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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

     For the fiscal year ended December 31, 2002.

For the transition period from                         to                        

Commission File Number 1-13699

RAYTHEON COMPANY

(Exact Name of Registrant as Specified in its Charter)

141 SPRING STREET, LEXINGTON, MASSACHUSETTS 02421

(Address of Principal Executive Offices) (Zip Code)

(781) 862-6600

Registrant’s telephone number, including area code

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

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

None

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

Indicate by check mark whether the registrant is an accelerated filer. Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of January 26, 2003, was approximately $12.3 billion.

Number of shares of Common Stock outstanding as of January 26, 2003: 408,673,000.

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Documents incorporated by reference and made a part of this Form 10-K:

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INDEX

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PART I

Item 1. Business

GENERAL

Raytheon Company (“Raytheon” or the “Company”), with worldwide 2002 sales of $16.8 billion, is a leader in defense electronics, including missiles; radar; sensors and electro-optics; intelligence, surveillance and reconnaissance; command, control, communication and information systems; naval systems; air traffic control systems; and technical services. Raytheon’s commercial electronics businesses leverage defense technologies in commercial markets. Raytheon Aircraft is one of the leading providers of business and special mission aircraft and delivers a broad line of jet, turboprop, and piston-powered airplanes to corporate and government customers world-wide.

The Company’s principal executive offices are located at 141 Spring Street, Lexington, Massachusetts 02421. The Company’s Internet address is www.raytheon.com. The content on the Company’s website is available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

The Company makes available free of charge on or through its Internet website under the heading “Investor Relations,” its report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

BUSINESS SEGMENTS

Electronic Systems. The Electronic Systems segment (“ES”) focuses on anti-ballistic missile systems; air defense; air-to-air, surface-to-air, and air-to-surface missiles; naval and maritime systems; ship self-defense systems; torpedoes; strike, interdiction and cruise missiles; and advanced munitions. ES also specializes in radar, electronic warfare, infrared, laser, and GPS technologies with programs focusing on land, naval, airborne and spaceborne systems used for surveillance, reconnaissance, targeting, navigation, commercial and scientific applications.

ES develops ground-based phased-array radars, including the X-Band Radar (XBR) and Upgrade Early Warning Radar (UEWR) for Ground-based Midcourse Defense (GMD), as well as the Ground-Based Radar (GBR) for the Theater High Altitude Area Defense (THAAD) system, part of the U.S. Army’s Theater Missile Defense Program. It also is developing next-generation theater missile interceptors for the Navy Theater Wide (NTW) systems and the Exoatmospheric Kill Vehicle (EKV) for the GMD program.

ES produces the Patriot ground-based air defense missile system, which is capable of tracking and intercepting enemy aircraft, cruise missiles, and tactical ballistic missiles. In addition to the U.S., eight nations have selected Patriot as an integral part of their air defense systems. Since the end of the Gulf War in 1991, Raytheon has received approximately $3.5 billion in international orders for Patriot equipment and services. In addition, ES leads Raytheon’s efforts as the prime contractor for the Hawk ground-launched missile, which is in service with the U.S. and 18 allied nations.

ES manufactures the primary air-to-air missile for the U.S. Air Force and Navy fighter aircraft—the Advanced Medium Range Air-to-Air Missile (AMRAAM), and is developing the AIM-9X (short-range air-to-air missile). Other missiles produced by ES include Tomahawk, TOW, Stinger, Maverick, Standard, the High Speed Anti-Radiation Missile (HARM), Paveway laser-guided bombs, Extended Range Guided Munitions (ERGM), XM-982, Joint Stand Off Weapon (JSOW), and Javelin (as part of a joint venture).

ES also leads Raytheon’s efforts as the prime contractor for the NATO Sea-Sparrow Surface to Air Missile System (NSSMS), as well as producing the air-and surface-launched versions of the Sparrow missile for both the U.S. and foreign Navies. ES produces Phalanx and the Rolling Airframe Missile (RAM), which the U.S. and foreign Navies use as part of the ship self-defense system. ES develops sonars, combat control systems, mine hunting equipment and torpedoes for submarines and ships in U.S. and allied fleets, in addition to designing unmanned underwater vehicles. ES produces a variety of shipboard radar systems. ES also leads Raytheon’s development efforts on the U.S. Navy’s next generation of

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surface combatant ships, the DD-X.

ES airborne radars are deployed on four operational tactical fighter aircraft operated by U.S. forces (the F-14, F-15, F/A-18, and the AV-8B) and international customers, as well as radars for the AC-130U gunship and the B-2 Stealth Bomber. ES is also part of a joint venture providing the next generation airborne radar for the F-22 aircraft. The segment provides the Forward Looking Infrared (FLIR) and designation system for the F-117 Stealth Fighter, and the Advanced Targeting FLIR for the F/A-18.

ES supplies integrated sensor suites for applications such as the Global Hawk Unmanned Aerial Vehicle Reconnaissance System, which includes a synthetic aperture radar and electro-optical/infrared sensors. ES surveillance and reconnaissance systems are used on a variety of aircraft, such as the British Tornado, the U.S. Air Force U-2 and the U.S. Navy P-3 Orion. Through a joint venture, ES is developing next generation airborne ground surveillance radar, which will be scalable for multiple platforms. ES also provides space sensors for defense and scientific applications.

