six months ended June 30, 2004, we made discretionary and non-discretionary pension contributions of $2,000 (pre-tax) and $13 (pre-tax). During the three months ended June 30, 2004, we made discretionary pension contributions of $1,000 (pre-tax). We may contribute further to our plans in 2004, and are evaluating an additional discretionary contribution of up to $1,000 in the near term. We expect to contribute approximately $20 to our other postretirement benefit plans in 2004. During the six and three months ended June 30, 2004, we made contributions of $8 and $5.

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Note 14 – Share-Based Compensation

The Share-based plans expense caption on the Condensed Consolidated Statements of Operations represents the total expense we recognized for all our qualified stock-based compensation plans that are payable only in stock.

Share-based plans expense consisted of the following:

	Six months ended June 30				Three months ended June 30
	2004		2003		2004		2003
Performance Shares	$	217	$	162	$	128	$	84
ShareValue Trust		38		35		20		17
Stock options, other		28		36		16		18
	$	283	$	233	$	164	$	119

Certain deferred stock compensation plans are reflected in general and administrative expense. We had issued 10,084,524 stock units as of June 30, 2004, that are convertible to either stock or a cash equivalent, of which 8,877,880 are vested, and the remainder generally vest with employee service through retirement. These stock units principally represent a method of deferring employee compensation by which a liability is established based upon the current stock price. An expense or reduction to expense is recognized associated with the change in that liability balance which reflects stock price changes and earned dividends. For the six months ended June 30, 2004 and 2003, general and administrative expense related to deferred stock compensation was $75 and $10. For the three months ended June 30, 2004 and 2003, general and administrative expense related to deferred stock compensation was $86 and $59.

Performance Shares

During the six months ended June 30, 2004, our stock price met the 60% cumulative growth rate level for performance share grants made in 2003. Accordingly, pursuant to the plan’s terms, 45% of the 2003 Performance Shares awarded were converted to 3,984,763 shares of common stock. In addition, during the second quarter of 2004, we recorded an additional $25 of compensation expense to reflect the cumulative expense for those Performance Shares converted to common stock.

ShareValue Trust

The ShareValue Trust, established effective July 1, 1996, is a 14-year irrevocable trust that holds Boeing common stock, receives dividends and distributes to eligible employees appreciation in value above a 3% per annum threshold rate of return. The trust holds 41,537,823 shares of our common stock, split equally between two funds, “fund 1” and “fund 2.” On June 30, 2004, the market value of fund 2 exceeded $913 (the threshold representing a 3% per annum rate of return). Based on the average stock price of $50.825 as of June 30, 2004, the market value of fund 2 exceeded the threshold by $143 resulting in a distribution to participants. The distribution will be paid in Boeing common stock, except for partial shares, distributions to foreign employees and beneficiaries of deceased participants, which will be paid in cash. After employee withholding taxes, approximately 1.6 million shares of common stock will be distributed to participants. These transactions are recorded as a deduction to additional paid-in capital.

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Note 15 – Shareholders’ Equity

Changes in shareholders’ equity for the six months ended June 30, 2004 and 2003, consisted of the following:

(Shares in thousands)
	2004					2003
	Shares		Amount			Shares		Amount
Common stock
Beginning balance – January 1	1,011,870		$	5,059		1,011,870		$	5,059
Ending balance – June 30	1,011,870		$	5,059		1,011,870		$	5,059
Additional paid-in capital
Beginning balance – January 1			$	2,880				$	2,141
Share-based compensation				283					233
Treasury shares issued for stock plans, net				(241	)				(34	)
Tax benefit (expense) related to stock plans				(31	)				(80	)
ShareValue Trust distribution				(50	)
ShareValue Trust market value adjustment				371					81
Ending balance – June 30			$	3,212				$	2,341
Treasury stock
Beginning balance – January 1	170,388		$	(8,322	)	171,835		$	(8,397	)
Treasury shares issued for stock plans, net	(3,419	)		167		(900	)		47
Share Repurchase Program	4,376			(204	)
Ending balance – June 30	171,345		$	(8,359	)	170,935		$	(8,350	)
Retained earnings
Beginning balance – January 1			$	14,407				$	14,262
Net earnings (loss)				1,230					(670	)
Cash dividends declared				(337	)				(286	)
Ending balance – June 30			$	15,300				$	13,306
Accumulated other comprehensive income (loss)
Beginning balance – January 1			$	(4,145	)			$	(4,045	)
Reclassification adjustment for (gain) loss realized in net earnings, net of tax				15					13
Unrealized gain (loss) on derivative instruments, net of tax				2					14
Unrealized gain (loss) on certain investments, net of tax				(1	)				3
Foreign currency translation adjustment				(23	)				30
Ending balance – June 30			$	(4,152	)			$	(3,985	)
ShareValue Trust
Beginning balance – January 1	41,204		$	(1,740	)	40,374		$	(1,324	)
Shares acquired from dividend reinvestment, net of fees	334					462
Market value adjustment				(371	)				(81	)
Ending balance – June 30	41,538		$	(2,111	)	40,836		$	(1,405	)

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No adjustments to accumulated other comprehensive income (loss) are included in reported net earnings (loss) except for the $6 reclassification adjustment for (gain) loss realized in net earnings, net of tax, during the six months ended June 30, 2004.

In December 2000, a stock repurchase program was authorized by the Board of Directors, authorizing the repurchase of up to 85,000,000 shares of our stock. For the six months ended June 30, 2004, we repurchased 4,375,800 shares and there were no repurchases for the six months ended June 30, 2003.

Note 16 – Derivative Financial Instruments

We account for derivatives pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them.

We are exposed to a variety of market risks, including the effects of changes in interest rates, foreign currency exchange rates and commodity prices. These exposures are managed, in part, with the use of derivatives. The following is a summary of our risk management strategies and the effect of these strategies on the condensed consolidated financial statements.

Fair value hedges

Interest rate swaps under which we agree to pay variable rates of interest are designated as fair value hedges of fixed-rate debt. The net change in fair value of the derivatives and the hedged items is reported in earnings. Ineffectiveness related to the interest rate swaps was insignificant for the six months ended June 30, 2004 and 2003.

For the six months ended June 30, 2004 and 2003, $8 and $5 of gains related to the basis adjustment of certain terminated interest rate swaps were amortized to earnings. During the next twelve months, we expect to amortize a $16 gain, from the amount recorded in the basis adjustment of certain terminated fair value hedge relationships, to earnings.

Cash flow hedges

Our cash flow hedges include certain interest rate swaps, cross currency swaps, foreign currency forward contracts, and commodity purchase contracts. Interest rate swap contracts under which we agree to pay fixed rates of interest are designated as cash flow hedges of variable-rate debt obligations. We use foreign currency forward contracts to manage currency risk associated with certain forecasted transactions, specifically sales and purchase commitments made in foreign currencies. Our foreign currency forward contracts hedge forecasted transactions principally occurring up to five years in the future. We use commodity derivatives, such as fixed-price purchase commitments, to hedge against potentially unfavorable price changes for items used in production, principally commitments to purchase electricity at fixed prices through December 2005. The changes in fair value of the percentage of the commodity derivatives that are not designated in a hedging relationship are recorded in earnings immediately. There were no significant changes in fair value reported in earnings for the six months ended June 30, 2004 and 2003.

For the six months ended June 30, 2004 and 2003, net gains of 2 and 14 (net of tax) were recorded in accumulated other comprehensive income associated with our cash flow hedging transactions. Ineffectiveness for cash flow hedges was insignificant for the six months ended June 30, 2004 and 2003. For the six months ended June 30, 2004 and 2003, losses of $6 and $13 (net of tax) were reclassified to cost of products and services. During the next year, we expect the reclassification to cost of products and services to be insignificant.

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Derivative financial instruments not receiving hedge treatment

We also hold certain non-hedging instruments, such as interest exchange agreements, interest rate swaps, warrants, conversion feature of convertible debt and foreign currency forward contracts. The changes in fair value of these instruments are recorded in earnings. For the six months ended June 30, 2004 and 2003, these non-hedging instruments resulted in losses (gains) of $2 and ($19).

We held forward-starting interest rate swap agreements to fix the cost of funding a firmly committed lease for which payment terms are determined in advance of funding. During the six months ended June 30, 2003, the forward-starting interest rate swaps no longer qualified for fair value hedge accounting treatment. As a result, we recognized a pre-tax charge of $21. For the six months ended June 30, 2003, ineffectiveness losses of $1 were recorded in interest expense related to the forward-starting interest rate swaps.

Note 17 – Arrangements with Off-Balance Sheet Risk

We enter into arrangements with off-balance sheet risk in the normal course of business, as discussed below. These arrangements are primarily in the form of guarantees, ETC investments, and product warranties.

Guarantees

The following tables provide quantitative data regarding our third-party guarantees. The maximum potential payments represent a “worst-case scenario,” 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 our Condensed Consolidated Statements of Financial Position reflects our best estimate of future payments we may incur as part of fulfilling our guarantee obligations.

As of June 30, 2004	Maximum Potential Payments		Estimated Proceeds from Collateral/ Recourse		Carrying Amount of Liabilities*
Contingent repurchase commitments	$	5,818	$	5,818
Trade-in commitments		1,037		982	$	55
Asset-related guarantees		408		291		4
Credit guarantees related to the Sea Launch venture		511		307		204
Other credit guarantees		88		24		8
Equipment trust certificates		28
Performance guarantees		62		21		1

* Amounts included in Accounts payable and other liabilities

As of December 31, 2003	Maximum Potential Payments		Estimated Proceeds from Collateral/ Recourse		Carrying Amount of Liabilities*
Contingent repurchase commitments	$	5,564	$	5,564
Trade-in commitments		1,279		1,214	$	65
Asset-related guarantees		468		364		5
Credit guarantees related to the Sea Launch venture		519		311		208
Other credit guarantees		106		50		5
Equipment trust certificates		28
Performance guarantees		56		18

* Amounts included in Accounts payable and other liabilities

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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 entered into contingent repurchase commitments (Contingent Repurchase Commitments) with certain customers wherein we agree to repurchase the Sale Aircraft at a specified price, generally ten years after delivery of the Sale Aircraft. 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. Based on our historical experience, we believe that very few, if any, of our outstanding Contingent Repurchase Commitments will ultimately become trade-in commitments.

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 table 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. As disclosed in the above table, the maximum amounts payable under trade-in commitments were $1,037 and $1,279 as of June 30, 2004 and December 31, 2003. Based on the best market information available at the time, it was probable that we would be obligated to perform on trade-in commitments with gross amounts payable to customers totaling $271 and $582 as of June 30, 2004 and December 31, 2003. The estimated fair value of trade-in aircraft related to probable contractual trade-in commitments was $216 and $517 as of June 30, 2004 and December 31, 2003. Accounts payable and other liabilities included $55 and $65 as of June 30, 2004 and December 31, 2003, which represents the exposure related to these trade-in commitments.

We have issued various asset-related guarantees, principally to facilitate the sale of 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. These obligations are collateralized principally by commercial aircraft, and expire within the next 14 years.

We have issued credit guarantees to creditors of the Sea Launch venture, in which we are a 40% partner, to assist the venture in obtaining financing. We have substantive guarantees from the other venture partners, who are obligated to reimburse us for their share (in proportion to their Sea Launch ownership percentages) of any guarantee payments we may make related to Sea Launch obligations. Some of these guarantees are also collateralized by certain assets of the venture. In addition, we have issued credit guarantees, principally to facilitate the sale of 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 has been extended on behalf of original debtors or lessees with less than investment-grade credit. Current outstanding credit guarantees expire within the next 11 years.

Relating to our ETC investments, we have potential obligations relating to shortfall interest payments in the event that the interest rates in the underlying agreements with United Airlines are reset below levels specified in these agreements. These obligations would cease if United Airlines were to default on its interest payments to the ETC. These guarantees will expire over the next 12 years.

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As of December 31, 2002, we had certain obligations to investors in the trusts as a liquidity provider for ETC pass-through arrangements, which required funding to the trust to cover interest due to such investors in the event of default by United Airlines. In the event of funding, we are entitled to receive a first priority position in the ETC collateral in the amount of the funding. On February 7, 2003, we advanced $101 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.

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. Current performance guarantees expire over the next 13 years.

Product warranties

We provide product warranties in conjunction with certain product sales. The majority of our warranties are issued by our Commercial Airplanes segment. Generally, aircraft sales are accompanied by a three to four-year standard warranty for systems, accessories, equipment, parts, and software manufactured by us or manufactured to certain standards under our authorization. Additionally, on occasion we have made commitments beyond the standard warranty obligation to correct fleet wide major warranty issues of a particular model. These costs are included in the program’s estimate at completion (EAC) and expensed as aircraft are delivered. These warranties cover factors such as non-conformance to specifications and defects in material and design. Warranties issued by our IDS segment principally relate to sales of military aircraft and weapons hardware. These sales are generally accompanied by a six to twelve-month warranty period and cover systems, accessories, equipment, parts, and software manufactured by us to certain contractual specifications. These warranties cover factors such as non-conformance to specifications and defects in material and workmanship.

Estimated costs related to standard warranties are recorded in the period in which the related product sales occur. The warranty liability recorded at each balance sheet date reflects the estimated number of months of warranty coverage outstanding for products delivered times the average of historical monthly warranty payments, as well as additional amounts for certain major warranty issues that exceed a normal claims level. The following table summarizes product warranty activity recorded during the six months ended June 30, 2004 and 2003.

	Product Warranty Liabilities*
	2004			2003
Beginning balance – January 1	$	825		$	898
Additions for new warranties		58			93
Reductions for payments made		(137	)		(148	)
Changes in estimates		77			38
Ending balance – June 30	$	823		$	881

* Amounts included in Accounts payable and other liabilities

Material variable interests in unconsolidated entities

During the 1990s, we began investing 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. Our investments in ETCs and EETCs are included in the scope of FASB Interpretation No. (FIN) 46(R), Consolidation of Variable Interest Entities, but do not require consolidation. We believe that our maximum exposure to economic loss from ETCs and EETCs is

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$542, comprised of our $408 investment balance, rights to collateral estimated at $106 related to liquidity obligations satisfied in February 2003, and a maximum potential exposure of $28 relating to potential shortfall interest payments. Accounting losses, if any, from period to period could differ. As of June 30, 2004, the ETC and EETC transactions we participated in had total assets of $4,045 and total debt (which is non-recourse to us) of $3,637.

During the 1980s, we began providing subordinated loans to certain special purpose entities (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 FIN 46(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. We believe that our maximum exposure to economic loss from non-consolidated SPE arrangements that are Variable Interest Entities (VIE) is $151, which represents our investment balance. Accounting losses, if any, from period to period could differ. As of June 30, 2004, these SPE arrangements had total assets of $1,658 and total debt (which is non-recourse to us) of $1,507.

Other commitments

Irrevocable financing commitments related to aircraft on order, including options, scheduled for delivery through 2007 totaled $3,313 and $1,495 as of June 30, 2004 and December 31, 2003. We anticipate that not all of these commitments will be utilized and that we will be able to arrange for third-party investors to assume a portion of the remaining commitments, if necessary. We had no commitments to arrange for equipment financing as of June 30, 2004 and $41 as of December 31, 2003.

As of June 30, 2004 and December 31, 2003, future lease commitments on aircraft not recorded on the Condensed Consolidated Statements of Financial Position totaled $279 and $306. These lease commitments extend through 2015, and our intent is to recover these lease commitments through sublease arrangements. As of June 30, 2004 and December 31, 2003, Accounts payable and other liabilities included $96 attributable to adverse commitments under these lease arrangements.

As of June 30, 2004 and December 31, 2003, we had extended a $39 and $69 credit line agreement to one of our joint venture partners. To date, $9 had been drawn on this agreement, which was recorded as an additional investment in the joint venture.

Note 18 – Contingencies

Legal

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

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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 June 30, 2004, inventories included approximately $583 of recorded costs on the A-12 contract, against which we have established a loss provision of $350. The amount of the provision, which was established in 1990, was based on McDonnell Douglas’ 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.

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 $275, consisting principally of remaining inventory costs and adjustments, and 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 plus statutory interest from February 1991 (currently totaling approximately $1,115). In that event our loss would total approximately $1,505 in pre-tax charges. Should, however, the March 31, 1998 judgment of the United States Court of Federal Claims in favor of the Team be reinstated, we would receive approximately $988, 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 June 30, 2004. 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 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

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former employees in July 2003 and filed a criminal complaint in May 2004 against the third employee. We are in discussions with the Air Force over a possible administrative agreement that would facilitate lifting of the suspension in advance of final resolution of the criminal investigation. 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 current complaint, 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. These suits have now been consolidated. The plantiffs 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 lawsuit seeks 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 charged that our 2003 Proxy Statement contained false and misleading statements concerning the 2003 Incentive Stock Plan. The lawsuit sought a declaration voiding shareholder approval of the 2003 Incentive Stock Plan, injunctive relief and equitable accounting. This case was dismissed by the court and the plaintiff has appealed to the Court of Appeals of the Second Circuit.

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

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

On November 24, 2003, our Executive Vice President and Chief Financial Officer (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 concerning this and related matters. (On April 20, 2004, Druyun pled guilty to one count of criminal conspiracy for negotiating employment while a U.S. Government official.) 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 determine at this time what further 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 eight employment discrimination matters filed during the period of June 1998 through June 2004, 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 state court

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in California; 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.

The lawsuits are in varying stages of litigation. One case in Seattle alleging discrimination based on national origin (Asian) resulted in a verdict for us following trial. One case in Seattle alleging discrimination based on gender has been settled. Three cases – one in Los Angeles, one in Missouri, and one in Kansas, all alleging gender discrimination – have resulted in denials of class certification. The case in Oklahoma, also alleging gender discrimination, resulted in the granting of class action status. The other two cases are in earlier stages of litigation.

It is not possible to determine whether these actions could or would have a material adverse effect on our financial position.

Other contingencies

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

We routinely assess, based on in-depth studies, expert analyses and legal reviews, our contingencies, obligations and commitments for remediation of contaminated sites, including assessments of ranges and probabilities of recoveries from other responsible parties who have and have not agreed to a settlement and of recoveries from insurance carriers. Our policy is to immediately accrue and charge to current expense identified exposures related to environmental remediation sites based on our best estimate within a range of potential exposure for investigation, cleanup and monitoring costs to be incurred.

The costs incurred and expected to be incurred in connection with such activities have not had, and are not expected to have, a material adverse effect on us. With respect to results of operations, related charges have averaged less than 1% of historical annual revenues. Although not considered likely, should we be required to incur remediation charges at the high level of the range of potential exposure, the additional charges would be less than 3% of historical annual revenues.

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

We have possible material exposures related to the 717 program, principally attributable to termination costs that could result from a lack of market demand. During the fourth quarter of 2003, we lost a major sales campaign, thus increasing the possibility of program termination. Program continuity is dependent on the outcomes of current sales campaigns. In the event of a program termination decision, current estimates indicate we could recognize a pre-tax earnings charge of approximately $350.

We have entered into standby letters of credit agreements and surety bonds with financial institutions primarily relating to the guarantee of future performance on certain contracts. Contingent liabilities on outstanding letters of credit agreements and surety bonds aggregated approximately $2,620 as of June 30, 2004.

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Note 19 – Business Segment Data

The Boeing Company and Subsidiaries

Business Segment Data

(Unaudited)

(Dollars in millions)	Six months ended June 30						Three months ended June 30
	2004			2003			2004			2003
Sales and other operating revenues:
Commercial Airplanes	$	11,001		$	11,516		$	5,671		$	5,819
Integrated Defense Systems:
Aircraft and Weapon Systems		5,687			5,224			2,666			2,540
Network Systems		5,206			4,187			2,725			2,233
Support Systems		2,206			1,984			1,099			1,019
Launch and Orbital Systems		1,480			1,428			672			770
Total Integrated Defense Systems		14,579			12,823			7,162			6,562
Boeing Capital Corporation		480			456			229			232
Other		265			500			131			272
Accounting differences/eliminations		(334	)		(379	)		(105	)		(168	)
Sales and other operating revenues	$	25,991		$	24,916		$	13,088		$	12,717
Earnings (loss) from continuing operations:
Commercial Airplanes	$	734		$	201		$	382		$	313
Integrated Defense Systems:
Aircraft and Weapon Systems		860			753			384			372
Network Systems		406			235			225			101
Support Systems		281			216			137			107
Launch and Orbital Systems		(113	)		(1,602	)		(50	)		(1,009	)
Total Integrated Defense Systems		1,434			(398	)		696			(429	)
Boeing Capital Corporation		88			(66	)		15			60
Other		(228	)		(182	)		(124	)		(64	)
Accounting differences/eliminations		(106	)		79			(36	)		54
Share-based plans expense		(283	)		(233	)		(164	)		(119	)
Unallocated (expense)/income		(171	)		(96	)		(125	)		(127	)
Earnings (loss) from continuing operations		1,468			(695	)		644			(312	)
Other income/(expense), net		225			33			66			17
Interest and debt expense		(169	)		(185	)		(85	)		(92	)
Earnings (loss) before income taxes		1,524			(847	)		625			(387	)
Income tax (expense)/benefit		(324	)		161			(39	)		187
Net earnings (loss) from continuing operations	$	1,200		$	(686	)	$	586		$	(200	)
Income from discontinued operations, net of taxes		16			16			7			8
Net gain on disposal of discontinued operations, net of taxes		14						14
Net earnings (loss)	$	1,230		$	(670	)	$	607		$	(192	)
Effective income tax rate		21.3	%		19.0	%		6.2	%		48.3	%
Research and development expense:
Commercial Airplanes	$	476		$	314		$	251		$	157
Integrated Defense Systems:
Aircraft and Weapon Systems		202			166			95			88
Network Systems		131			95			71			53
Support Systems		30			33			14			18
Launch and Orbital Systems		94			134			57			86
Total Integrated Defense Systems		457			428			237			245
Other		63			56			34			35
Total research and development expense	$	996		$	798		$	522		$	437

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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 IDS; and BCC. All other activities fall within the Other segment, principally made up of Boeing Technology and Connexion by Boeing^SM. Effective April 1, 2004, ATM was absorbed into the Phantom Works research division which is included within Boeing Technology.

Our Commercial Airplanes operation principally involves 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, both land-based and aircraft-carrier-based, including fighter, transport and attack aircraft with wide mission capability, and vertical/short takeoff and landing capability; helicopters and missiles, space systems, 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.

See Note 20 for a discussion of the BCC segment operations.

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. Financing activities other than BCC, consisting principally of four C-17 transport aircraft under lease to the United Kingdom Royal Air Force, are included within the Other segment classification.

For segment reporting purposes, we record Commercial Airplanes segment revenues and cost of sales for airplanes transferred to other segments. Such transfers may include airplanes accounted for as operating leases and considered transferred to the BCC segment and airplanes transferred to the IDS segment for further modification prior to delivery to the customer. The revenues and cost of sales for these transfers are eliminated in the ‘Accounting differences/eliminations’ caption. In the event an airplane accounted for as an operating lease is subsequently sold, the ‘Accounting differences/eliminations’ caption would reflect the recognition of revenues and cost of sales on the condensed consolidated financial statements.

For segment reporting purposes, we record IDS revenues and cost of sales for only the modification performed on airplanes received from Commercial Airplanes when the airplane is delivered to the customer or at the attainment of performance milestones. The ‘Accounting differences/eliminations’ caption would reflect the recognition of revenues and cost of sales for the pre-modified airplane upon delivery to the customer or at the attainment of performance milestones.

The ‘Accounting differences/eliminations’ caption of net earnings also includes the impact of cost measurement differences between generally accepted accounting principles and federal cost accounting standards. This includes the following: the difference between pension costs recognized under SFAS No. 87, Employers’ Accounting for Pensions, and under federal cost accounting standards, principally on a funding basis; the differences between retiree health care costs recognized under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and under federal cost accounting standards, principally on a cash basis; the differences between workers’ compensation costs recognized under SFAS No. 5, Accounting for Contingencies, and under federal cost accounting standards, under which adjustments to prior years’ estimates of claims incurred and not reported are recognized in future periods; and the differences in timing of cost recognition related to certain activities, such as facilities consolidation, undertaken as a result of mergers and acquisitions

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whereby such costs are expensed under generally accepted accounting principles and deferred under federal cost accounting standards. Additionally, the amortization of costs capitalized in accordance with SFAS No. 34, Capitalization of Interest Cost, is included in the ‘Accounting differences/eliminations’ caption.

The cost attributable to share-based plans expense is not allocated to other business segments except for the portion related to BCC. Unallocated expense also includes the recognition of an expense or a reduction to expense for deferred stock compensation plans resulting from stock price changes as described in Note 14.

Note 20 – Boeing Capital Corporation (BCC)

BCC, a wholly owned subsidiary, is primarily engaged in the financing of commercial and private aircraft. On May 24, 2004, BCC entered into a purchase and sale agreement with GECC to sell substantially all of the assets related to its Commercial Financial Services business. See Note 7 for a discussion on the disposition of BCC’s Commercial Financial Services business.

BCC’s portfolio consists of financing leases, notes and other receivables, equipment under operating leases (net of accumulated depreciation), investments and equipment held for sale or re-lease (net of accumulated depreciation). BCC segment revenues consist principally of interest from financing receivables and notes, lease income from operating lease equipment, investment income, gains on disposals, and gains/losses on revaluation of derivatives. Cost of products and services for the segment consists of depreciation on leased equipment, asset impairment expenses and other charges, and provisions recorded against the valuation allowance presented in Note 8. BCC is fully consolidated into our financial statements. Intracompany profits, transactions, and balances (including those related to intracompany guarantees) have been eliminated in consolidation and are reflected in the “Boeing” columns below.

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	Consolidated						Boeing						BCC
Six months ended June 30	2004			2003			2004			2003			2004			2003
Operations:
Sales and other operating revenues	$	25,991		$	24,916		$	25,511		$	24,460		$	480		$	456
Cost of products and services		(21,586	)		(22,137	)		(21,424	)		(21,825	)		(162	)		(312	)
BCC interest expense		(173	)		(179	)								(173	)		(179	)
		4,232			2,600			4,087			2,635			145			(35	)
Operating expenses		(2,764	)		(3,295	)		(2,707	)		(3,264	)		(57	)		(31	)
Earnings (loss) from continuing operations		1,468			(695	)		1,380			(629	)		88			(66	)
Other income, net		225			33			225			33
Interest and debt expense		(169	)		(185	)		(169	)		(185	)
Earnings (loss) before income taxes		1,524			(847	)		1,436			(781	)		88			(66	)
Income tax (expense)/benefit		(324	)		161			(295	)		128			(29	)		33
Net earnings (loss) from continuing operations		1,200			(686	)		1,141			(653	)		59			(33	)
Income from discontinued operations, net of taxes		16			16									16			16
Net gain on disposal of discontinued operations, net of taxes		14												14
Net earnings (loss)	$	1,230		$	(670	)	$	1,141		$	(653	)	$	89		$	(17	)
Six months ended June 30	2004			2003			2004			2003			2004			2003
Cash flows:
Net earnings (loss)	$	1,230		$	(670	)	$	1,141		$	(653	)	$	89		$	(17	)
Operating activities adjustments		314			1,087			137			666			177			421
Operating activities		1,544			417			1,278			13			266			404
Investing activities		1,283			(757	)		(325	)		(356	)		1,608			(401	)
Financing activities		(1,276	)		(114	)		(352	)		1			(924	)		(115	)
Net increase/(decrease) in cash and cash equivalents		1,551			(454	)		601			(342	)		950			(112	)
Cash and cash equivalents at beginning of year		4,633			2,333			3,917			1,647			716			686
Cash and cash equivalents at end of period	$	6,184		$	1,879		$	4,518		$	1,305		$	1,666		$	574
	June 30, 2004			December 31, 2003			June 30, 2004			December 31, 2003			June 30, 2004			December 31, 2003
Financial Position:
Assets *	$	54,283		$	52,986		$	42,153		$	40,150		$	12,130		$	12,836
Debt		13,659			14,443			5,203			5,266			8,456			9,177
Equity		8,949			8,139			7,164			6,197			1,785			1,942
Debt-to-equity ratio														4.7 to 1			4.7 to 1

* BCC’s portfolio, as of June 30, 2004, totaled $10,031 compared with $10,065 as of December 31, 2003. The difference between BCC’s total assets and portfolio is primarily cash.

Operating cash flow in the Condensed Consolidated Statements of Cash Flows includes intracompany cash received from the sale of aircraft by the Commercial Airplanes segment for customers who receive financing from BCC. The contribution to operating cash flow related to customer deliveries of Boeing airplanes financed by BCC amounted to $376 and $784 for the six months ended June 30, 2004 and 2003. Investing cash flow includes a reduction in cash for the intracompany cash paid by BCC to Commercial Airplanes as well as an increase in cash for amounts received from third parties, primarily customers paying amounts due on aircraft financing transactions.

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As part of BCC’s quarterly review of its portfolio of financing assets and operating leases, additions to the valuation allowance and specific impairment losses were identified. During the six months ended June 30, 2004, BCC recorded no increase to the valuation allowance, as additions were offset by write-offs. However, during the same period of 2003, BCC increased the valuation allowance by $130, resulting from deterioration in the credit worthiness of its airline customers, airline bankruptcy filings, and continued decline in aircraft and general equipment asset values. During the six months ended June 30, 2004, BCC recognized impairment charges of $45. This was primarily comprised of $16 related to aircraft and equipment under operating lease and $29 related to an other than temporary impairment of a held-to-maturity investment in ATA maturing in 2015. During the six months ended June 30, 2003, BCC recognized impairment charges of $49 and charges of $21 related to the write-off of forward-starting interest rate swaps related to Hawaiian Holdings, Inc.

Intracompany Guarantees

We provide BCC with certain intracompany guarantees and other subsidies. The following table provides the financial statements impact of intracompany guarantees and asset impairments, lease accounting differences, and other subsidies. These amounts have been recorded in the operating earnings of the Other segment.

	Six months ended June 30
	2004			2003
Guarantees and asset impairments	$	42		$	85
Lease accounting differences		(2	)
Other subsidies		21			28
	$	61		$	113

Included in ‘Guarantees and asset impairments’ for the six months ended June 30, 2004 and 2003, was an increase in the customer financing valuation allowance of $34 and $30 resulting from guarantees provided to BCC. There were no additional asset impairments and other charges for the six months ended June 30, 2004. However, there were charges of $22 related to the deterioration of aircraft values, reduced estimated cash flows for operating leases, and the renegotiation of leases for the six months ended June 30, 2003.

Note 21 – Subsequent Event

On July 26, 2004, BCC exercised its right to redeem $1,000 face value of its outstanding senior notes, which had a carrying value of $999. This redemption included the entire principal amount, equal to $500 face value, of its 7.10% senior notes due 2005 at a redemption price equal to 105.30% of the principal amount of the notes together with interest accrued to the redemption date. BCC also redeemed $500 face value of its 5.65% senior notes due 2006 at a redemption price equal to 104.81% of the principal amount of the notes together with interest accrued to the redemption date. We expect to recognize a loss of $52 during the third quarter of 2004 related to this early debt redemption. These transactions will be reflected in our September 30, 2004 condensed consolidated financial statements.

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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Litigation Reform Act of 1995. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results and future trends may differ materially depending on a variety of factors, including the continued operation, viability and growth of major airline customers and non-airline customers (such as the U.S. Government); adverse developments in the value of collateral securing customer and other financings; the occurrence of any significant collective bargaining labor dispute; our successful execution of internal performance plans, price escalation, production rate increases and decreases (including any reduction in or termination of an aircraft product), acquisition and divestiture plans, and other cost-reduction and productivity efforts; charges from any future SFAS No. 142 review; an adverse development in rating agency credit ratings or assessments; the actual outcomes of certain pending sales campaigns, including the 717 program and the launch of the 7E7 program, and U.S. and foreign government procurement activities, including the timing of procurement of tankers by the DoD; the cyclical nature of some of our businesses; unanticipated financial market changes which may impact pension plan assumptions; domestic and international competition in the defense, space and commercial areas; continued integration of acquired businesses; performance issues with key suppliers, subcontractors and customers; significant and prolonged disruption to air travel worldwide (including future terrorist attacks); global trade policies; worldwide political stability; domestic and international economic conditions; price escalation; the outcome of political and legal processes; changing priorities or reductions in the U.S. Government or foreign government defense and space budgets; termination of government or commercial contracts due to unilateral government or customer action or failure to perform; legal, financial and governmental risks related to international transactions; legal proceedings; tax settlements with the IRS; and other economic, political and technological risks and uncertainties. Additional information regarding these factors is contained in our SEC filings, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2003 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.

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Item 2. 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.

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 and Connexion by Boeing^SM. Effective April 1, 2004, Air Traffic Management was absorbed into Phantom Works research division which is included within Boeing Technology.

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, 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.

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BCC is primarily engaged in the financing of commercial and private aircraft. On May 24, 2004, BCC entered into a purchase and sale agreement to sell substantially all of the assets related to its Commercial Financial Services business to General Electric Capital Corporation (GECC). The assets to be sold to GECC consist of leases and financing arrangements having a carrying value of $1.9 billion as of May 31, 2004. The purchase agreement called for the sale of the assets to take place in a series of closings, commencing on May 31, 2004 and ending no later than July 30, 2004. Final closing may occur subsequent to July 30, 2004, subject to mutual agreement between the parties.

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. Financing activities other than those carried out by BCC are also included within the Other segment classification.

Consolidated Results of Operations

	Six months ended June 30						Three months ended June 30
Dollars in millions	2004			2003			2004			2003
Revenues	$	25,991		$	24,916		$	13,088		$	12,717
Operating Earnings (Loss)	$	1,468		$	(695	)	$	644		$	(312	)
Operating Margins		5.6	%		(2.8	)%		4.9	%		(2.5	)%
Net Earnings (Loss)	$	1,230		$	(670	)	$	607		$	(192	)
Effective Income Tax Rate		21.3	%		19.0	%		6.2	%		48.3	%

	June 30 2004		December 31 2003
Contractual Backlog	$	103,350	$	104,812
Unobligated Backlog	$	46,076	$	50,564

Revenues

Higher revenues for the six months ended June 30, 2004 when compared to the same period in 2003 were primarily due to growth in IDS revenues. The increase in IDS revenues of approximately $1.8 billion was primarily due to growth in our Network Systems segment, specifically due to increased activity in Future Combat Systems, Missile Defense, and Proprietary and Airborne Command and Control programs. In addition, our A&WS revenues increased due to volume increases in the F/A-18, Joint Direct Attack Munitions (JDAM), and rotorcraft programs. These increases in revenues, however, were partially offset by a decrease in the Commercial Airplanes segment of $515 million. While deliveries of commercial jet aircraft increased when compared to the first six months of 2003, revenues from commercial jet aircraft deliveries decreased since there was a change in the model mix which was skewed towards the lower-priced, single-aisle aircraft. Further, the decrease in Commercial Airplanes revenues was due to lower airplane services and used aircraft sales volume. In addition, the Other segment revenues decreased by $235 million primarily due to the delivery of 717 model aircraft to Air Tran Holdings, Inc. during the six months ended June 30, 2003. There were no such deliveries in 2004.

Higher revenues for the three months ended June 30, 2004 when compared to the same period in 2003 were primarily due to the factors discussed above.

Operating Earnings

Operating earnings increased for the six months ended June 30, 2004 when compared to the same period in 2003. During the three months ended March 31, 2003, we recorded goodwill impairment

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charges of $913 million ($818 million net of tax) that negatively impacted operating earnings 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. In addition, during the three months ended June 30, 2003, we recorded a charge of $1.1 billion related to the satellite and launch businesses due to the weakness in the commercial space launch market, higher mission and launch costs on the Delta IV program, and cost growth. Excluding these charges, our operating earnings for the six months ended June 30, 2004 improved slightly when compared to the six months ended June 30, 2003. Operating earnings improved due to a $162 million decrease in asset impairment charges and valuation reserves related to customer financing assets, which were recorded by BCC and the Other segment, when compared to the same period in 2003. Furthermore, operating earnings reflected improved cost performance in both the Commercial Airplanes segment and IDS. However, these improvements to operating earnings were mitigated by increased research and development expenses of $198 million and increased pension expense of $249 million. For the six months ended June 30, 2004, we had pension expense, compared to pension income for the six months ended June 30, 2003, due to negative pension asset returns in 2001 and 2002, the impact of which is amortized into earnings in future periods.

Net Earnings

The increase in net earnings for the six months ended June 30, 2004 when compared to the same period in 2003 resulted from higher operating earnings and the receipt of interest of $219 million related to our income tax refunds discussed below. These increases in operating earnings and interest income were offset by an increase in our income tax expense of $485 million.

Income Taxes

Income tax expense for the six months ended June 30, 2004 was $324 million, or an effective tax rate of 21.3% of pre-tax earnings, compared with an income tax benefit of $161 million, or an effective tax rate of 19.0% of pre-tax loss, for the same period in 2003. The effective income tax rate differed from the Federal statutory rate of 35% due to Foreign Sales Corporation (FSC) and Extra Territorial Income (ETI) exclusion tax benefits, tax credits, state income taxes, and tax benefits associated with a settlement with the Internal Revenue Service (IRS) of the years 1986-1997. The effective income tax rate for the six months ended June 30, 2003 also differed from the federal statutory rate due to FSC and ETI exclusion tax benefits, tax credits, state income taxes, and the non-deductibility for tax purposes of certain portions of goodwill impairment charges.

Income tax expense for the second quarter of 2004 was $39 million, or an effective tax rate of 6.2% of pre-tax earnings, compared with an income tax benefit of $187 million, or an effective tax rate of 48.3% of pre-tax loss, for the same period in 2003.

Income taxes have been settled with the IRS for The Boeing Company for all years through 1996 and for McDonnell Douglas Corporation for all years through 1992, and IRS examinations have been completed through 1997.

During the six months ended June 30, 2004, we received federal tax refunds totaling $368 million. $142 million related to a settlement of the 1996 tax year and the 1997 partial tax year for McDonnell Douglas Corporation and $223 million related to a settlement of the 1983 through 1987 tax years. The remainder of the $368 million related to the 1985 tax year. Of the total $368 million in refunds received, $154 million was reflected as interest income in the first quarter of 2004.

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In June 2004, we received notice and made accruals for approved federal income tax refunds totaling $230 million (of which $65 million represents interest). The refunds related to a settlement of the 1986 through 1997 tax years. This event resulted in a $188 million increase to net earnings for the three months ended June 30, 2004. 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 decrease in contractual backlog during the six months ended June 30, 2004 relates to higher delivery volume on all airplane programs relative to new orders in the Commercial Airplanes segment, sales in the A&WS segment, and a termination for convenience on a commercial satellite in the L&OS segment. These decreases in backlog were partially offset by increases in backlog attributable to the C-17 and JDAM programs in the A&WS segment and a C-17 program award in the Support Systems segment.

Unobligated backlog decreased by approximately $4.5 billion for the six months ended June 30, 2004. This decrease is primarily attributable to the termination of the RAH-66 Comanche program and firm order increases to the C-17 program, partially offset by an increase due to the Navy Multi-mission Maritime Aircraft program contract award.

For segment reporting purposes, we record 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 intercompany 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. Additionally we have substantial borrowing capability 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 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

	Six months ended June 30
(Dollars in millions)	2004			2003
Net earnings (loss)	$	1,230		$	(670	)
Non-cash items		1,217			2,114
Changes in working capital		(903	)		(1,027	)
Net cash (used)/provided by operating activities		1,544			417
Net cash (used)/provided by investing activities		1,283			(757	)
Net cash (used)/provided by financing activities		(1,276	)		(114	)
Net increase in cash and cash equivalents		1,551			(454	)
Cash and cash equivalents at beginning of year		4,633			2,333
Cash and cash equivalents at end of second quarter	$	6,184		$	1,879

Non-cash items

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

Working capital

During the six months ended June 30, 2004, our investment in working capital increased. This increase is primarily due to $2.0 billion of discretionary pension contributions made in 2004 (see below discussion on pensions). Other items contributing to the increase in investment in working capital include:

· a decrease in inventory resulting from a decrease in Commercial Airplanes inventory driven by the downturn in the commercial aviation market, which has resulted in less demand for the production of commercial aircraft,

· a change in income taxes payable related to the tax refunds recorded and tax expense related to current earnings.

Net cash provided by operations includes intracompany cash of $0.4 billion and $0.8 billion for the six months ended June 30, 2004 and 2003 resulting from the sale of aircraft for customers who received financing from BCC. An offsetting use of cash was reported as an investing activity.

We previously disclosed in our 2003 Annual Report on Form 10-K that we expect our required pension contributions under Employee Retirement Income Security Act (ERISA) regulations to be approximately $100 million in 2004 and that we were evaluating a discretionary contribution to our plans in the range of $1 billion (pre-tax) during the first quarter of 2004, and would consider making additional contributions later in the year. During the six months ended June 30, 2004, we made discretionary and non-discretionary pension contributions of $2 billion (pre-tax) and $13 million (pre-tax). We may contribute further to our plans in 2004, and are evaluating an additional discretionary contribution of up to $1 billion in the near term. We expect to contribute approximately $20 million to our other postretirement benefit plans in 2004. During the six months of 2004, we made contributions of $8 million.

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For discussion of income tax refunds refer to Consolidated Results of Operations – Income taxes (page 37).

Investing activities

The majority of BCC’s customer financing is funded by debt and cash flow from its own operations. The growth in customer financing was primarily financed by BCC’s cash flow for the six months ended June 30, 2004. As of June 30, 2004, we have outstanding irrevocable commitments of approximately $3.3 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 Note 17.

Cash was provided by investing activities for the six months ended June 30, 2004 and used by investing activities in the comparable period in 2003. For the six months ended June 30, 2004, we sold Commercial Financial Services; during the same period of 2003, we acquired Conquest. Additionally, for the six months ended June 30, 2004 the size of the BCC portfolio declined, which is consistent with the announcement to change their strategic direction.

Financing activities

There were no debt issuances during the six months ended June 30, 2004. For the six months ended June 30, 2003, we received proceeds of $1.0 billion related to our September 13, 2002 shelf registration. There were 4,375,800 shares repurchased at a price of $204 million and 3,214 shares repurchased in a stock swap in the six months ended June 30, 2004 and no shares were repurchased in the same period of 2003.

On July 26, 2004, BCC redeemed $1.0 billion face value of its outstanding senior notes, which had a carrying value of $999 million. This included the entire principal balance, equal to $500 million face value, of its 7.10% senior notes due 2005 and $500 million face value of its 5.65% senior notes due 2006. See Note 21 of the notes to condensed consolidated financial statements for a discussion on the July 26, 2004 debt redemption.

Credit Ratings

Our credit ratings are summarized below:

	Fitch	Moody’s	Standard & Poor’s
Long-term:
Boeing	A+	A3	A
BCC	A+	A3	A
Short-term:
Boeing	F-1	P-2	A-1
BCC	F-1	P-2	A-1

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 provides short-term liquidity. Commercial paper remains a significant liquidity source. As of June 30, 2004, we have no outstanding commercial paper issuances.

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Our total debt obligation is $13.7 billion and is primarily unsecured. Debt obligation includes $8.5 billion held at BCC. The remaining $5.2 billion of debt includes $0.5 billion relating to non-recourse debt as described in Note 14 of our 2003 Annual Report on Form 10-K.

We have additional substantial borrowing capability. Currently, we have $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 12. BCC has $4.8 billion that remains available from shelf registrations filed with the SEC. We believe our internally generated liquidity, together with access to external capital resources, will be sufficient to satisfy existing commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year.

On March 23, 2004, we filed a shelf registration with the SEC for $1.0 billion for the issuance of debt securities and underlying common stock.

Off-Balance Sheet Arrangements

We enter into arrangements with off-balance sheet risk in the normal course business. These arrangements are primarily in the form of guarantees, equipment trust certificate investments, and product warranties. See Note 17 to the condensed consolidated financial statements.

SEGMENT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

COMMERCIAL AIRPLANES

Business Environment and Trends

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, generating on-going travelers’ concerns and additional costs for security.

World-wide economic growth continued during the second quarter of 2004. Led by strong economic growth in the United States and China, world air traffic levels were at or above traffic levels carried by the airlines in 2000. This strong volume of air travel won’t necessarily generate strong airline profits because of a weak pricing environment and persistently high oil and fuel prices. Airlines find themselves in an increasingly competitive situation with fast-growing low-cost, low-fare competitors placing significant pricing pressure in an increasing number of air travel markets. Persistently high oil and fuel prices are placing cost pressure on airlines, increasing world-wide airline operating costs by billions of dollars. The ability of airlines to pass these costs on to their customers is limited by the competitive environment. Consequently, some airlines, particularly large US network carriers, are facing significant losses again in 2004 and may face significant financial difficulties.

Exogenous shocks still represent further major uncertainties for the airline industry. Recurrence of disease outbreaks like the 2003 SARS outbreak in Asia, new armed conflict, and/or terrorist attacks focused on air travel all represent threats to the airline industry’s recovery.

During this year, we expect to establish cost sharing arrangements with suppliers for the 7E7 to offset a substantial portion of the financial risk of developing the 7E7 product. In each arrangement, we will retain the traditional Boeing rights to the 7E7.

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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 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.

We continue to explore strategic options related to our operations at Wichita, Tulsa and McAlester sites.

Operating Results

	Six months ended June 30						Three months ended June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	11,001		$	11,516		$	5,671		$	5,819
% Of Total Company Revenues		42	%		46	%		43	%		46	%
Operating Earnings	$	734		$	201		$	382		$	313
Operating Margins		6.7	%		1.7	%		6.7	%		5.4	%

	June 30 2004		December 31 2003
Contractual Backlog	$	62,179	$	63,929

Revenues

Commercial Airplanes revenue is derived primarily from commercial jet aircraft deliveries. The decline of $515 million in revenue from the first half of 2003 to the first half of 2004 was primarily attributable to new airplane model mix of $245 million, and lower airplane services of $96 million. New commercial jet aircraft deliveries were higher in the first half of 2004 compared to the same period in 2003, but the delivery mix included more single-aisle aircraft and fewer twin-aisle aircraft.

Revenues for the three months ended June 30, 2004 were down $148 million from the same period in 2003 primarily due to model mix of $206 million offset by used aircraft sales and other of $58 million.

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Commercial jet aircraft deliveries, including deliveries under operating lease, which are identified by parentheses, were as follows.

	Six months ended June 30				Three months ended June 30
Model	2004		2003		2004		2003
717	6	(4)	6	(5)	3	(1)	3	(3)
737 Next-Generation*	105		85		50		44
747	9		10		4		4
757	8		9		4		4
767	4	(1)	16	(1)	3		7
777	19		19		11		12
Total	151		145		75		74

* Deliveries in the six and three months ended June 30, 2003, included one intercompany Wedgetail AEW&C System 737 aircraft.

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

Model	June 30 2004	March 31 2004	December 31 2003
717	131	128	125
737 Next-Generation	1,525	1,475	1,420
747	1,347	1,343	1,338
757	1,044	1,040	1,036
767	920	917	916
777	482	471	463

The undelivered units under firm order* were as follows:

Model	June 30 2004	March 31 2004	December 31 2003
717	22	19	22
737 Next-Generation	773	785	800
747	31	30	32
757	5	9	13
767	25	24	25
777	145	153	159

* Firm orders represent new aircraft purchase agreements where the customers’ rights to cancel without penalty have expired. Typical customer rights to cancel without penalty include the customer receiving approval from its Board of Directors, shareholders, government and completing financing arrangements. All such cancellation rights must be satisfied or expired even if satisfying such conditions are highly certain. Firm orders exclude option aircraft and aircraft subject to reconfirmation.

Operating earnings

The increase of $533 million in operating earnings from the first half of 2003 to the first half of 2004 was primarily attributable to a goodwill impairment charge of $341 million in 2003 and improved cost performance and other of $285 million partially offset by increased research and development expense of $162 million.

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The increase of $69 million in operating earnings during the three months ended June 30, 2004 from the comparable period of 2003 was primarily due to improved cost performance and other of $136 million partially offset by increased research and development expense of $93 million.

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 Note 1 of our 2003 Annual Report on Form 10-K for a discussion on 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.

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.

There were changes to the program accounting quantities during the three months ended June 30, 2004 and there were no changes during the three months ended March 31, 2004 compared to December 31, 2003. The accounting quantity on the 717 program increased by six for additional firm orders and increased by 200 on the 737 program as a result of additional orders received since the last accounting quantity extension in 2003.

The program accounting quantities were as follows:

Model	June 30 2004	March 31 2004	December 31 2003
717	154	148	148
737 Next-Generation	2,400	2,200	2,200
747	1,388	1,388	1,388
757	1,050	1,050	1,050
767	975	975	975
777	650	650	650

Due to ongoing market uncertainty for the 717 aircraft, the accounting quantity for the 717 program has been based on firm orders since the fourth quarter of 2001. As of June 30, 2004, of the 22 remaining undelivered units, 10 units will be delivered to a single customer. Due to the customer’s uncertain financial condition, on a consolidated basis, these aircraft are expected to be accounted for as long-term operating leases as they are delivered. The value of the inventory for the undelivered aircraft as of June 30, 2004, remained realizable.

We have possible material exposures related to the 717 program, principally attributable to termination costs that could result from a lack of market demand. During the fourth quarter of 2003, we lost a major sales campaign, thus increasing the possibility of program termination. We continue to aggressively market the 717 aircraft. Program continuity is dependent on the outcomes of current sales campaigns.

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In the event of a program termination decision, current estimates indicate we could recognize a pre-tax earnings charge of approximately $350 million.

The accounting quantity for each program may include units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the future (anticipated orders). In developing total program estimates all of these items within the accounting quantity must be addressed. The percentage of anticipated orders included in the program accounting estimates as compared to the number of cumulative firm orders* were as follows:

	717	737 Next- Generation		747		757	767		777
June 30, 2004
Cumulative firm orders (CFO)	153	2,298		1,378		1,049	945		627
Anticipated orders	N/A	100		9		N/A	28		23
Anticipated orders as a % of CFO	N/A	4	%	1	%	N/A	3	%	4	%
March 31, 2004
Cumulative firm orders	147	2,260		1,373		1,049	941		624
Anticipated orders	N/A	N/A		14		N/A	32		26
Anticipated orders as a % of CFO	N/A	N/A		1	%	N/A	3	%	4	%
December 31, 2003
Cumulative firm orders	147	2,220		1,370		1,049	941		622
Anticipated orders	N/A	N/A		17		N/A	32		28
Anticipated orders as a % of CFO	N/A	N/A		1	%	N/A	3	%	5	%

* Cumulative firm orders represent the cumulative number of commercial jet aircraft deliveries (see table in Commercial Airplanes Revenues discussion) plus undelivered units under firm order (see table in Commercial Airplanes Revenues discussion). Cumulative firm orders include orders that fall within the current accounting quantities as well as orders that extend beyond the current accounting quantities. Cumulative firm orders exclude program test aircraft that will not be refurbished for sale.

The Department of Defense (DoD) is currently reviewing the United States Air Force (USAF)/Boeing agreement for the purchase/lease combination of 100 767 Tankers. On February 4, 2004, the Secretary of Defense asked for the completion of reports from the Defense Science Board and the DoD inspector general. The reports were completed in May 2004. Further program postponement was announced in May 2004 by the DoD to November 2004, pending completion of an Analysis of Alternatives (AoA) and the Mobility Capabilities Study (MCS). On February 20, 2004, we announced the slow down of development efforts on the USAF 767 Tanker program. This slow down resulted in the redeployment of labor resources in order to continue working on only critical path items to reduce company spending until the DoD reviews are complete. Receipt of the USAF tanker order is dependent on legislative action. The Department of Defense Appropriations Act for fiscal year 2005, as reported from conference (H.R. 108-22) provides funding for tanker replacement. The National Defense Authorization Act for fiscal year 2005 is still in process however the prior fiscal year’s Act (H.R. 1588) provided authorization for procurement of tanker aircraft. Our current expectation is that it is probable we will receive the USAF tanker order in 2005. If approved, delivery of the pre-modified aircraft from Commercial Airplanes to IDS is scheduled to begin in 2006.

In order to meet the USAF’s proposed schedule for delivery, as of June 30, 2004, we have incurred inventoriable precontract costs of approximately $160 million, which consisted of $118 million related to development costs and about $42 million related to spending on one in-production aircraft. If the order is not received, we would also incur supplier termination charges of approximately $25 million. The inventoriable development costs are being deferred based on our assessment that it is probable the contract will be received. If the contract is not received, these costs will be charged to expense and would have a material negative impact to the program’s gross margin and may impact the continuation of the 767 program.

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This anticipated order, which has a significant positive impact on the 767 program, has been incorporated into our program accounting estimates to the extent the aircraft fall within the current accounting quantity. Approximately 40% of the remaining deliveries in the current accounting quantity on the 767 program relates to the anticipated USAF tanker order. Based on the forecasted delivery schedule and production rates the majority of these aircraft fall beyond the current accounting quantity.

Deferred production costs

Commercial aircraft inventory production costs incurred on in-process and delivered units in excess of the estimated average cost of such units, determined as described in Note 1 of our 2003 Annual Report on Form 10-K, represent deferred production costs. As of June 30, 2004 and December 31, 2003, there were no significant excess deferred production costs or unamortized tooling costs not recoverable from existing firm orders for the 777 program.

The deferred production costs and unamortized tooling included in the 777 program’s inventory are summarized in the following table:

	June 30 2004		December 31 2003
Deferred production costs	$	905	$	837
Unamortized tooling	$	519	$	582

As of June 30, 2004 and December 31, 2003, the balance of deferred production costs and unamortized tooling related to all other commercial aircraft programs was insignificant relative to the programs’ balance-to-go cost estimates.

Backlog

Contractual firm backlog for the Commercial Airplanes segment excludes customers we deem to be high risk or in bankruptcy as of the reporting date. The decline in backlog during the three months ended June 30, 2004 represents higher delivery volume on all airplane programs relative to new orders due to the decline in the commercial aviation market. June 30, 2004, backlog does not include the anticipated order of 100 767 Tankers from the USAF. This order is anticipated to become a firm contract in 2005.

INTEGRATED DEFENSE SYSTEMS

Business Environment and Trends

IDS is comprised of four reportable segments, which include A&WS, Network Systems, Support Systems and L&OS. The IDS business environment extends over multiple markets, including defense (A&WS, Network Systems and Support Systems segments), homeland security (Network Systems), civil space transportation and 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, the primary customers of IDS 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 civil space transportation and exploration market, and the U.S. Government and commercial satellite service providers for the launch and satellites market. Since the trends associated with these markets impact IDS opportunities and risks in unique ways, the various environmental factors for each are discussed individually below.

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Defense environment overview

The DoD represents nearly 50% of the world’s defense budget. The current defense environment is characterized by transformation and change in the face of shrinking force structure, aging platforms, and a level of operations and engagements worldwide that are expected to remain high for the foreseeable future. The current environment is also heavily influenced by the continuing war on terrorism and the need to bring new technologies to assist the war fighter. The United States’ leadership in the global war on terrorism demonstrates the value of networked intelligence, surveillance and communications, interoperability across platforms, services and forces, and the leveraging effects of precise, persistent, and selective engagement. The significance and advantage of unmanned systems to perform many of these tasks is growing. These experiences are driving the DoD, along with militaries worldwide, to transform their forces and the way they operate. Network-centric warfare is at the heart of this transformation.

As evidenced by President Bush’s fiscal year 2005 budget request, we continue to see near-term growth in the DoD budget and a focus on transformation that will provide opportunities for IDS products in the future. However, with a weak global economy and anticipated federal budget deficits, allocations to DoD procurement are unlikely to increase significantly. This suggests that the DoD will continue to focus on affordability strategies emphasizing network-centric operations, joint interoperability, long range strike, unmanned air combat and reconnaissance vehicles, precision guided weapons and continued privatization of logistics and support activities as a means to improve overall effectiveness while maintaining control over costs. Along with this, we are already seeing the need for the military to make difficult choices between programs in an effort to support their highest priority. Programs will be continually evaluated with program performance and relevancy to the overall DoD vision as the measures for continuation or cancellation.

Military transformation

The defense transformation is evidenced by a trend toward smaller, more capable, interoperable, and technologically advanced forces. To achieve these capabilities, a transformation in acquisition is underway with an increasing trend toward early deployment of initial program capabilities followed by subsequent incremental improvements, cooperative international development programs and a demonstrated willingness to explore new forms of development, acquisition and support. Along with these trends, new system procurements are being evaluated for the degree to which they support the concept of jointness and interoperability among the services.

Institutions and events continue to shape the defense industrial environment. The DoD’s implementation of a new Joint Capabilities Integration and Development Systems organization and process, along with revisions to the Defense Acquisition System, Program Planning Budgeting and Execution processes and the establishment of the Office of Force Transformation, has created a durable institutional foundation for continued transformation. Operations in the continuing global war on terrorism reaffirm the need for the rapid projection of decisive combat power around the world and emphasize the need for new capabilities and solutions for the war fighter. They also highlight the need for improved logistics and stability operation capabilities at completion of hostilities. Toward that end, the DoD is fully committed to a transformation that will achieve and maintain advantages through changes in operational concepts, organizational structure and technologies that significantly improve warfighting capabilities.

Missile Defense

Another significant area of growth and transformation are the efforts being made in missile defense. Funding for the missile defense market is primarily driven by the U.S. Government Missile Defense Agency (MDA) budget. The primary thrusts in this market are the continued development and

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deployment of theater missile defense systems and the Ground-based Midcourse Defense (GMD) program. The overall MDA missile defense budget for 2004 is approximately $9 billion with the 2005 budget expected to be at the same level.

Over the past year, emphasis has been placed on meeting President Bush’s call to deploy a national missile defense capability by late 2004. Congress demonstrated support for this effort as the funding for deployment has remained a top MDA budget priority. Through our leadership position on the Missile Defense National Team and our prime contractor role on the GMD segment program and on the Airborne Laser program, IDS is positioned to maintain its role as MDA’s number one contractor.

Defense Competitive Environment

The global competitive environment continues to intensify, with increased focus on the U.S. defense market, the world’s largest and most attractive. IDS faces strong competition in all market segments, primarily from Lockheed Martin, Raytheon, and Northrop Grumman. BAE Systems and EADS continue to build a strategic presence in the U.S. market by strengthening their North American operations and partnering with U.S. defense companies.

We expect industry consolidation, partnering, and market concentration to continue. Prime contractors will continue to partner or serve as major suppliers to each other on various programs and will perform targeted acquisitions to fill technology or customer gaps. At the lower tiers, consolidation persists and select companies have been positioning for larger roles, especially in the aerospace support market.

Homeland Security Environment

The Department of Homeland Security became official in 2003, a year characterized by significant U.S. Government transformational and organizational challenges. Organizational alignment is ongoing and procurement practices are evolving. It is important to realize that this new department has been formed from existing agencies and their budgets, and therefore a large portion of the near-term budget is committed to heritage programs and staffing. Until some of these existing commitments are complete, funding for new opportunities will represent a small share of the overall Department of Homeland Security budget. We expect Homeland Security to be a stable market with minimal growth and emphasis being placed on Information Analysis and Infrastructure Protection.

The Bush Administration requested $40.2 billion in the fiscal 2005 budget request to support the Department of Homeland Security. This request is a 10 percent increase compared to the fiscal year 2004 request and exhibits the Bush Administration’s continued commitment to homeland security. Only 50% of the federal spending on homeland security is within the newly formed Department of Homeland Security. Other federal agencies such as DoD still have homeland security and homeland defense funding under their direction. IDS will continue to leverage our experience as the systems integrator on the EDS program, our aviation heritage and our Integrated Battlespace and network-centric operations expertise and capabilities into the homeland security marketplace.

Civil Space Transportation and Exploration Environment

The total NASA budget is expected to remain relatively flat over the next ten years, but it is forecasted that this budget will see a change in direction and emphasis. President Bush defined a new vision for exploration that will not require large budget increases in the near-term. Instead, it will bring about a sustained focus over time and reorientation of NASA’s programs. The funding added for exploration will total about $12 billion over the next five years. Most of this funding will be reallocated from existing areas as NASA reprioritizes to accomplish the new vision for exploration. The President has requested an additional $1 billion for NASA’s existing five-year plan, or on average $200 million per year. We believe this allocation will be more significant in the first three years of the plan rather than the later

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two. The establishment of the new vision will provide great opportunities for industry to develop new technologies and operational concepts to take human beings beyond low-earth-orbit. IDS, with our strong heritage in the development of space systems and our expertise in the area of human space flight, including the Space Shuttle and the International Space Station, is well positioned to work with and support our customer in accomplishing their goals. IDS will continue its work on the Space Shuttle and International Space Station programs along with development of critical technologies such as rocket propulsion and life support systems to prepare to meet the challenge of returning to the Moon and exploring the Solar System.

Launch and Satellite Environment

The commercial space market has softened significantly since the late 1990s in conjunction with the downturn in the telecommunications industry. This market is now characterized by overcapacity, aggressive pricing and limited near-term opportunities. Recent projections indicate these market conditions will persist until the end of this decade. We believe there will be lower commercial satellite orders through this decade, along with lower demand for commercial launch services as compared to the high points of the early to mid-1990s. In this extremely limited market, we see a growing amount of overcapacity, which in turn is driving the continued deterioration of pricing conditions. We will continue to pursue profitable commercial satellite opportunities, where the customer values our technical expertise and unique solutions. However, we will not pursue commercial satellite orders or launch contracts at a loss, and given the current pricing environment, we have decided, for the near-term, to focus our Delta IV program on the government launch market, which we believe is a more stable market.

Inherent business risks

Our businesses are heavily regulated in most of our markets. We deal with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, NASA, and Homeland Security. Similar government authorities exist in our international markets.

The U.S. Government, and other governments, may terminate any of our government contracts at their convenience as well as for default based on our failure to meet specified performance measurements. If any of our government contracts were to be terminated for convenience (TFC), we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default (TFD), generally the U.S. Government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government can also hold us liable for damages resulting from the default.

On February 23, 2004, the U.S. Government announced plans to terminate for convenience, the RAH-66 Comanche contract. Boeing and Sikorsky Aircraft (a division of United Technologies Corporation) each had a 50/50 share in program work share and earnings. On March 19, 2004, the U.S. Government issued a partial TFC notification. By March 19, 2005, a termination proposal will be submitted and negotiated with the U.S. Government. It is anticipated that a complete termination will be issued shortly thereafter. The program represents less than 1% of the Boeing Company’s projected revenues for 2004 and 2005.

U.S. Government contracts also are conditioned upon the continuing availability of Congressional appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. On research and development contracts, Congress usually appropriates funds on a Government-fiscal-year basis (September 30 year- end), even though contract performance may extend over years.

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Many of our contracts are fixed-price contracts. While firm, fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns. If the initial estimates we use to calculate the contract price prove to be incorrect, we can incur losses on those contracts. In addition, some of our contracts have specific provisions relating to cost controls, schedule, and product performance. If we fail to meet the terms specified in those contracts, then we may not realize their full benefits. Our ability to manage costs on these contracts may affect our financial condition. Cost overruns may result in lower earnings, which would have an adverse effect on our financial results.

Sales of our products and services internationally are subject not only to local government regulations and procurement policies and practices but also to the policies and approval of the U.S. Department of State and DoD. The policies of some international customers require “industrial participation” agreements, which are discussed more fully in the “Disclosures about contractual obligations and commitments” section in our 2003 Annual Report on Form 10-K.

We are subject to business and cost classification regulations associated with our U.S. Government defense and space contracts. Violations can result in civil, criminal or administrative proceedings involving fines, compensatory and treble damages, restitution, forfeitures, and suspension or debarment from U.S. Government contracts. We are currently in discussions with the U.S. Government regarding the allocability of certain pension costs which could be material. It is not possible at this time to predict the outcome of these discussions.

767 Tanker Program

The Department of Defense (DOD) is currently reviewing the USAF/Boeing agreement for the purchase/lease combination of 100 767 Tankers. On February 4, 2004, the Secretary of Defense asked for the completion of reports from the Defense Science Board and the DoD inspector general. The reports were completed in May 2004. Further program postponement was announced in May 2004 by the DoD to November 2004, pending completion of an Analysis of Alternatives (AoA) and the Mobility Capabilities Study (MCS). On February 20, 2004, we announced the slow down of development efforts on the USAF 767 Tanker program. This slow down resulted in the redeployment of labor resources in order to continue working on only critical path items to reduce company spending until the DoD reviews are complete. Receipt of the USAF tanker order is dependent on legislative action. The Department of Defense Appropriations Act for fiscal year 2005, as reported from conference (H.R. 108-22) provides funding for tanker replacement. The National Defense Authorization Act for fiscal year 2005 is still in process, however the prior fiscal year’s Act (H.R. 1588) provided authorization for procurement of tanker aircraft. Our current expectation is that it is probable we will receive the USAF tanker order in 2005. If approved, delivery of the pre-modified aircraft from Commercial Airplanes to IDS is scheduled to begin in 2006. In the event the program is not contracted, we would expense tanker related inventoried costs, and incur supplier termination charges. On a consolidated basis, our potential termination charges would be $268 million as of June 30, 2004, consisting of $185 million related to the Commercial Airplanes segment, and $83 million related to the IDS A&WS and Support Systems segments. Additionally, the outcome of the USAF proposal could also have an adverse impact on our margins associated with Italian and Japanese tanker contracts.

Sea Launch

The Sea Launch venture, in which we are a 40% partner, provides ocean-based launch services to commercial satellite customers and is reported in the L&OS segment. For the six months ended June 30, 2004, the venture conducted three successful launches. The venture continues to aggressively manage its cost structure.

We have issued credit guarantees to creditors of the Sea Launch venture to assist the venture in obtaining financing. In the event we are required to perform on these guarantees, we have the right to

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recover a portion of the loss from other venture partners, and have collateral rights to certain assets of the venture. We believe our total maximum exposure to loss from Sea Launch totals $225 million, taking into account recourse from other venture partners and estimated proceeds from collateral. The components of this exposure include $189 million ($839 million, net of $447 million in established reserves and $203 million in recourse from partners) of other assets and advances, $23 million for potential subcontract termination liabilities, and $13 million ($35 million net of $21 million in recourse from partners and $1 million in established reserves) of exposure related to performance guarantees provided by us to a Sea Launch customer. We also have outstanding credit guarantees with no net exposure ($511 million, net of $307 million in recourse from partners and $204 million in established reserves). We made no additional capital contributions to the Sea Launch venture during the six months ended June 30, 2004.

Delta IV

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, were terminated and a third employee was disciplined and resigned. In March 2003, the USAF notified us that it was reviewing our present responsibility as a government contractor in connection with the incident. In June 2003, Lockheed Martin filed a lawsuit against us and the three individual former employees arising from the same facts. It is not possible at this time to predict the outcome of these matters or whether an adverse outcome would or could have a material adverse effect on our financial position. In addition, 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 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. The Delta IV is reported in the L&OS segment.

The cost estimates for the Delta II and Delta IV programs are based, in part, upon estimated quantities and timing of launch missions for existing and anticipated contracts (the Mission Manifest) to determine the allocation of fixed costs for individual launches. Revenue estimates include probable price adjustments due to contractual statement of work changes where we have established contractual entitlement. The Mission Manifest represents management’s best estimate of the launch services market, taking into account all known information. Due to the volatility of the government launch market, and the current suspension, as described in Note 18, it is possible that changes in quantity and timing of launches could occur that would change the Mission Manifest and therefore the financial performance of the Delta Programs.

Satellites

As is the standard for the commercial satellite industry, contracts are fixed price in nature. Many of the existing satellite programs have very complex designs including unique phased array antenna designs. As technical or quality issues arise, we have continued to experience schedule delays and cost impacts. We believe we have appropriately estimated costs to complete these contracts. However, if a major event arises, it could result in a material charge. These programs are on-going, and while we believe the cost estimates reflected in the June 30, 2004 financial statements are adequate, the technical complexity of the satellites create financial risk, as additional completion costs may become necessary, or scheduled delivery dates could be missed, which could trigger termination for default provisions or other financially significant exposure. Thus far in 2004, two satellites have been delivered retiring the TFD risk on those satellites. For the remainder of the year we have two commercial satellite

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contracts that could still expose us to the risk of contract TFD notification. The TFD risks are $235 and $477 million. Management believes a TFD notification is not likely due to program progress and continuing contractual efforts in process on the remaining two satellites this year. Our satellite programs are reported in either the Network Systems or L&OS segments.

Additionally, in certain launch and satellite sales contracts, we include provisions for replacement launch services or hardware if we do not meet specified performance criteria. We have historically purchased insurance to cover these exposures when allowed under the terms of the contract. The current insurance market reflects unusually high premium rates and also suffers from a lack of capacity to handle all insurance requirements. We make decisions on the procurement of third-party insurance based on our analysis of risk. There is one contractual launch scheduled in late 2004 for which full insurance coverage may not be available, or if available, could be prohibitively expensive. We will continue to review this risk. We estimate that the potential uninsured amount for this launch could be approximately $100 million.

Contract Accounting

Contract accounting is used predominately by the segments within IDS. The majority of business conducted in these segments is performed under contracts with the U.S. Government and foreign governments that extend over a number of years. Contract accounting involves a judgmental process of estimating the total sales and costs at the completion of each contract, which results in the development of estimated cost of sales percentages. For each contract, the amount reported as cost of sales is determined by applying the estimated cost of sales percentage to the amount of revenue recognized.

Total contract sales estimates are based on negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance, and price adjustment clauses (such as inflation or index-based clauses). Total contract cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends, business base and other economic projections. Factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.

Sales related to contracts with fixed prices are recognized as deliveries are made, except for certain fixed-price contracts that require substantial performance over an extended period before deliveries begin, for which sales are recorded based on the attainment of performance milestones. Sales related to contracts in which we are reimbursed for costs incurred plus an agreed upon profit are recorded as costs are incurred. Contracts may contain provisions to earn incentive and award fees if targets are achieved. Incentive and award fees that can be reasonably estimated are recorded over the performance period of the contract. Incentive and award fees that cannot be reasonably estimated are recorded when awarded.

The development of cost of sales percentages involves procedures and personnel in all areas that provide financial, technical, or production information on the status of contracts. Estimates of each significant contracts sales and costs (including certain costs presented as General and Administrative) are reviewed and reassessed quarterly. Any changes in these estimates result in recognition of cumulative adjustments to the contract profit in the period in which changes are made. Due to the size and nature of many of our contracts, the estimation of total sales and costs through completion is complicated and subject to many variables. Assumptions are made regarding the length of time to complete each contract because estimated costs also include expected changes in wages, prices for materials, fixed costs, and other costs.

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Due to the significance of judgment in the estimation process described above, it is likely that materially different cost of sales amounts could be recorded if we used different assumptions, or if the underlying circumstances were to change. Changes in underlying assumptions/estimates, supplier performance, or circumstances may adversely or positively affect financial performance in future periods.

IDS Operating Results

	Six months ended June 30						Three months ended June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	14,579		$	12,823		$	7,162		$	6,562
% Of Total Company Revenues		56	%		51	%		55	%		52	%
Operating Earnings (Loss)	$	1,434		$	(398	)	$	696		$	(429	)
Operating Margins		9.8	%		(3.1	)%		9.7	%		(6.5	)%
							June 30 2004			December 31 2003
Contractual Backlog							$	41,171		$	40,883

Revenues

For the six months ended June 30, 2004 revenues grew nearly 14% compared to the same period in 2003 with increased revenue throughout all four segments. A&WS increased revenue is driven by increased deliveries on the F/A-18 and F/A-22 programs; higher volume on the Joint Direct Attack Munitions (JDAM), V-22, Apache, and Chinook programs of $700 million, partially offset by fewer C-17, C-40 and T-45 deliveries totaling $240 million in decreased sales. Network Systems had increased volume from the Missile Defense and Integrated Battlespace markets, including Airborne Command and Control, Proprietary, and Military Transformation Programs generating increased revenues of $1.2 billion, partially offset by decreased Homeland Security activity. Support Systems had increased volume in the Supply Chain Services, Training Systems and Services, Life Cycle Customer Support (LCCS), Modification and Upgrades and Maintenance and Modification businesses generating over $300 million in increased revenues, partially offset by decreased Contractor Logistics Support and Services activity. L&OS had a settlement of a TFC on a commercial satellite program and increased return to flight activity on NASA programs of $220 million, partially offset by decreased launch and satellite deliveries and milestone completions of $160 million. IDS revenues increased 9% for the three months ended June 30, 2004 compared to the same period in 2003.

Operating Earnings

For the six months ended June 30, 2004 earnings increased by 13% compared to the same period in 2003, excluding 2003 charges recognized in connection with our review of goodwill balances under SFAS No. 142 and $1.1 billion related to Delta IV and satellites in the second quarter. The SFAS No. 142 review resulted in a first quarter charge of $572 million related to L&OS. A&WS increase is due to continued performance improvements on production programs in both the Precision Engagement and Mobility markets of $66 million and revenue growth of $80 million, partially offset by increased investment on the 767 Global Tanker Transport Aircraft (GTTA) program during the period. Network Systems increase is due to the improved profitability on the Integrated Battlespace, Proprietary and Homeland Security Programs of $42 million and revenue growth of $117 million, partially offset by cost growth on Missiles Defense, Airborne Command and Control and military satellite programs. Support Systems increase is due to the revenue growth of $38 million and performance throughout the Support Systems business base of $27 million. L&OS operating earnings continue to be negatively impacted by performance issues and inventory write downs in the satellite business.

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For the three months ended June 30, 2004 earnings increased by nearly 4% compared to the same period in 2003, this excludes the 2003 charges mentioned above. The 2004 second quarter earnings growth follow the increased revenue stated above along with strong performance in the A&WS, Network Systems and Support Systems segments. Those increases were partially offset by increased investment on the 767 GTTA program in A&WS and continued cost growth/inventory issues on the commercial satellite programs in L&OS.

Backlog

For the six months ended June 30, 2004 backlog increased by 1% mainly due to orders on F/A-22 and C-17 in A&WS; Turkey 737 AEW&C in Network Systems; and various Support Systems segment orders for a total contractual backlog increase of nearly $14.9 billion offset by sales throughout the segments of $14.6 billion. Network Systems also won the Navy Multi-mission Maritime Aircraft program in June which added $3.9 billion to our total backlog.

Aircraft and Weapons Systems

	Six months ended June 30						Three months ended June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	5,687		$	5,224		$	2,666		$	2,540
% Of Total Company Revenues		22	%		21	%		20	%		20	%
Operating Earnings	$	860		$	753		$	384		$	372
Operating Margins		15.1	%		14.4	%		14.4	%		14.6	%
							June 30 2004			December 31 2003
Contractual Backlog							$	19,661		$	19,352

Revenues

For the six months ended June 30, 2004 revenue increased by 9% compared to the same period in 2003 due to additional deliveries on the F/A-18 and F/A-22 programs and increased volume from the Apache, Chinook, V-22 and JDAM programs, partially offset by fewer C-17 and T-45 deliveries. A&WS revenue increased by 5% for the three months ended June 30, 2004 compared to the same period in 2003. This was primarily due to additional deliveries on the F/A-18 and F/A-22 programs coupled with increased volume from the Apache, Chinook and JDAM programs, partially offset by fewer C-17 and T-45 deliveries and the retirement of the AV-8B program.

Deliveries of units for principal production programs (New Build Aircraft only) were as follows:

	Six months ended June 30		Three months ended June 30
	2004	2003	2004	2003
C-17 Globemaster	8	9	3	4
F/A-18E/F Super Hornet	25	20	12	9
T-45TS Goshawk	4	7	2	3
F-15E Eagle	2	2	1	1
CH-47 Chinook	0	0	0	0
C-40A Clipper	0	1	0	0
AH-64 Apache	0	0	0	0

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Operating Earnings

For the six months ended June 30, 2004 earnings improved by 14% compared to the same period in 2003 due to continued performance improvements on production programs and the revenue growth stated above. For the six months ended June 30, 2003 segment earnings benefited from favorable adjustments resulting from liquidation of inventory that was impaired in 1999 on the F-15 program. A&WS earnings increased by 3% for the three months ended June 30, 2004 compared to the same period in 2003 from the revenue growth stated above partially offset by increased investment on the 767 GTTA program during the period.

Backlog

For the six months ended June 30, 2004 total contractual backlog for A&WS increased. A&WS increased contractual backlog is attributed to increases to the F/A-22 and C-17 programs. This was partially offset by sales on the F/A-18 and JDAM programs. The second quarter decrease can be attributed to aircraft deliveries on the F/A-18 program.

Network Systems

	Six months ended June 30						Three months ended June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	5,206		$	4,187		$	2,725		$	2,233
% Of Total Company Revenues		20	%		17	%		21	%		18	%
Operating Earnings	$	406		$	235		$	225		$	101
Operating Margins		7.8	%		5.6	%		8.3	%		4.5	%
							June 30 2004			December 31 2003
Contractual Backlog							$	12,266		$	11,715

Revenues

For the six months ended June 30, 2004 revenues increased by 24% compared to the same period in 2003 from increased volume from the Missile Defense and Integrated Battlespace markets, including Airborne Command and Control, Proprietary, and Military Transformation Programs, partially offset by decreased Homeland Security activity. Network Systems revenue increased by 22% for the three months ended June 30, 2004 when compared to the same period in 2003. The increase was driven primarily by increased volume in Missile Defense and Integrated Battlespace Proprietary and Military Transformation Programs, including the completion of major design concept review on the Future Combat Systems.

Operating Earnings

For the six months ended June 30, 2004 operating earnings increased 33% when compared to the same period in 2003, which excludes second quarter 2003 charges of $0.1 billion related to military satellite contracts. This increase is due to the improved profitability on the Integrated Battlespace Proprietary and Homeland Security Programs coupled with the revenue growth stated above, partially offset by cost growth on Missiles Defense, Airborne command and control and military satellite programs. For the three months ended June 30, 2004, Network Systems earnings increased 31% when compared to the same period in 2003, excluding the charges mentioned above, due to the improved profitability on the Integrated Battlespace Proprietary and Military Transformation programs coupled with the revenue growth stated above.

Backlog

Total contractual backlog for Network Systems increased for the six months ended June 30, 2004. The increase is primarily due to the capture of an order for the Turkey 737 AEW&C. Future Combat

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Systems and Airborne Laser programs also contributed to the increase. This was offset by sales on the Missile Defense and Proprietary programs. Network Systems also won the Navy Multi-mission Maritime Aircraft program in June which added $3.9 billion to total backlog.

Support Systems

	Six months ended June 30						Three months ended     June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	2,206		$	1,984		$	1,099		$	1,019
% Of Total Company Revenues		8	%		8	%		8	%		8	%
Operating Earnings	$	281		$	216		$	137		$	107
Operating Margins		12.7	%		10.9	%		12.5	%		10.5	%

	June 30 2004		December 31 2003
Contractual Backlog	$	6,143	$	5,882

Revenues

For the six months ended June 30, 2004 revenues increased 11% compared to the same period in 2003 through increased volume in the Supply Chain Services, Training Systems and Services, LCCS, Modification and Upgrades and Maintenance and Modification businesses, partially offset by decreased Contractor Logistics Support and Services. Support Systems segment revenues for the three months ended June 30, 2004 increased 8% compared to the same period in 2003 primarily through increased volume in Supply Chain Services, LCCS, and Training Systems and Services, offset with lower volume in Contractor Logistics Support and Services.

Operating Earnings

For the six months ended June 30, 2004 earnings increased 30% compared to 2003 due to the revenue volume stated above and the excellent performance throughout the business base. Support Systems segment earnings for the three months ended June 30, 2004 increased 28% compared to the same period in 2003 from the increased revenue stated above and strong performance in LCCS and maintenance and modification businesses.

Backlog

Total contractual backlog for Support Systems increased for the six months ended June 30, 2004 due to the LCCS and Modernization and Upgrade programs. The second quarter decrease can be attributed to sales within the Contractor Logistics Support and Service program as well as Supply Chain Services.

Launch & Orbital Systems

	Six months ended June 30						Three months ended     June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	1,480		$	1,428		$	672		$	770
% Of Total Company Revenues		6	%		6	%		5	%		6	%
Operating Loss	$	(113	)	$	(1,602	)	$	(50	)	$	(1,009	)
Operating Margins		(7.6	)%		N.M.			(7.4	)%		N.M.

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	June 30 2004		December 31 2003
Contractual Backlog	$	3,101	$	3,934

N.M. = Not Meaningful

Revenues

For the six months ended June 30, 2004 revenues increased by 4% when compared to the same period in 2003 primarily driven increased return to flight activity on NASA programs and revenues associated with a settlement of a TFC on a commercial satellite program, partially offset by decreased launch and satellite deliveries and milestone completions. L&OS segment revenues decreased by 13% for the three months ended June 30, 2004 when compared to the same period in 2003 primarily due to decreased commercial satellite milestone completions and deliveries.

Deliveries of production units were as follows:

	Six months ended June 30		Three months ended June 30
	2004	2003	2004	2003
Delta II	1	2	1	1
Delta IV	0	1	0	0
BSS Satellites	2	3	1	2

Operating Earnings

For the three and six months ended June 30, 2004 L&OS operating earnings continue to be negatively impacted by performance issues and inventory write downs in the satellite business. During the second quarter the US Government lowered its Delta IV EELV Mission Manifest. This reduction was reflected in our cost estimates and was offset by a probable price adjustment for a change in the statement of work on certain Delta IV EELV missions. 2003 L&OS earnings were impacted by first and second quarter charges recognized in connection with our review of goodwill balances under SFAS No. 142 (first quarter charge of $572 million) and charges recognized in connection with Delta IV and Boeing Satellite Systems businesses (second quarter charge of $1.0 billion).

We are a 50-50 partner with Lockheed Martin in a joint venture called United Space Alliance, which is responsible for all ground processing of the Space Shuttle fleet and for space-related operations with the USAF. 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-plus-type contracts. Our proportionate share of joint venture earnings is recognized as income. Included in the L&OS operating earnings for the three months ended June 30, 2004 were $17 million compared to $11 million for the same period in 2003. For the six months ended June 30, 2004, earnings were $27 million compared to $24 million for the same period in 2003.

Backlog

Total contractual backlog for L&OS decreased for the six months ended June 30, 2004 due to the TFC of a satellite contract as well as sales related to NASA programs. The decrease in contractual backlog in the second quarter is attributed to the strong sales from the NASA programs.

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BOEING CAPITAL CORPORATION

Business Environment and Trends

BCC’s strategic direction has shifted 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 facilitates, arranges and provides financing to Commercial Airplanes’ customers. For our space and defense markets, BCC primarily arranges and structures financing solutions for IDS’s government customers. On May 24, 2004, BCC entered into a purchase and sale agreement with General Electric Capital Corporation (GECC) to sell substantially all of the assets related to its Commercial Financial Services business. The assets to be sold to GECC consist of leases and financing arrangements having a carrying value of $1.9 billion as of May 31, 2004. The purchase agreement called for the sale of the assets to take place in a series of closings, commencing on May 31, 2004 and ending no later than July 30, 2004. Final closing may occur subsequent to July 30, 2004, subject to mutual agreement between the parties. See Note 7 for a discussion on the disposition of BCC’s Commercial Financial Services business.

At June 30, 2004, BCC’s portfolio consisted of financing leases, notes and other receivables, equipment under operating leases (net of accumulated depreciation), investments and equipment held for sale or re-lease (net of accumulated depreciation).

Refer to discussion of the airline industry environment in the Commercial Airplanes Business Environments and Trends.

Aircraft values and lease rates are also being impacted by the number and type of aircraft that are currently out of service due to overcapacity. Approximately 1,900 aircraft (11% of world fleet) continue to be parked, including both in production and out of production aircraft types. This is a decrease of approximately 100 aircraft from the number of aircraft parked at March 31, 2004.

In October 2003, Commercial Airplanes announced the decision to end production of the 757 program, with the final aircraft scheduled to be produced in late 2004. While we continue to believe in the utility and marketability of the 757 aircraft, we are unable to predict whether or how the end of the 757 program, as well as overall market conditions, may impact 757 collateral values and rental rates. At June 30, 2004, $1.6 billion of BCC’s portfolio was collateralized by 757 aircraft of various vintages and variants. Should the 757 aircraft suffer a significant decline in utility and market acceptance, the aircraft’s collateral values may decline which could result in an increase to the allowance for losses on receivables. While BCC is unable to determine the likelihood of these impacts occurring, such impacts could result in a potential material adverse effect on BCC’s earnings and/or financial position.

Due to ongoing market uncertainty for the 717 aircraft, possible material exposures exist related to the 717 program. (See Commercial Airplanes segment discussion). At June 30, 2004, $2.3 billion of BCC’s portfolio was collateralized by 717 aircraft. We are unable to predict whether or how a possible end of production, as well as overall market conditions, would impact 717 collateral values. In the event of a program termination decision, the aircraft’s collateral values may decline which could result in an increase to the allowance for losses on receivables. While BCC is unable to determine the likelihood of these impacts occurring, such impacts could result in a potential material adverse effect on BCC’s earnings and/or financial position.

Excluding the effects of BCC’s sale of its Commercial Financial Services business, at June 30, 2004, there were $148 million of assets, principally commercial aircraft, that were held for sale or re-lease, of which $70 million had a firm contract to sell or place on lease. Additionally, approximately $218 million of BCC’s assets are currently scheduled to come off lease in the next twelve months and become subject to replacement into the market. The inability of BCC to sell or place these assets into a revenue-generating service could pose a potential risk to its results of operations.

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Significant Customer Contingencies

A substantial portion of BCC’s portfolio is concentrated among commercial airline customers. Certain customers have filed for bankruptcy protection or requested lease or loan restructurings; these negotiations were in various stages as of June 30, 2004. These bankruptcies or restructurings could have a material adverse effect on BCC’s earnings, cash flows and/or financial position.

United Airlines (United) accounted for $1.2 billion (11.5%) of BCC’s total portfolio at both June 30, 2004 and December 31, 2003. At June 30, 2004, the United portfolio was secured by security interests in two 767 aircraft and 13 777 aircraft and by an ownership and security interest in five 757 aircraft. At June 30, 2004, United was BCC’s second largest customer. United continues to operate under Chapter 11 bankruptcy protection. On June 28, 2004, United’s application to obtain federal loan guarantees was denied by the Airline Transportation Stabilization Board, which also withdrew United’s eligibility to reapply. Subsequent to June 30, 2004, United successfully extended its debtor-in-possession financing credit facilities through June 30, 2005 and increased its financing commitments by $500 million. United is continuing to pursue alternative financing through private investors. During 2003, BCC completed a restructuring of United’s aircraft loans and leases. The receivables associated with a security interest in the two 767 aircraft and 13 777 aircraft were restructured with terms that did not necessitate a troubled debt restructuring charge to the allowance for losses on receivables. The lease terms attributable to the five 757 aircraft in which BCC holds an ownership and security interest were revised in a manner that reclassified these leases as operating leases. At June 30, 2004, United is current on all of its obligations related to these 20 aircraft.

United retains certain rights by operating under Chapter 11 bankruptcy protection, including the right to reject the restructuring terms with its creditors and return aircraft, including our aircraft. The terms of BCC’s restructuring with United, which were approved by the federal bankruptcy court, set forth the terms under which all 20 aircraft BCC financed are expected to remain in service upon United’s emergence from Chapter 11 protection. If United exercises its right to reject the agreed upon restructuring terms, the terms of all of the leases and loans revert to the original terms, which are generally less favorable to United. United would retain its right under Chapter 11 to return the aircraft in the event of a reversion to the original lease and loan terms.

ATA Holdings Corp. (ATA) accounted for $722 million and $743 million (7.2% and 7.4%) of BCC’s total portfolio at June 30, 2004 and December 31, 2003. At June 30, 2004, the ATA portfolio included 12 757 aircraft and an investment in mandatory redeemable preferred stock with a face value of $50 million. In November 2002, ATA received a loan of $168 million administered by the Airline Transportation Stabilization Board. In the third quarter of 2003, BCC agreed to restructure certain outstanding leases by extending their terms and deferring a portion of ATA’s rent payments for a limited period of time. The terms of the restructured leases did not result in a charge to the allowance for losses on receivables.

ATA’s continued financial difficulties led us to conclude that the unsecured preferred stock investment maturing in 2015 is other-than-temporarily impaired. Accordingly, during the second quarter of 2004 BCC lowered the carrying value of this investment to its fair value, resulting in an impairment of $29 million.

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Hawaiian Holdings, Inc. (Hawaiian) accounted for $481 million and $506 million (4.8% and 5.0%) of BCC’s total portfolio at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, the Hawaiian portfolio primarily consisted of 11 717 aircraft and three 767 aircraft. Hawaiian filed for Chapter 11 bankruptcy protection on March 21, 2003. BCC agreed to permit Hawaiian to return two 717 aircraft. These 717 aircraft were leased to a third party in the first quarter of 2004. In February 2004, BCC filed in court, as a co-proponent with the Corporate Recovery Group (CRG), a plan of reorganization for Hawaiian, which would include among other things a revision of their lease terms resulting in a substantial decrease in their rentals from Hawaiian. Taking into account the specific reserves for the Hawaiian receivables, BCC does not expect that the transactions with Hawaiian will have a material adverse effect on their earnings, cash flows and/or financial position. In the event that future negotiations or proceedings result in the return of a substantial number of aircraft, there could be a material adverse effect on BCC’s earnings, cash flows and/or financial position, at least until such time as the aircraft are sold or redeployed for adequate consideration.

Summary Financial Information

	Six months ended June 30						Three months ended June 30
(Dollars in millions)	2004			2003			2004			2003
Revenues	$	480		$	456		$	229		$	232
% Of Total Company Revenues		1.8	%		1.8	%		1.7	%		1.8	%
Operating Earnings (Loss)	$	88		$	(66	)	$	15		$	60
Operating Margins		18.3	%		(14.5	)%		6.6	%		25.9	%
				June 30 2004						December 31 2003
Portfolio				$	10,031					$	10,065
% of Total Receivables in Valuation Allowance					5.1	%					5.1	%
Debt				$	8,456					$	9,177
Debt-to-Equity Ratio					4.7-to-1						4.7-to-1

Revenues

BCC segment revenues consist principally of income from financing receivables and notes, lease income from operating lease equipment, investment income, gains on disposals and gains/losses on revaluation of derivatives. BCC does not expect growth in the future due to its change in business strategy described in the Business Environment and Trends section. During the six months ended June 30, 2004, BCC’s net gain on disposal totaled $19 million compared with $2 million of net losses for the same period in 2003. The increase was primarily due to the sale of an investment in a single special purpose entity (SPE) arrangement. These gains are sporadic in nature and depend in part on market conditions at the time of disposal. There can be no assurance that BCC will recognize such gains in the future.

Operating earnings

BCC’s operating earnings are presented net of interest expense, valuation allowance adjustments, asset impairment expense, depreciation on leased equipment and other operating expenses. The increase in operating earnings during the six months ended June 30, 2004 was primarily attributable to the decrease in valuation allowance compared to the same period in 2003. Financing related interest expense decreased to $173 million during the six months ended June 30, 2004, when compared to $179 million for the same period in 2003.

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As summarized in the following table, during the six months ended June 30, 2004, we recognized pre-tax expenses of $90 million in response to the deterioration in the credit worthiness of BCC’s airline customers, airline bankruptcy filings and the continued decline in the commercial aircraft and general equipment asset values, of which $45 million related to BCC. For the same period in 2003, we recognized pre-tax expenses of $252 million, of which $200 million related to BCC.

(Dollars in millions)	BCC Segment		Other Segment		Consolidated
2004
Increased valuation allowance			$	34	$	34
Revaluation of equipment on operating lease	$	16				16
Other adjustments		29		11		40
	$	45	$	45	$	90
2003
Increased valuation allowance	$	130	$	30	$	160
Revaluation of equipment on operating lease		49		4		53
Other adjustments		21		18		39
	$	200	$	52	$	252

In light of the decline in the creditworthiness of its customers over the past few years, BCC has substantially increased the valuation allowance. BCC recorded no special charge to earnings to increase the valuation allowance during the six months ended June 30, 2004, compared to a $130 million charge to earnings during the same period of 2003 due to the decline in the creditworthiness of its customers over the past two years. The Other segment recorded a $34 million charge to earnings during the six months ended June 30, 2004, compared to $30 million during the same period in 2003.

Additionally, during the six months ended June 30, 2004, BCC recorded pre-tax non-cash asset impairment-related charges totaling $45 million. This was primarily comprised of $16 million related to aircraft and equipment under operating lease and held for sale or re-lease and $29 million related to an other than temporary impairment of a held-to-maturity investment in ATA maturing in 2015. During the same period of 2003, BCC recognized charges of $70 million, of which $21 million was due to the write-off of forward-starting interest rate swaps related to Hawaiian. Additionally, the Other segment recognized charges of $11 million and $22 million during the six months ended June 30, 2004 and 2003, respectively. The charge of $11 million related to the decline in lease rates on certain aircraft. BCC carefully monitors the relative value of aircraft equipment since we remain at substantial economic risk to significant decreases in the value of aircraft equipment and their associated lease rates.

OTHER

Other segment losses were $228 million for the six months ended June 30, 2004 as compared to losses of $182 million for the six months ended June 30, 2003. Increase in other segment losses during the six months ended June 30, 2004 when compared to the same period in 2003 were attributable to impairment costs of $15 million at our Shared Services Group, increased costs at Connexion by Boeing^SM related to the preparation for the launch of commercial services of $19 million which started in May 2004 and other miscellaneous insignificant increases. On April 1, 2004, ATM was absorbed into Phantom Works advanced research and development division, which is included within the Boeing Technology organization.

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Other segment losses were $124 million for the three months ended June 30, 2004 as compared to $64 million for the three months ended June 30, 2003. Increase in other segment losses during the three months ended June 30, 2004 when compared to the same period in 2003 were primarily due to the factors above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes to our market risk since December 31, 2003.

Item 4. Controls and Procedures

(a) Disclosure controls and procedures.

The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 18 Contingencies to the condensed consolidated financial statements.

In our Annual Report on Form 10-K for the period ended December 31, 2003, we reported that two virtually identical shareholder derivative lawsuits were filed in September 2003 in Cook County Circuit Court, Illinois against us as nominal defendant and against each then current member of our Board of Directors. These two suits were consolidated November 13, 2003. We also reported that a shareholder derivative action was filed against us as nominal defendant and against each then current member of our Board of Directors in October 2003 in federal court for the Southern District of New York. This derivative action charged that our 2003 Proxy Statement contained false and misleading statements concerning the 2003 Incentive Stock Plan. The lawsuit sought a declaration voiding shareholder approval of the 2003 Incentive Stock Plan, injunctive relief and equitable accounting. This case was dismissed by the federal district court and the plaintiff has appealed to the Court of Appeals of the Second Circuit.

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

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In our Annual Report on Form 10-K for the period ended December 31, 2003, we reported that 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. In our Quarterly Report on Form 10-Q for the period ended March 31, 2004, we reported that we were named as a defendant in an eighth employment discrimination matter in state court in California. These eight lawsuits, which seek various forms of relief including front and back pay, overtime, injunctive relief and punitive damages, are in varying stages of litigation. One case in Seattle alleging discrimination based on national origin resulted in a verdict for us following trial. One case in Seattle alleging discrimination based on gender has been settled. Three cases—one in Los Angeles, one in Missouri, and one in Kansas, all alleging gender discrimination—have resulted in denials of class certification. The case in Oklahoma, also alleging gender discrimination, resulted in the granting of class action status, and we are seeking review of that decision. We intend to continue our aggressive defense of these cases. It is not possible to determine whether the pending employment discrimination matters could or would have a material adverse effect on our financial position.

There have been no other material developments in our other previously reported legal proceedings.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(e) The following table provides information about purchases we made during the quarter ended June 30, 2004 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)	(b)	(c)	(d)
Period	Total Number of Shares Purchased(1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
04/01/04 thru 04/30/04	0	0	0	0
05/01/04 thru 05/31/04	750,000	$43.98	750,000	43,515,500
06/01/04 thru 06/30/04	3,629,014	$47.38	3,625,800	39,889,700
TOTAL	4,379,014	$46.80	4,375,800	39,889,700

(1) We repurchased an aggregate of 4,375,800 shares of our common stock pursuant to the resumption of our repurchase program that we publicly announced on May 3, 2004 (the “Program”) and an aggregate of 3,214 shares of our common stock in stock swap transactions outside of the Program.

(2) Our Board of Directors approved the repurchase by us of up to an aggregate of 85 million shares of our common stock pursuant to the program. Unless terminated earlier by resolution of our Board of Directors, the Program will expire when we have repurchased all shares authorized for repurchase thereunder.

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

(a) The Company’s Annual Meeting of Shareholders was held on May 3, 2004.

(b) In an uncontested election, four nominees of the Board of Directors were elected for three-year terms expiring on the date of the annual meeting in 2007. The votes were as follows:

	For	Withheld
John H. Biggs	590,120,709	119,760,495
John E. Bryson	584,422,185	125,459,019
Linda Z. Cook	680,134,752	29,746,452
Rozanne L. Ridgway	583,506,824	126,374,380

The terms of the following directors continued after the annual meeting:

Kenneth M. Duberstein	John F. McDonnell
W. James McNerney, Jr.	Lewis E. Platt
John M. Shalikashvili	Harry C. Stonecipher

Paul E. Gray retired as of the date of the 2004 Annual Meeting.

(c) The results of voting on Proposals 2 through 10 were as follows:

2. A management proposal to approve amendments to the Company’s Certificate of Incorporation and By-Laws to eliminate certain supermajority vote requirements.

	Number of Votes
For	530,195,608
Against	28,363,506
Abstain	13,960,530
Broker non-votes	137,361,560

3. A Company advisory vote on the appointment of Deloitte & Touche as independent auditors for the fiscal year ending December 31, 2004.

	Number of Votes
For	676,472,844
Against	20,696,897
Abstain	12,711,464
Broker non-votes	-0-

4. A shareholder proposal requesting the Company to amend its code of conduct and to provide a report relating to ethical criteria for military production-related contract bids.

	Number of Votes
For	40,326,579
Against	474,570,623
Abstain	57,622,443
Broker non-votes	137,361,559

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5. A shareholder proposal requesting the Board to develop and adopt a comprehensive human rights policy.

	Number of Votes
For	88,787,036
Against	422,583,191
Abstain	61,149,417
Broker non-votes	137,361,560

6. A shareholder proposal requesting the Board to adopt annual election of all directors.

	Number of Votes
For	333,482,931
Against	223,219,095
Abstain	15,817,619
Broker non-votes	137,361,560

7. A shareholder proposal requesting the Board to adopt simple majority vote on all issues submitted for shareholder vote.

	Number of Votes
For	337,658,096
Against	216,817,954
Abstain	18,043,592
Broker non-votes	137,361,562

8. A shareholder proposal requesting the Board to seek shareholder approval for future severance agreements for senior executives.

	Number of Votes
For	154,399,087
Against	398,920,991
Abstain	19,199,563
Broker non-votes	137,361,563

9. A shareholder proposal requesting the Board to adopt a policy regarding the retention of stock obtained through options by senior executives and directors.

	Number of Votes
For	109,907,467
Against	443,849,729
Abstain	18,762,448
Broker non-votes	137,361,560

10. A shareholder proposal requesting the Board to give all employees a choice of pension plans at the time of termination or retirement.

	Number of Votes
For	59,908,808
Against	494,459,043
Abstain	18,151,792
Broker non-votes	137,361,562

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

(3) Articles of Incorporation and By-Laws.

(i) Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on May 26, 2004.

(ii) By-Laws, as amended and restated on May 24, 2004.

(10) Material Contracts.

· Management Contracts and Compensatory Plans

(iii) Deferred Compensation Plan for Employees of The Boeing Company, as amended and restated on June 27, 2004.

(15) Letter from Independent Registered Public Accounting Firm regarding unaudited interim financial information. Filed herewith.

(31.1) Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

(31.2) Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

(32.1) Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(32.2) Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On May 24, 2004, we filed under Item 5 a press release announcing that Boeing Capital Corporation, a wholly-owned subsidiary of The Boeing Company, had sold its Commercial Financial Services business to GE Commercial Finance, a business-to-business financial services unit of General Electric.

On May 4, 2004, we filed under Item 5 a press release announcing an increase in our quarterly dividend, the resumption of our authorized share repurchase program and that we were considering a near-term contribution to our pension plan.

On April 28, 2004, we furnished under Item 12 a press release for the first quarter results and updated outlook.

On April 22, 2004, we furnished under Item 12 a press release with respect to our expected earnings per share for the first quarter of 2004.

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REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

The condensed consolidated statement of financial position as of June 30, 2004, the condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2004 and 2003, have been reviewed by the registrant’s independent registered public accountants, Deloitte & Touche LLP, whose report covering their review of the financial statements follows.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

The Boeing Company

Chicago, Illinois

We have reviewed the accompanying condensed consolidated statement of financial position of The Boeing Company and subsidiaries (the “Company”) as of June 30, 2004, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2004 and 2003, and of cash flows for the six-month periods ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 7 to the condensed consolidated interim financial statements, the Company has discontinued a significant portion of its Commercial Financial Services business in May 2004. The gain on sale and results prior to the sale are included in income from discontinued operations in the accompanying condensed consolidated interim financial statements.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of the Company as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 29, 2004 (February 11, 2004 as to the effects of the tax refunds described in Notes 6 and 25 therein), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/S/    DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Chicago, Illinois

July 26, 2004

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE BOEING COMPANY
	(Registrant)
July 28, 2004	/s/    Harry S. McGee III
(Date)	Harry S. McGee III Vice President Finance & Corporate Controller (Chief Accounting Officer)

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EX-3.I

Exhibit 3(i)

The Boeing Company

Restated Certificate of Incorporation

THE BOEING COMPANY, a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that:

1. The original Certificate of Incorporation was filed with the Secretary of State of Delaware on July 19, 1934, and the name under which it was originally incorporated is Boeing Airplane Company.

2. The following Restated Certificate of Incorporation was duly adopted by the Corporation’s Board of Directors in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware, and only restates and integrates and does not further amend the provisions of the Corporation’s Certificate of Incorporation as heretofore amended and supplemented, and there is no discrepancy between those provisions and the following:

FIRST: The name of the Corporation is THE BOEING COMPANY.

SECOND: Its registered office or place of business in the State of Delaware is to be located at 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle. The name of its registered agent is Corporation Service Company, and the address of said registered agent is 2711 Centerville Road, Suite 400, in said City of Wilmington.

THIRD: The nature of the business, or objects or purposes to be transacted, promoted, or carried on, are those necessary to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of stock of all classes which the Corporation shall have authority to issue is 1,220,000,000 shares, of which 20,000,000 shares shall be Preferred Stock of the par value of $1 each (hereinafter called “Preferred Stock”) and 1,200,000,000 shares shall be Common Stock of the par value of $5 each (hereinafter called “Common Stock”).

The designations and the powers, preferences, and rights and the qualifications, limitations, or restrictions thereof of the shares of each class are as follows:

1. The Preferred Stock may be issued from time to time in one or more series, the shares of each series to have such voting powers, full or limited, and such designations, preferences, and relative, participating, optional, or other special rights and qualifications, limitations, or restrictions thereof as are stated and expressed herein or in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided.

2. Authority is hereby expressly granted to the Board of Directors of the Corporation, subject to the provisions of this Article FOURTH and to the limitations prescribed by law, to authorize the issue of one or more series of Preferred Stock and with respect to each such series to fix by resolution or resolutions providing for the issue of such series the voting powers, full or limited, if any, of the shares of such series and the designations, preferences, and relative, participating, optional, or other special rights and the qualifications, limitations, or restrictions thereof. The authority of the Board of Directors with respect to each series shall include but not be limited to the determination or fixing of the following:

(a) The designation of such series.

(b) The dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or noncumulative.

(c) Whether the shares of such series shall be subject to redemption by the Corporation and, if made subject to such redemption, the times, prices, and other terms and conditions of such redemption.

(d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series.

(e) Whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange.

(f) The extent, if any, to which the holders of the shares of such series shall be entitled to vote with respect to the election of directors or otherwise.

(g) The restrictions, if any, on the issue or reissue of any additional Preferred Stock.

(h) The rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Corporation.

3. Except as otherwise required by law and except for such voting powers with respect to the election of directors or other matters as may be stated in the resolution or resolutions of the Board of Directors providing for the issue of any series of Preferred Stock, the holders of any such series shall have no voting power whatsoever. Subject to such restrictions as may be stated in the resolution or resolutions of the Board of Directors providing for the issue of any series of Preferred Stock, any amendment to the Certificate of Incorporation which shall increase or decrease the authorized stock of any class or classes may be adopted by the affirmative vote of the holders of a majority of the outstanding shares of the stock of the Corporation entitled to vote for the election of directors (“Voting Stock”).

4. No holder of stock of any class of the Corporation shall have, as such holder, any preemptive or preferential right of subscription to any stock of any class of the Corporation or to any obligations convertible into stock of the Corporation, issued or sold, or to any right of subscription to, or to any warrant or option for the purchase of any thereof, other than such (if any) as the Board of Directors of the Corporation, in its discretion, may determine from time to time.

5. The Corporation may from time to time issue and dispose of any of the authorized and unissued shares of Common Stock or of Preferred Stock for such consideration not less than its par value, as may be fixed from time to time by the Board of Directors, without action by the stockholders. The Board of Directors may provide for payment therefor to be received by the Corporation in cash, property, or services. Any and all such shares of the Preferred or Common Stock of the Corporation the issuance of which has been so authorized, and for which consideration so fixed by the Board of Directors has been paid or delivered, shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon.

6. Effective as of August 1, 1966, the stock of the Corporation is changed to eliminate all fractions of one share that may then exist. In lieu of each such fraction of one share there is created a money obligation of the Corporation in an amount equal to said fraction multiplied by the closing price per share of such stock on the New York Stock Exchange on August 1, 1966, such amount to be paid by the Corporation after such date to the person or persons entitled thereto conditioned only upon the surrender of the fractional share certificate to the Corporation’s Transfer Agent. No money obligation or payment provided for in this paragraph shall be a charge upon or against the capital stock account of the Corporation.

FIFTH: The minimum amount of capital with which the Corporation will commence business is One Thousand Dollars.

SIXTH: The Corporation is to have perpetual existence.

SEVENTH: The private property of the stockholders shall not be subject to the payment of corporate debts.

EIGHTH: Any action by stockholders of the Corporation shall be taken at a meeting of stockholders and no action may be taken by written consent of stockholders entitled to vote upon such action unless such action shall have been submitted to the stockholders after approval by the affirmative vote of a majority of the Continuing Directors. For purposes of Article EIGHTH and Article TENTH hereof and Articles I, II and VIII of the By-Laws of the Corporation, the following definitions shall apply:

1. A “Continuing Director” is a member of the Board of Directors of the Corporation who was a director prior to May 5, 2004, or any director who was recommended for election or elected by the Continuing Directors. Any action to be taken by the Continuing Directors shall require the affirmative vote of a majority of the Continuing Directors.

2. An “Interested Stockholder” is a Person other than the Corporation who is the beneficial owner of ten percent or more of the Voting Stock as defined in Article FOURTH of the Certificate of Incorporation. For purposes of determining whether a Person is an Interested Stockholder (i) the number of shares of Voting Stock deemed to be owned by the Interested Stockholder shall include shares deemed owned through application of the preceding sentence together with Voting Stock that may be issuable pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, warrants, or options, or otherwise and (ii) the number of shares of Voting Stock deemed to be outstanding shall not include any shares of Voting Stock that may be issuable pursuant to any agreement, arrangement, or understanding or upon the exercise of conversion rights, warrants, or options, or otherwise.

3. A “Person” is a natural person or a legal entity of any kind, together with any Affiliate of such person or entity, or any person or entity with whom such person, entity, or an Affiliate has any agreement or understanding relating to acquiring, voting, holding, or disposing of Voting Stock. “Affiliate” and “beneficial owner” are used herein as defined in Rule 12b-2 and Rule 13d-3, respectively, under the Securities Exchange Act of 1934 as in effect on the date of approval of this paragraph by the stockholders of the Corporation. The term “Affiliate” as used herein shall exclude the Corporation, but shall include the definition of “associate” as contained in said Rule 12b-2.

NINTH: Subject to the provisions of the laws of the State of Delaware, the following provisions are adopted for the management of the business and for the conduct of the affairs of the Corporation, and for defining, limiting, and regulating the powers of the Corporation, the directors, and the stockholders:

(a) The books of the Corporation may be kept outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors.

(b) The business of the Corporation shall be managed by its Board of Directors, and the Board of Directors shall have power to exercise all the powers of the Corporation, including (but without limiting the generality hereof) the power to create mortgages upon the whole or any part of the property of the Corporation, real or personal, without any action of or by the stockholders, except as otherwise provided by statute or by the By-Laws.

(c) The number of the directors shall be fixed by the By-Laws, subject to alteration from time to time by amendment of the By-Laws either by the Board of Directors or the stockholders. An

increase in the number of directors shall be deemed to create vacancies in the Board, to be filled in the manner provided in the By-Laws. Any director or any officer elected or appointed by the stockholders or by the Board of Directors may be removed in such manner as shall be provided in the By-Laws.

(d) The Board of Directors shall have power to make and alter By-Laws, subject to such restrictions upon the exercise of such power as are contained in this Certificate or the By-Laws.

(e) The Board of Directors shall have power, in its discretion, to fix, determine, and vary from time to time the amount to be retained as surplus and the amount or amounts to be set apart out of any of the funds of the Corporation available for dividends as working capital or a reserve or reserves for any proper purpose, and to abolish any such reserve in the manner in which it was created.

(f) The Board of Directors shall have power, in its discretion, from time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them, other than the stock ledger, shall be open to the inspection of stockholders; and no stockholder shall have any right to inspect any account, book, or document of the Corporation, except as conferred by law or authorized by resolution of the directors or the stockholders.

(g) Upon any sale, exchange, or other disposal of the property and/or assets of the Corporation, payment therefor may be made either to the Corporation or directly to the stockholders in proportion to their interests, upon the surrender of their respective stock certificates, or otherwise, as the Board of Directors may determine.

(h) The right to cumulate votes in the election of directors shall not exist with respect to shares of stock of the Corporation.

(i) In case the Corporation shall enter into any contract or transact any business with one or more of its directors, or with any firm of which any director is a member, or with any corporation or association of which any director is a stockholder, director, or officer, such contract or transaction shall not be invalidated or in any way affected by the fact that such director has or may have an interest therein which is or might be adverse to the interests of the Corporation, even though the vote of such director might have been necessary to obligate the Corporation upon such contract or transaction; provided, that the fact of such interest shall have been disclosed to the other directors or the stockholders of the Corporation, as the case may be, acting upon or with reference to such contract or transaction.

(j) Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code, or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the court directs. If a majority in number representing three- fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, said compromise or arrangement and said reorganization shall, if sanctioned by the court to which said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.

TENTH: The Corporation reserves the right to amend, alter, change, add to, or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute; and all rights herein conferred are granted subject to this reservation.

Notwithstanding anything contained in this Certificate of Incorporation to the contrary, either (a) the recommendation of a majority of the Continuing Directors together with the affirmative vote of the holders of record of a majority of the Voting Stock or (b) the affirmative vote of the holders of record of at least seventy-five percent of the Voting Stock shall be required to alter, amend, repeal, or adopt any provision inconsistent with Article EIGHTH hereof, paragraphs (c), (d), and (h) of Article NINTH hereof, this Article TENTH, and Article VIII of the By-Laws.

ELEVENTH: To the full extent that the Delaware General Corporation Law, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for conduct as a director. Any amendment to or repeal of this Article ELEVENTH shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.

THE BOEING COMPANY

By:

/s/ HARRY C. STONECIPHER

Harry C. Stonecipher

President and Chief Executive Officer

ATTEST:

/s/ JAMES C. JOHNSON

James C. Johnson

Corporate Secretary

EX-3.II

Exhibit 3(ii)

BY-LAWS

OF

THE BOEING COMPANY

(As amended May 24, 2004)

THE BOEING COMPANY

BY-LAWS

TABLE OF CONTENTS

ARTICLE I

Stockholders’ Meetings

		Page
Section 1.	Annual Meetings	1
Section 2.	Special Meetings	1
Section 3.	Place of Meeting	1
Section 4.	Notice of Meetings	1
Section 5.	Waivers of Notice	2
Section 6.	Quorum	2
Section 7.	Proxies	2
7.1	Appointment	2
7.2	Delivery to Corporation; Duration	3
Section 8.	Inspectors of Election	3
8.1	Appointment	3
8.2	Duties	3
8.3	Determination of Proxy Validity	3
Section 9.	Fixing the Record Date	3
9.1	Meetings	3
9.2	Consent to Corporate Action Without a Meeting	4
9.3	Dividends, Distributions, and Other Rights	4
9.4	Voting List	4
Section 10.	Action By Stockholders Without a Meeting	5
Section 11.	Business and Nominations at Stockholders’ Meetings	5
11.1	Business and Nominations at Annual Meetings	5
11.2	Stockholder Notice	6
11.3	Business and Nominations at Special Meetings	6
11.4	Stockholder Meeting Procedures	6
11.5	Public Announcement of Stockholders’ Meetings	7
Section 12.	Notice to Corporation	7

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ARTICLE II

Board of Directors

Section 1.	Number and Term of Office	7
Section 2.	Nomination and Election	8
2.1	Nomination	8
2.2	Election	8
Section 3.	Place of Meeting	8
Section 4.	Annual Meeting	8
Section 5.	Stated Meetings	8
Section 6.	Special Meetings	8
6.1	Convenors and Notice	8
6.2	Waiver of Notice	8
Section 7.	Quorum and Manner of Acting	8
Section 8.	Chairman of the Board	9
Section 9.	Resignations	9
Section 10.	Removal of Directors	9
Section 11.	Filling of Vacancies Not Caused by Removal	9
Section 12.	Directors’ Fees	9
Section 13.	Action Without a Meeting	9
ARTICLE III
Board Committees
Section 1.	Audit Committee	10
Section 2.	Other Committees	10
2.1	Committee Powers	10
2.2	Committee Members	10
Section 3.	Quorum and Manner of Acting	10
ARTICLE IV
Officers and Agents:
Terms, Compensation, Removal, Vacancies
Section 1.	Officers	11
Section 2.	Term of Office	11
Section 3.	Salaries of Elected Officers	11
Section 4.	Bonuses	11

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Section 5.	Removal of Elected and Appointed Officers	11
Section 6.	Vacancies	11
ARTICLE V Officers’ Duties and Powers
Section 1.	Chairman of the Board	12
Section 2.	President	12
Section 3.	Chief Executive Officer	12
Section 4.	Vice Presidents and Controller	12
Section 5.	Secretary	12
Section 6.	Treasurer	13
Section 7.	Additional Powers and Duties	13
Section 8.	Disaster Emergency Powers of Acting Officers	13
ARTICLE VI Stock and Transfers of Stock
Section 1.	Stock Certificates	14
Section 2.	Transfer Agents and Registrars	14
Section 3.	Transfers of Stock	14
Section 4.	Lost Certificates	14
ARTICLE VII Miscellaneous
Section 1.	Fiscal Year	14
Section 2.	(Repealed)
Section 3.	Signing of Negotiable Instruments	14
Section 4.	Indemnification of Directors and Officers	15
4.1	Right to Indemnification	15
4.2	Right of Indemnitee to Bring Suit	16
4.3	Nonexclusivity of Rights	16
4.4	Insurance, Contracts, and Funding	16
4.5	Persons Serving Other Entities	16
4.6	Indemnification of Employees and Agents of the Corporation	17
4.7	Procedures for the Submission of Claims	17

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ARTICLE VIII Amendments
Section 1.	Amendment of the By-Laws: General	17
Section 2.	Amendments as to Compensation and Removal of Officers	17
Section 3.	Amendments as to Shareholder Meetings, Directors	18
Section 4.	Amendment of this Article VIII	18

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BY-LAWS

OF

THE BOEING COMPANY

ARTICLE I

Stockholders’ Meetings

SECTION 1. Annual Meetings.

The Annual Meeting of the stockholders shall be held on such date and at such time as the Board of Directors shall determine, for the election of directors and the transaction of such other business as may come before the meeting.

SECTION 2. Special Meetings.

A special meeting of the stockholders may be called at any time by the Board of Directors, or by stockholders holding together at least twenty-five percent of the outstanding shares of stock entitled to vote, except as otherwise provided by statute or by the Certificate of Incorporation or any amendment thereto.

SECTION 3. Place of Meeting.

All meetings of the stockholders of the Corporation shall be held at such place or places within or without the State of Delaware as may from time to time be fixed by the Board of Directors or as shall be specified or fixed in the respective notices or waivers of notice thereof.

SECTION 4. Notice of Meetings.

Except as otherwise required by statute and as set forth below, notice of each annual or special meeting of stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date. If the Corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, notice of each special meeting of stockholders shall be given to each stockholder of record entitled to vote at such meeting not less than fifty-five nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date, unless the calling of such meeting is ratified by the affirmative vote of a majority of the Continuing Directors as defined in Article EIGHTH of the Certificate of Incorporation, in which case notice of such special meeting shall be given to each stockholder of record entitled to vote at such meeting not less than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date. Such notice shall be given by delivering to each stockholder a written or printed notice thereof either personally or by mailing such notice in a postage-prepaid envelope addressed to the stockholder’s address as it appears on the stock books of the Corporation. Except as otherwise required by statute, no publication of any notice of a meeting of stockholders shall be required. Every notice of a meeting of stockholders shall state the place, date, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

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SECTION 5. Waivers of Notice.

Whenever any notice is required to be given to any stockholder under the provisions of these By-Laws, the Certificate of Incorporation, or the Delaware General Corporation Law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. The attendance of a stockholder at a meeting, in person or by proxy, shall constitute a waiver of notice of such meeting, except when a stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

SECTION 6. Quorum.

At all meetings of stockholders, except when otherwise provided by statute or by the Certificate of Incorporation or any amendment thereto, or by the By-Laws, the presence, in person or by proxy duly authorized, of the holders of one-third of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business; and except as otherwise provided by statute or rule of law, or by the Certificate of Incorporation or any amendment thereto, or by the By-Laws, the vote, in person or by proxy, of the holders of a majority of the shares constituting such quorum shall be binding upon all stockholders of the Corporation. In the absence of a quorum, a majority of the shares present in person or by proxy and entitled to vote may adjourn any meeting, from time to time but not for a period of more than thirty days at any one time, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. Unless otherwise provided by statute, no notice of an adjourned meeting need be given.

SECTION 7. Proxies.

7.1 Appointment. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy. Such authorization may be accomplished by (a) the stockholder or such stockholder’s authorized officer, director, employee, or agent executing a writing or causing his or her signature to be affixed to such writing by any reasonable means, including facsimile signature, or (b) by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the intended holder of the proxy or to a proxy solicitation firm, proxy support service, or similar agent duly authorized by the intended proxy holder to receive such transmission; provided, that any such telegram, cablegram, or other electronic transmission must either set forth or be accompanied by information from which it can be determined that the telegram, cablegram, or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication, or other reliable reproduction of the writing or transmission by which a stockholder has authorized another person to act as proxy for such stockholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication, or other reproduction shall be a complete reproduction of the entire original writing or transmission.

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7.2 Delivery to Corporation; Duration. A proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting or the delivery to the Corporation of the consent to corporate action in writing. A proxy shall become invalid three years after the date of its execution, unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof.

SECTION 8. Inspectors of Election.

8.1 Appointment. In advance of any meeting of stockholders, the Board of Directors of the Corporation shall appoint one or more persons to act as inspectors of election at such meeting and to make a written report thereof. The Board of Directors may designate one or more persons to serve as alternate inspectors to serve in place of any inspector who is unable or fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of such meeting shall appoint one or more persons to act as inspector of elections at such meeting.

8.2 Duties. The inspectors shall: (a) ascertain the number of shares of the Corporation outstanding and the voting power of each such share; (b) determine the shares represented at the meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by them; and (e) certify their determination of the number of shares represented at the meeting and their count of the votes and ballots. Each inspector of election shall, before entering upon the discharge of his or her duties, take and sign an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors of election may appoint or retain other persons or entities to assist them in the performance of their duties.

8.3 Determination of Proxy Validity. The validity of any proxy or ballot executed for a meeting of stockholders shall be determined by the inspectors of election in accordance with the applicable provisions of the Delaware General Corporation Law as then in effect. In determining the validity of any proxy transmitted by telegram, cablegram, or other electronic transmission, the inspectors shall record in writing the information upon which they relied in making such determination.

SECTION 9. Fixing the Record Date.

9.1 Meetings. For the purpose of determining stockholders entitled to notice of and to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not fewer than thirty nor more than sixty (or the maximum number permitted by applicable law) days before the date of such meeting. If the corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, the record date for each special meeting of stockholders shall be not fewer than fifty-five nor more than sixty (or the maximum number permitted by applicable law) days before the meeting date, unless the calling of such meeting is ratified by the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH of the Certificate of

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Incorporation. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of and to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

9.2 Consent to Corporate Action Without a Meeting. For the purpose of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (or the maximum number permitted by applicable law) days after the date on which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by Chapter 1 of the Delaware General Corporation Law as now or hereafter amended, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the records of proceedings of meetings of stockholders. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by Chapter 1 of the Delaware General Corporation Law as now or hereafter amended, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

9.3 Dividends, Distributions, and Other Rights. For the purpose of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (or the maximum number permitted by applicable law) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

9.4. Voting List. At least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting shall be made, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. This list shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at such meeting for inspection by any stockholder who is present.

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SECTION 10. Action by Stockholders Without a Meeting.

Subject to the provisions of Article NINTH of the Certificate of Incorporation, any action which could be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, are (a) signed by the holders of outstanding stock having not fewer than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and (b) delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the records of proceedings of meetings of stockholders. Delivery made to the Corporation’s registered office shall be by hand or by certified mail or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless written consents signed by a sufficient number of stockholders to take such action are delivered to the Corporation, in the manner required by this section, within sixty (or the maximum number permitted by applicable law) days of the date of the earliest dated consent delivered to the Corporation in the manner required by this section. The validity of any consent executed by a proxy for a stockholder pursuant to a telegram, cablegram, or other means of electronic transmission transmitted to such proxy holder by or upon the authorization of the stockholder shall be determined by or at the direction of the Secretary of the Corporation. A written record of the information upon which the person making such determination relied shall be made and kept in the records of the proceedings of the stockholders. Any such consent shall be inserted in the minute book as if it were the minutes of a meeting of the stockholders. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

SECTION 11. Business and Nominations at Stockholders’ Meetings.

11.1 Business and Nominations at Annual Meetings. In addition to the election of directors, other proper business may be transacted at the annual meeting of stockholders, provided that such business is a proper matter for stockholder action and is properly brought before such meeting. To be properly brought before an annual meeting, nominations of persons for election to the Board of Directors and business to be considered by stockholders must be (a) made or brought by or at the direction of the Board of Directors, or (b) made or brought before the meeting by a stockholder of the Corporation who is a stockholder of record at the time of giving notice as required in this By-Law, who is entitled to vote at the meeting, and who complies with the notice procedures set forth in this By-Law. Notice by a stockholder pursuant to (b) above must be in writing, in accordance with Section 12 of this Article I, and received by the Secretary not earlier than the one-hundred and twentieth day nor later than the close of business on the ninetieth day prior to the date specified in Section 1 of this Article I for such annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than sixty days after such date, notice by the stockholder must be received by the Secretary not earlier than the one-hundred and twentieth

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day prior to such annual meeting and not later than the close of business on the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation.

11.2 Stockholder Notice. Any stockholder notice given pursuant to Section 11.1 shall set forth (i) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal or nomination is made; (ii) a representation that the stockholder is entitled to vote at such meeting and a statement of the number of shares of the Corporation which are owned by the stockholder and the number of shares which are beneficially owned by the beneficial owner, if any; (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons or to propose the business specified in the notice; and (iv) as to each person the stockholder proposes to nominate for election or re-election as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such nominee been nominated by the Board of Directors, and a description of any arrangements or understandings, between the stockholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made, and the written consent of each such nominee to being named in the proxy statement as a nominee and to serving as a director if elected; or, as to each matter the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the business matter (if appropriate), and any material interest of the stockholder in such business.

11.3 Business and Nominations at Special Meetings. At any special meeting of the stockholders, only such business as is specified in the notice of such special meeting given by or at the direction of the person or persons calling such meeting, in accordance with Section 2 of this Article I, shall come before such meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph 11.1 of this By-Law shall be delivered to the Secretary not earlier than the one hundred and twentieth day nor later than the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.

11.4 Stockholder Meeting Procedures. No business shall be conducted nor director nominations made at any meeting of stockholders except in accordance with this Section 11. If

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the facts warrant, the Board of Directors, or the chairman of a stockholders’ meeting at which directors are to be elected, may determine and declare (a) that a proposal does not constitute proper business to be transacted at the meeting or (b) that business was not properly brought before the meeting in accordance with the provisions of this Section 11 or (c) that a nomination was not made in accordance with this Section 11; and, if it is so determined, the defective proposal or nomination shall be disregarded and shall not be transacted or acted upon. The right of stockholders to bring business before or to make nominations pursuant to the foregoing procedure is subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation. The procedures set forth in this Section 11 for stockholders’ bringing business before a stockholders’ meeting or stockholders’ making nominations for the election of directors are in addition to, and not in lieu or limitation of, (a) any procedures now in effect or hereafter adopted by or at the direction of the Board of Directors or any committee thereof and (b) the requirements set forth in Rule 14a-8 and Rule 14a-11 under Section 14 of the Securities Exchange Act of 1934, or any successor provisions.

11.5 Public Announcement of Stockholders’ Meetings. For purposes of this By-Law, “public announcement” as to an annual or special meeting of stockholders shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of a stockholder’s notice as described above.

SECTION 12. Notice to Corporation.

Any written notice required to be delivered by a stockholder to the Corporation pursuant to Section 11.1 of this Article I or Section 2.1 of Article II must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation’s executive offices in the City of Seattle, State of Washington.

ARTICLE II

Board of Directors

SECTION 1. Number and Term of Office.

The number of directors shall be ten, but the number may be increased, or decreased to not less than three, from time to time, either by the directors by adoption of a resolution to such effect or by the stockholders by amendment of the By-Laws in accordance with Article VIII hereof. The directors shall be divided into three classes, each of which shall be composed as nearly as possible of one-third of the directors. Each director shall serve for the term to which the director was elected, and until a successor shall have been elected and qualified or until the director’s prior death, resignation, or removal. At each annual election, directors shall be chosen for a full three-year term to succeed those whose terms expire.

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SECTION 2. Nomination and Election.

2.1 Nomination. Only persons who are nominated in accordance with Article I, Section 11 of these By-Laws shall be eligible for election as directors.

2.2 Election. At each election of directors, the persons receiving the greatest number of votes shall be the directors.

SECTION 3. Place of Meeting.

Meetings of the Board of Directors, or of any committee thereof, may be held either within or without the State of Delaware.

SECTION 4. Annual Meeting.

Each year the Board of Directors shall meet in connection with the annual meeting of stockholders for the purpose of electing officers and for the transaction of other business. No notice of such meeting is required. Such annual meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Board, or in a consent and waiver of notice thereof, signed by all the directors.

SECTION 5. Stated Meetings.

The Board of Directors may, by resolution adopted by affirmative vote of a majority of the whole Board, from time to time appoint the time and place for holding stated meetings of the Board, if by it deemed advisable; and such stated meetings shall thereupon be held at the time and place so appointed, without the giving of any special notice with regard thereto. In case the day appointed for a stated meeting shall fall upon a legal holiday, such meeting shall be held on the next following day, not a legal holiday, at the regularly appointed hour. Except as otherwise provided in the By-Laws, any and all business may be transacted at any stated meeting.

SECTION 6. Special Meetings.

6.1 Convenors and Notice. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board or any two directors. Notice of a special meeting of the Board of Directors, stating the place, day, and hour of the meeting, shall be given to each director in writing (by mail, wire, facsimile, or personal delivery) or orally (by telephone or in person).

6.2 Waiver of Notice. With respect to a special meeting of the Board of Directors, a written waiver, signed by a director, shall be deemed equivalent to notice to that director. A director’s attendance at a meeting shall constitute that director’s waiver of notice of such meeting, except when the director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the waiver of notice of such meeting.

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SECTION 7. Quorum and Manner of Acting.

Except as herein otherwise provided, forty percent of the total number of directors fixed by or in the manner provided in these By-Laws at the time of any stated or special meeting of the Board or, if vacancies exist on the Board of Directors, forty percent of such number of directors then in office, provided, however, that such number may not be less than one-third of the total number of directors fixed by or in the manner provided in these By-Laws, shall constitute a quorum for the transaction of business; and, except as otherwise required by statute or by the Certificate of Incorporation or any amendment thereto, or by the By-Laws, the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn any meeting, from time to time, until a quorum is present. No notice of any adjourned meeting need be given.

SECTION 8. Chairman of the Board.

The Chairman of the Board shall preside, when present, at all meetings of the Board, except as otherwise provided by law.

SECTION 9. Resignations.

Any director of the Corporation may resign at any time by giving written notice thereof to the Secretary. Such resignation shall take effect at the time specified therefor or if the time is not specified, upon delivery thereof; and, unless otherwise specified with respect thereto, the acceptance of such resignation shall not be necessary to make it effective.

SECTION 10. Removal of Directors.

Any director may be removed solely for cause by the affirmative vote of the holders of record of a majority of the outstanding shares of stock entitled to vote, at a meeting of the stockholders called for the purpose; and the vacancy on the Board caused by any such removal may be filled by the stockholders at such meeting or at any subsequent meeting.

SECTION 11. Filling of Vacancies Not Caused by Removal.

In case of any increase in the number of directors, or of any vacancy created by death or resignation, the additional director or directors may be elected or, as the case may be, the vacancy or vacancies may be filled, either (a) by the Board of Directors at any meeting, (i) if the Corporation has an Interested Stockholder as defined in Article EIGHTH of the Certificate of Incorporation, by the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH, or (ii) if the Corporation does not have an Interested Stockholder, by the affirmative vote of a majority of the remaining directors, though less than a quorum; or (b) by the stockholders entitled to vote, either at an annual meeting or at a special meeting thereof called for the purpose, by the affirmative vote of a majority of the outstanding shares entitled to vote at such meeting.

SECTION 12. Directors’ Fees.

The Board of Directors shall have authority to determine from time to time the amount of compensation which shall be paid to its members for attendance at meetings of the Board or of any committee of the Board.

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SECTION 13. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

ARTICLE III

Board Committees

SECTION 1. Audit Committee.

In addition to any committees appointed pursuant to Section 2 of this Article, there shall be an Audit Committee, appointed annually by the Board of Directors, consisting of at least three directors who are not members of management. It shall be the responsibility of the Audit Committee to review the scope and results of the annual independent audit of books and records of the Corporation and its subsidiaries and to discharge such other responsibilities as may from time to time be assigned to it by the Board of Directors. The Audit Committee shall meet at such times and places as the members deem advisable, and shall make such recommendations to the Board of Directors as they consider appropriate.

SECTION 2. Other Committees.

2.1 Committee Powers. The Board of Directors may appoint standing or temporary committees and invest such committees with such powers as it may see fit, with power to subdelegate such powers if deemed desirable by the Board of Directors; but no such committee shall have the power or authority of the Board of Directors to adopt, amend, or repeal the By-Laws of the Corporation or approve, adopt or recommend to the stockholders of the Corporation any action or matter expressly required by the Certificate of Incorporation, these By-Laws or the Delaware General Corporation Law to be submitted to stockholders for approval.

2.2 Committee Members. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member.

SECTION 3. Quorum and Manner of Acting.

A majority of the number of directors composing any committee of the Board of Directors, as established and fixed by resolution of the Board of Directors, shall constitute a quorum for the transaction of business at any meeting of such committee but, if less than a majority are present at a meeting, a majority of such directors present may adjourn the meeting from time to time without further notice. The act of a majority of the members of a committee present at a meeting at which a quorum is present shall be the act of such committee.

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ARTICLE IV

Officers and Agents: Terms, Compensation, Removal, Vacancies

SECTION 1. Officers.

The elected officers of the Corporation shall be a Chairman of the Board (who shall be a director) and, at the discretion of the Board, a President (who shall be a director), and one or more Vice Presidents (each of whom may be assigned by the Board of Directors or the Chief Executive Officer an additional title descriptive of the functions assigned to such officer and one or more of whom may be designated Executive or Senior Vice President). The Board may also elect one or more Vice Chairmen. The Board of Directors shall also designate either the Chairman of the Board or the President as the Chief Executive Officer of the Corporation. The Board of Directors shall appoint a Controller, a Secretary, and a Treasurer. Any number of offices, whether elective or appointive, may be held by the same person. The Chief Executive Officer may, by a writing filed with the Secretary, designate titles as officers for employees and agents and appoint Assistant Secretaries and Assistant Treasurers, as, from time to time, may appear to be necessary or advisable in the conduct of the affairs of the Corporation and may, in the same manner, terminate or change such titles.

SECTION 2. Term of Office.

So far as practicable, all elected officers shall be elected at the annual meeting of the Board in each year, and shall hold office until the annual meeting of the Board in the next subsequent year and until their respective successors are chosen. The Controller, Secretary, and Treasurer shall hold office at the pleasure of the Board.

SECTION 3. Salaries of Elected Officers.

The salaries paid to the elected officers of the Corporation shall be authorized or approved by the Board of Directors.

SECTION 4. Bonuses.

None of the officers, directors, or employees of the Corporation or any of its subsidiary corporations shall at any time be paid any bonus or share in the earnings or profits of the Corporation or any of its subsidiary corporations except pursuant to a plan approved by affirmative vote of two-thirds of the members of the Board of Directors.

SECTION 5. Removal of Elected and Appointed Officers.

Any elected or appointed officer may be removed at any time, either for or without cause, by affirmative vote of a majority of the whole Board of Directors, at any meeting called for the purpose.

SECTION 6. Vacancies.

If any vacancy occurs in any office, the Board of Directors may elect or appoint a successor to fill such vacancy for the remainder of the term.

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ARTICLE V

Officers’ Duties and Powers

SECTION 1. Chairman of the Board.

The Chairman of the Board shall preside, when present, at all meetings of the stockholders (except as otherwise provided by statute) and at all meetings of the Board of Directors. The Chairman shall have general power to execute bonds, deeds, and contracts in the name of the Corporation; to affix the corporate seal; to sign stock certificates; and to perform such other duties and services as shall be assigned to or required of the Chairman by the Board of Directors.

SECTION 2. President.

The President shall have general power to execute bonds, deeds, and contracts in the name of the Corporation and to affix the corporate seal; to sign stock certificates; during the absence or disability of the Chairman of the Board to exercise the Chairman’s powers and to perform the Chairman’s duties; and to perform such other duties and services as shall be assigned to or required of the President by the Board of Directors; provided, that if the office of President is vacant, the Chairman shall exercise the duties ordinarily exercised by the President until such time as a President is elected or appointed.

SECTION 3. Chief Executive Officer.

The officer designated by the Board of Directors as the Chief Executive Officer of the Corporation shall have general and active control of its business and affairs. The Chief Executive Officer shall have general power to appoint or designate all employees and agents of the Corporation whose appointment or designation is not otherwise provided for and to fix the compensation thereof, subject to the provisions of these By-Laws; to remove or suspend any employee or agent who shall not have been elected or appointed by the Board of Directors or other body; to suspend for cause any employee, agent, or officer, other than an elected officer, pending final action by the body which shall have appointed such employee, agent, or officer; and to exercise all the powers usually pertaining to the office held by the Chief Executive Officer of a corporation.

SECTION 4. Vice Presidents and Controller.

The several Vice Presidents and the Controller shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors or the Chief Executive Officer, respectively.

SECTION 5. Secretary.

The Secretary shall attend to the giving of notice of all meetings of stockholders and of the Board of Directors and shall keep and attest true records of all proceedings thereat. The Secretary shall have charge of the corporate seal and have authority to attest any and all instruments or writings to which the same may be affixed and shall keep and account for all books, documents, papers, and records of the Corporation relating to its corporate organization. The Secretary shall have authority to sign stock certificates and shall generally perform all the duties usually appertaining to the office of secretary of a corporation. In the absence of the Secretary, an Assistant Secretary or Secretary pro tempore shall perform the duties of the Secretary.

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SECTION 6. Treasurer.

The Treasurer shall have the care and custody of all moneys, funds, and securities of the Corporation, and shall deposit or cause to be deposited all funds of the Corporation in accordance with directions or authorizations of the Board of Directors or the Chief Executive Officer. The Treasurer shall have power to sign stock certificates, to indorse for deposit or collection, or otherwise, all checks, drafts, notes, bills of exchange, or other commercial paper payable to the Corporation, and to give proper receipts or discharges therefor. In the absence of the Treasurer, an Assistant Treasurer shall perform the duties of the Treasurer.

SECTION 7. Additional Powers and Duties.

In addition to the foregoing especially enumerated duties and powers, the several officers of the Corporation shall perform such other duties and exercise such further powers as may be provided in these By-Laws or as the Board of Directors may from time to time determine, or as may be assigned to them by any superior officer.

SECTION 8. Disaster Emergency Powers of Acting Officers.

If, as a result of a disaster or other state of emergency, the Chief Executive Officer is unable to perform the duties of that office, (a) the powers and duties of the Chief Executive Officer shall be performed by the employee with the highest base salary who shall be available and capable of performing such powers and duties and, if more than one such employee has the same base salary, by the employee whose surname begins with the earliest letter of the alphabet among the group of those employees with the same base salary; and (b) the officer performing such duties shall continue to perform such powers and duties until the Chief Executive Officer becomes capable of performing those duties or until the Board of Directors shall have elected a new Chief Executive Officer or designated another individual as Acting Chief Executive Officer; and (c) such officer shall have the power in addition to all other powers granted to the Chief Executive Officer by these By-Laws and by the Board of Directors to appoint an acting President, acting Vice President - Finance, acting Controller, acting Secretary, and acting Treasurer, if any of the persons duly elected to any such office is not by reason of such disaster or emergency able to perform the duties of such office, each of such acting appointees to serve in such capacities until the officer for whom the appointee is acting becomes capable of performing the duties of such office or until the Board of Directors shall have designated another individual to perform such duties or have elected another person to fill such office; and (d) any such acting officer so appointed shall be entitled to exercise all powers vested by the By-Laws or the Board of Directors in the duly elected officer for whom the acting officer is acting; and (e) anyone transacting business with this Corporation may rely upon a certification by any two officers of the Corporation that a specified individual has succeeded to the powers of the Chief Executive Officer and that such person has appointed other acting officers as herein provided and any person, firm, corporation, or other entity to which such certification has been delivered by such officers may continue to rely upon it until notified of a change in writing signed by two officers of this Corporation.

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ARTICLE VI

Stock and Transfers of Stock

SECTION 1. Stock Certificates.

Every stockholder shall be entitled to a certificate, signed by the Chairman of the Board or the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares owned by the stockholder in the Corporation. Any and all of the signatures on a certificate may be a facsimile. If any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue.

SECTION 2. Transfer Agents and Registrars.

The Board of Directors may, in its discretion, appoint responsible banks or trust companies in the Borough of Manhattan, in the City of New York, State of New York, and in such other city or cities as the Board may deem advisable, from time to time, to act as transfer agents and registrars of the stock of the Corporation; and, when such appointments shall have been made, no stock certificate shall be valid until countersigned by one of such transfer agents and registered by one of such registrars.

SECTION 3. Transfers of Stock.

Shares of stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by written power of attorney to sell, assign, and transfer the same, signed by the record holder thereof; but no transfer shall affect the right of the Corporation to pay any dividend upon the stock to the holder of record thereof, or to treat the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the Corporation.

SECTION 4. Lost Certificates.

The Board of Directors may provide for the issuance of new certificates of stock to replace certificates of stock lost, stolen, mutilated, or destroyed, or alleged to be lost, stolen, mutilated, or destroyed, upon such terms and in accordance with such procedures as the Board of Directors shall deem proper and prescribe.

ARTICLE VII

Miscellaneous

SECTION 1. Fiscal Year.

The fiscal year of the Corporation shall be the calendar year.

SECTION 2. (Repealed in its entirety by vote of the stockholders, May 5, 1975.)

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SECTION 3. Signing of Negotiable Instruments.

All bills, notes, checks, or other instruments for the payment of money shall be signed or countersigned by such officer or officers and in such manner as from time to time may be prescribed by resolution (whether general or special) of the Board of Directors.

SECTION 4. Indemnification of Directors and Officers.

4.1 Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any actual or threatened action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director or officer of the Corporation or that, being or having been such a director or officer or an employee of the Corporation, he or she is or was serving at the request of an executive officer of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to an employee benefit plan (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as such a director, officer, employee, or agent or in any other capacity while serving as such a director, officer, employee, or agent, shall be indemnified and held harmless by the Corporation to the full extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), or by other applicable law as then in effect, against all expense, liability, and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the indemnitee’s heirs, executors, and administrators; provided, however, that except as provided in Section 4.2 with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized or ratified by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 4.1 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advance-ment of expenses”); provided, however, that an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an under-taking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section 4.1 or otherwise; and provided, further, that an advancement of expenses shall not be made if the Corporation’s Board of Directors makes a good faith determination that such payment would violate law or public policy.

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4.2 Right of Indemnitee to Bring Suit. If a claim under Section 4.1 is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. The indemnitee shall be presumed to be entitled to indemnification under this Section 4 upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the indemnitee is not so entitled. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee is not entitled to indemnification shall be a defense to the suit or create a presumption that the indemnitee is not so entitled.

4.3 Nonexclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section 4 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provisions of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or disinterested directors, or otherwise. Notwithstanding any amendment to or repeal of this Section 4, or of any of the procedures established by the Board of Directors pursuant to Section 4.7, any indemnitee shall be entitled to indemnification in accordance with the provisions hereof and thereof with respect to any acts or omissions of such indemnitee occurring prior to such amendment or repeal.

4.4 Insurance, Contracts, and Funding.

The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the Corporation or another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under the Delaware General Corporation Law. The Corporation may, without further stockholder approval, enter into contracts with any indemnitee in furtherance of the provisions of this Section 4 and may create a trust fund, grant a security interest, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Section 4.

4.5 Persons Serving Other Entities. Any person who is or was a director, officer, or employee of the Corporation who is or was serving (i) as a director or officer of another corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Corporation or (ii) in an executive or management capacity in a partnership, joint venture, trust, or other enterprise of which the Corporation or a wholly owned subsidiary of the Corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of an executive officer of the Corporation and entitled to indemnification and advancement of expenses under Section 4.1.

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4.6 Indemnification of Employees and Agents of the Corporation. The Corporation may, by action of its Board of Directors, authorize one or more executive officers to grant rights to advancement of expenses to employees or agents of the Corporation on such terms and conditions as such officer or officers deem appropriate under the circumstances. The Corporation may, by action of its Board of Directors, grant rights to indemnification and advancement of expenses to employees or agents or groups of employees or agents of the Corporation with the same scope and effect as the provisions of this Section 4 with respect to the indemnification and advancement of expenses of directors and officers of the Corporation; provided, however, that an undertaking shall be made by an employee or agent only if required by the Board of Directors.

4.7 Procedures for the Submission of Claims. The Board of Directors may establish reasonable procedures for the submission of claims for indemnification pursuant to this Section 4, determination of the entitlement of any person thereto, and review of any such determination. Such procedures shall be set forth in an appendix to these By-Laws and shall be deemed for all purposes to be a part hereof.

ARTICLE VIII

Amendments

SECTION 1. Amendment of the By-Laws: General.

Except as herein otherwise expressly provided, the By-Laws of the Corporation may be altered or repealed in any particular and new By-Laws, not inconsistent with any provision of the Certificate of Incorporation or any provision of law, may be adopted, either by the affirmative vote of the holders of record of a majority in number of the shares present in person or by proxy and entitled to vote at an annual meeting of stockholders or at a special meeting thereof, the notice of which special meeting shall include the form of the proposed alteration or repeal or of the proposed new By-Laws, or a summary thereof; or either

(a) by the affirmative vote of a majority of the whole Board of Directors at any meeting thereof, or

(b) by the affirmative vote of all the directors present at any meeting at which a quorum, less than a majority, is present;

provided, in either of the latter cases, that the notice of such meeting shall include the form of the proposed alteration or repeal or of the proposed new By-Laws, or a summary thereof.

SECTION 2. Amendments as to Compensation and Removal of Officers.

Notwithstanding anything contained in these By-Laws to the contrary, the affirmative vote of the holders of record of a majority of the Voting Stock, as defined in Article FOURTH of the Certificate of Incorporation, at a meeting of the stockholders called for the purpose, shall be required to alter, amend, repeal, or adopt any provision inconsistent with Sections 3, 4 and 5 of Article IV hereof, notice of which meeting shall include the form of the proposed amendment, or a summary thereof.

17

SECTION 3. Amendments as to Stockholders’ Meetings, Directors.

Notwithstanding anything contained in these By-Laws to the contrary, either (a) the affirmative vote of a majority of the Continuing Directors, as defined in Article EIGHTH of the Certificate of Incorporation, or (b) the affirmative vote of the holders of record of at least seventy-five percent of the Voting Stock, as defined in Article FOURTH of the Certificate of Incorporation, shall be required to alter, amend, repeal, or adopt any provision inconsistent with Sections 1, 2, and 4 of Article I and Sections 1, 10, and 11 of Article II.

SECTION 4. Amendment of this Article VIII.

Notwithstanding anything contained in these By-Laws to the contrary, either (a) the recommendation of a majority of the Continuing Directors, as defined in Article EIGHTH of the Certificate of Incorporation, together with the affirmative vote of the holders of record of a majority of the Voting Stock, as defined in Article FOURTH of the Certificate of Incorporation, or (b) the affirmative vote of the holders of record of at least seventy-five percent of the Voting Stock, as defined in Article FOURTH of the Certificate of Incorporation, shall be required to alter, amend, repeal, or adopt any provision inconsistent with this Article VIII.

18

EX-10.III

Exhibit 10(iii)

DEFERRED COMPENSATION PLAN FOR

EMPLOYEES OF THE BOEING COMPANY

(As Amended and Restated on June 27, 2004)

1. Purpose. The purpose of this Deferred Compensation Plan (the “Plan”) for employees of The Boeing Company (the “Company”) and its subsidiaries is to provide a means by which eligible employees may defer payment of base salaries and awards made under incentive compensation plans sponsored by the Company or its subsidiaries.

2. Eligibility. Any Executive Payroll employee, including those employed by a subsidiary of the Company, if such employee is paid on a U.S. dollar-based payroll, shall be eligible to participate in this Plan.

3. Elections. Effective with respect to periods beginning on or after January 1, 2005, an eligible employee may elect deferrals, by executing and delivering to the Company a notice, by the deadline prescribed below, which shall state:

in the case of salary deferrals, the percentage of the Participant’s base salary (but not more than 50% thereof) to be deferred in each regular pay period, by December 1 to be effective for the following year, and

in the case of deferrals of incentive compensation awards payable in cash, the percentage of the award to be deferred (which shall be all or any portion thereof), by December 1 of the year preceding the performance period, and

in the case of Boeing Stock Units (BSU), an election to defer such award (such election to apply to all of the BSU award), by December 1 of the year preceding the performance period, and in the case of Performance Shares, the percentage of the award to be deferred (which shall be all or any portion thereof), by December 1 of the year preceding the year of grant, and

with respect to any of the above elections, the method for crediting investment earnings on deferred amounts, by December 1 of the year in which the election is due.

A notice of election will remain in effect until changed with respect to future deferrals by a notice to the Company increasing or decreasing the percentage of future salary, cash awards under incentive compensation plans, or Performance Shares to be deferred, terminating an election to defer a BSU award, or changing the method for crediting investment earnings on future deferrals. Any such change in election must be made by December 1 of the year for which new elections of the same type are due and, if approved by the Committee, shall supersede any election previously made.

A Participant may request that the Committee approve cancellation of a salary deferral election during the year for which such deferral was elected. No such request shall be approved except upon a showing of substantial hardship not capable of being alleviated through the use of other resources reasonably available to the Participant. If approved, such cancellation shall have prospective effect only, from the date of such approval.

If a Participant terminates participation in this Plan, all amounts accumulated in the Participant’s account prior to termination will continue to be held subject to the Plan.

For purposes of the Plan, a “Participant” means an employee or former employee having an account under the Plan.

4. Company Matching Contributions. To the extent that the Company or any subsidiary makes a matching contribution with respect to all or part of any amounts deferred under this Plan, each such matching contribution shall be deferred together with the Participant deferral to which it relates, and shall be subject to all of the Participant elections (including default elections) with respect to such deferral. Any matching contribution made pursuant to this Section 4 shall be canceled and forfeited if the employee leaves the employment of the Company or a subsidiary for any reason other than retirement under a retirement plan sponsored by the Company or a subsidiary, disability as determined by the Company or subsidiary, layoff, or death.

5. Earnings Credits on Deferred Amounts. All amounts deferred under the Plan, and any matching Company or subsidiary contribution with respect thereto, shall be credited to the Participant’s account at the time at which they would otherwise first have become payable to the Participant or, if earlier, the time at which the Participant’s interest in the award becomes vested. Non-cash awards shall be credited to the Participant’s account at the time at which they would otherwise first have become distributable to the Participant.

Each account shall be credited with earnings thereon, under the Interest Credit method or the Stock Unit method, at the election of the Participant. In the absence of an election the Interest Credit method shall be used. Once an election has been made, it shall be irrevocable except for the special one-time election to change the method of crediting earnings for terminating Participants.

Interest Credit Method. A Participant’s account shall be credited monthly with interest on all amounts in that account during the preceding month.

Interest will be computed during each calendar year at the mean between the high and the low during the first eleven months of the preceding year of yields on Aa-rated

industrial Bonds as reported by Moody’s Investors Service, Inc., rounded to the nearest  ¹/4th of one percent. The Company will notify Participants annually of the established interest rate.

Stock Unit Method. A Participant’s Stock Unit account shall be credited with the number of shares of the Company’s common stock that could be purchased with the amount credited to such account, based on the Fair Market Value of the Company’s common stock on the day the account is so credited (or on the next business day on which the New York Stock Exchange (the “Exchange”) is open, if the Exchange is closed on the day the account is credited) excluding commissions, taxes, and other charges. Such number (carried to two decimal places) shall be recorded as stock units in the Participant’s account, for bookkeeping purposes only. For purposes of the Plan, “Fair Market Value” means the mean of the high and low per share trading prices for the common stock of the Company as reported for the “New York Stock Exchange - Composite Transactions” for a single trading day. The number of stock units in an account shall be appropriately adjusted to reflect stock splits, stock dividends, and other like adjustments in the Company’s common stock.

Each Participant’s Stock Unit account periodically shall be credited with the number of shares of the Company’s common stock that could be purchased, as set forth in the preceding paragraph, with an amount equal to the cash dividends that would be payable on the number of shares of the Company’s common stock that equals the number of stock units in a Participant’s Stock Unit account. The Company will notify Participants annually of the number of stock units, and the dividend equivalents, credited to their Stock Unit account.

Special Election for Terminating Employees. Following termination of employment, a Participant will have an opportunity to make a one-time special election to change the method of crediting earnings on all or a portion of amounts accumulated in one or more deferral accounts. For terminations of employment occurring after December 31, 2001, the special election must be received by the Company no later than twelve (12) months after the date of the Participant’s termination. For terminations of employment occurring on or before December 31, 2001, the special election must be received by November 30, 2002. The Company will record the election upon receipt but no earlier than the first business day following a Participant’s date of termination of employment and no later than twelve (12) months after the date of termination, or for terminations occurring on or before December 31, 2001, the election will be recorded no earlier than January 2, 2002 and no later than November 30, 2002. Once recorded, such election shall be irrevocable. Once the election is recorded, the Company will transfer the specified amount to the newly elected earnings credit method on the last day of the quarter following the quarter in which the election was recorded (or on the next business day on which the Exchange is open, if the Exchange is closed on that day). Any amounts (other than dividend equivalent earnings) deferred after the transfer date will be deferred based on the earnings method set forth in the original deferral election. All payment elections will continue to apply as though no earnings method change had been made.

6. Payment. The timing and manner of distribution of amounts held under the Plan shall be determined by the Committee in its sole discretion, but distributions shall commence no later than the January 15, or such later date as may be otherwise determined by the Committee, immediately following (a) the year in which the Participant reaches age 70 ¹/2 or (b) if the Participant continues employment with the Company beyond such age, the year the Participant retires from the Company or otherwise terminates service from the Company. A Participant may submit an election to the Committee, stating the number of years over which payment shall be made (which shall be between 1 and 15 years), the initial year of payment, and the payment option (in the case of payments to be made over 2 or more years). The election shall be submitted to the Committee by not later than December 1 of the year following the year of termination of the Participant’s employment by the Company. Distribution shall be made in accordance with the election unless the Committee determines that the distribution should be made at some different time or in some different manner.

The payment options (in the case of payments to be made over 2 or more years) shall be as follows:

Approximately Equal Option. The amount payable to the Participant each year shall be computed by the Company so that the aggregate amount of cash or stock in a Participant’s account under the Plan shall be distributed in approximately equal installments in each year for which deferred compensation payments are to be made.

Fractional Option. The amount payable to the Participant each year shall be computed by multiplying a fraction, the numerator of which is one and the denominator of which is the number of years remaining in the distribution period, by the balance in the account on January 1 of such year.

Under either option, the Participant’s account shall be debited at the time of payment.

An approved payment period and payment option shall be applicable to the Participant’s total aggregate deferred compensation accounts under the Plan, including any accounts previously maintained that have been combined into an account under this Plan.

Distributions from a Participant’s Stock Unit account shall be paid in cash: provided, that following a Participant’s termination of employment, distributions from the Stock Unit account may be made in stock at the written election of the Participant. The cash

distribution shall equal the cash value, on the date as of which the distribution is calculated (which shall be the first business day in January unless some other date is prescribed by the Committee), of the number of whole shares of Company common stock then distributable to such Participant, based on the Fair Market Value of such stock on that date, or the next day on which the Exchange is open if the Exchange is closed on the date the distribution is calculated. Any distribution in stock shall be in whole shares of the Company’s common stock equal in number to the whole number of stock units credited to the Participant’s account under the Stock Unit method. No fractional shares shall be distributed and any account balance remaining after a stock distribution shall be paid in cash.

A Participant may request that amounts credited to the Participant’s account under the Plan be distributed prior to the Participant’s termination of employment with the Company, or that an approved method of payment be changed. Any such request shall set forth the reason therefor, and is subject to approval by the Committee in its sole and absolute discretion. Any request for a distribution prior to termination of employment must be submitted to the Committee by no later than December 1 of the year prior to the year in which the distribution is requested to be made. No request for distribution prior to termination of employment will be approved if the Participant also has elected to defer any portion of an incentive compensation award to be made in the calendar year in which the requested distribution is to be made. A Participant may request that any or all amounts accumulated under this Plan be distributed except for any amounts, and any interest or dividends credited thereon, which were deferred in the calendar year in which the request for distribution is submitted.

The Committee may establish guidelines for its own use and the use of its delegates in considering any such request or any other request or election under the Plan, but such guidelines shall not in any way limit the Committee’s discretion in acting upon a request or election, or in determining the timing and manner of any distributions to be made under the Plan.

Distributions under the Plan shall be subject to withholding for taxes and other charges, as required by law, and the Company shall deduct from any such distribution any amounts owed by the Participant to the Company. For distributions in stock, required withholding and any other deductions will be taken from the common stock that would have been received.

7. Beneficiaries. A Participant may designate one or more beneficiaries to receive distributions from the Plan, upon the Participant’s death. If no beneficiary has been designated, all such amounts shall be paid to the Participant’s personal representative. Except as provided in the following paragraph, the death of a Participant shall not affect the timing or manner of distributions from the Participant’s account.

A Participant may elect that one or more fixed payments be made from the Plan to the Participant’s personal representative or designated beneficiary, following the Participant’s death. Such payments, if approved by the Committee, shall be made within 15 months after the Participant’s death. Any amounts thereafter remaining in the Participant’s account will be distributed at the time and in the manner approved by the Committee.

8. Termination or Amendment of the Plan. This Plan may be terminated, modified, or amended from time to time by resolution of the Board of Directors of the Company. If the Plan is terminated, all amounts accumulated prior to termination will continue to remain subject to the provisions of the Plan as if the Plan had not been terminated.

9. Participant’s Rights. Amounts deferred and accumulated under the Plan remain the property of the Company, and no Participant or other person shall acquire any property interest in the account or any other assets of the Company on account of participation in the Plan, the Participant’s rights being limited to receiving from the Company the payments provided for in the Plan. The Plan is unfunded and to the extent that any Participant acquires a right to receive payments from the Plan such rights shall be no greater than the rights of a general unsecured creditor of the Company.

Except to the extent provided in the final paragraph of Section 6 of the Plan, the right of a Participant, legal representative or beneficiary to receive payments from the Plan shall not be subject to anticipation, sale, assignment, pledge, encumbrance or charge, nor shall such right be liable for or subject to the debts, contracts, liabilities or torts of the Participant or the Participant’s legal representative or beneficiaries.

10. Powers of Compensation Committee. The Compensation Committee (the “Committee”) of the Board of Directors of the Company shall have full power and authority to construe and interpret this Plan. The Committee may from time to time delegate such of its functions hereunder as it may determine, to one or more of the officers of the Company, on such terms and conditions as the Committee may decide. Decisions of the Committee or its delegates shall be final and binding upon the Participants, their legal representatives and beneficiaries. Action by the Committee or its delegates on any election or request made by a Participant pursuant to the Plan shall be subject to the sole discretion of the Committee or such delegates.

11. Boeing Satellite Systems, Inc. Pursuant to the Stock Purchase Agreement between The Boeing Company, Hughes Electronics Corporation and Hughes Telecommunications and Space Company dated as of January 13, 2000 (the “Agreement”) and effective as of the closing date under the Agreement (“Closing Date”), the Committee has designated certain employees of Boeing Satellite Systems, Inc. (“BSS”) as Executive Payroll employees eligible to participate in this Plan (“Satellite Executives”).

The deferral elections of Satellite Executives in effect pursuant to the Hughes Electronic Corporation Executive Deferred Compensation Plan (“Hughes Plan”) as of the Closing Date shall be deemed to be irrevocable deferral elections in effect for purposes of this Plan for salary and cash payments related to the Hughes Annual Incentive Plan and Long-Term Achievement Plan paid by BSS in 2000 and 2001.

Satellite Executives eligible for Company performance shares and restricted stock units in lieu of payments under the Hughes Long-Term Achievement Plan shall be provided the opportunity to make a deferral election with respect to such awards.

Accounts under this Plan shall be established for Satellite Executives in an amount equal to their account balances as of the Closing Date under the Hughes Plan. Such accounts shall be paid in accordance with the terms of this Plan. Except for such account balances, no Liability, as defined in the Agreement, shall accrue or be paid with respect to any Satellite Employee or Retired Satellite Employee, as defined in the Agreement, under the Hughes Plan on or after the Closing Date.

Satellite Executives with account balances established as of the Closing Date and/or who have irrevocable deferral elections in effect as of the Closing Date may elect earnings credits on deferred amounts in accordance with Section 5.

This Section 11 is effective as of the Closing Date, if any.

EX-15

EXHIBIT (15)

Letter from Independent Registered Public Accounting Firm Regarding

Unaudited Interim Financial Information

LETTER IN LIEU OF CONSENT FOR REVIEW REPORT

To the Board of Directors and Shareholders of

The Boeing Company

Chicago, Illinois

We have made a review, in accordance with standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim financial information of The Boeing Company and subsidiaries for the three-month and six-month periods ended June 30, 2004 and 2003, as indicated in our report dated July 26, 2004 (which report included an explanatory paragraph regarding a discontinued operation); because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, is incorporated by reference in Registration Statement Nos. 2-48576, 33-25332, 33-31434, 33-43854, 33-58798, 33-52773, 333-03191, 333-16363, 333-26867, 333-32461, 333-32491, 333-32499, 333-32567, 333-35324, 333-41920, 333-47450, 333-54234, 333-73252 and 333-107677 of The Boeing Company on Form S-8 and Registration Statement Nos. 333-99509 and 333-113844 of The Boeing Company on Form S-3.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

Deloitte & Touche LLP

Chicago, Illinois

July 26, 2004

70

EX-31.1

EXHIBIT (31.1)

CERTIFICATION PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Harry C. Stonecipher, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Boeing Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) (omitted pursuant to SEC Release No. 33-8238);

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2004

Harry C. Stonecipher

President and Chief Executive Officer

71

EX-31.2

EXHIBIT (31.2)

CERTIFICATION PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James A. Bell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Boeing Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) (omitted pursuant to SEC Release No. 33-8238);

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2004

James A. Bell

Executive Vice President and

Chief Financial Officer

72

EX-32.1

EXHIBIT (32.1)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Boeing Company (the “Company”) on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Harry C. Stonecipher, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Harry C. Stonecipher

President and Chief Executive Officer

July 26, 2004

73

EX-32.2

EXHIBIT (32.2)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Boeing Company (the “Company”) on Form 10-Q for the period ending June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James A. Bell, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

James A. Bell

Executive Vice President and

Chief Financial Officer

July 26, 2004

74