ES night vision and fire control systems equip combat vehicles like the M1 Abrams tank, Bradley Fighting Vehicle and a host of light armored vehicles, ships and submarines, and aircraft. The segment also puts state of the art technology in the hands of the infantry.

The segment’s surface radar products include radars for intelligence/data collection, spacetracking, deep space surveillance, missile warning and imaging and command and control radars. Tactical radars include battlefield radars for Forward Area Air Defense Systems and hostile weapons locating radars.

Command, Control, Communication and Information Systems. The Command, Control, Communication and Information Systems segment (“C3I”) is classified into five principal businesses. They are: Intelligence, Surveillance, Reconnaissance (“ISR”), Air Traffic Management (“ATM”), Command and Control / Battle Management (“C2BM”), Communications and Information Technology / Information Systems.

C3I products include command, control and communication systems; air traffic control automation and radar systems; tactical radios; satellite communication and ground control terminals; wide area surveillance systems; ground-based information processing systems; image processing; large scale information retrieval, processing and distribution systems; global broadcast systems and secure information technology solutions.

In the ISR business, C3I is a leading provider of remote sensing and processing for national intelligence systems as well as control and mission management systems for Unmanned Aerial Vehicles (UAVs). C3I designs and develops systems that provide real-time battlefield information, signal intelligence and multi-source intelligence integration to the U.S. Department of Defense and several other Government agencies. C3I also participates in the commercial ISR marketplace as the prime contractor for the Brazilian System for the Vigilance of the Amazon (SIVAM) program, and is providing an integrated information network that will be used to enable the Brazilian Government to protect the environment, improve air safety and weather forecasting, manage land occupation and usage, and enable effective law enforcement and border control.

C3I designs and installs Communications, Navigation, Surveillance / Air Traffic Management (CNS / ATM) systems around the world. C3I is the largest CNS / ATM supplier to the Federal Aviation Administration (FAA). Internationally, C3I has installed numerous air traffic control systems and is currently providing CNS / ATM systems for: Australia, Canada, Germany, Hong Kong, India, Japan, Norway, the People’s Republic of China, Switzerland, The United Kingdom and Taiwan.

In communications, C3I is a leading supplier of battlefield tactical radios and satellite ground terminals. The C3I Satcom programs group supplies Satcom terminals to the Navy, the Army and the Air Force. The C2BM programs group designs, develops and delivers tactical command and control systems that provide the means to effectively execute conventional and special operations missions. C2BM addresses market segments of fire control, joint command and control, sensor networking, modeling and simulation, command centers, sensor fusion and correlation, and command vehicles for a variety of military and non-military users.

C3I also performs contracts involving information technology for several U.S. Government Departments and agencies including Energy, Education, the Army and Navy and NASA. C3I efforts in this regard involve providing for information assurance, knowledge management, data storage and retrieval systems, web-based information systems and high performance computing.

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Technical Services. Raytheon Technical Services Company LLC (“RTSC”) provides technical services, training programs, and logistics and base operations support throughout the U.S. and in 30 other countries.

RTSC performs complete engineering and depot-level cradle-to-grave support for Raytheon-manufactured equipment and for various commercial and military customers. Services provided include installation and test of upgrades to deployed systems; engineering design, planning, and testing; repair and refurbishment of U.S. Department of Defense equipment; software engineering support; data management; preparation of technical manuals; training for allied forces; system and facility installations; field testing and evaluation; field engineering; and system operation and maintenance.

RTSC is a world leader in providing and supporting range instrumentation systems and bases worldwide for the Department of Defense. It also provides missile range calibration services for the U.S. Air Force, trains U.S. Army personnel in battlefield tactics and supports undersea testing and evaluation for the U.S. Navy. RTSC provides operations and engineering support to the Atlantic Underwater Test and Evaluation Center, range technical support, and facilities maintenance at several Department of Defense facilities.

RTSC supplies professional services to a broad range of customers in the areas of space and earth sciences, scientific data management, transportation management, remote sensing, and computer networking. RTSC also supports the U.S. Government’s demilitarization activities in countries of the former Soviet Union and the development and operation of Space Shuttle and Space Station simulators for NASA’s Johnson Space Center. It also provides logistics and science support for the National Science Foundation’s Antarctica program.

Commercial Electronics. Raytheon’s commercial electronics businesses produce, among other things, precision optical products for defense, medical, commercial, and telecommunications customers; gallium arsenide integrated circuits and power amplifiers for defense and wireless communications customers; thermal imaging products for the public safety, industrial, and transportation markets; navigation and communication systems for the commercial and military marine markets; and other electronic components for a wide range of applications.

Aircraft. Raytheon Aircraft Company (“RAC”) offers a broad product line of aircraft and aviation services in the general aviation market. RAC manufactures, markets, and supports business jets, turboprops, and piston-powered aircraft for the world’s commercial, fractional ownership, and military aircraft markets. RAC’s piston-powered aircraft line includes the single-engine Beech Bonanza and the twin-engine Beech Baron aircraft for business and personal flying. The King Air turboprop series includes the Beech King Air C90B, B200, and 350.

The jet line includes the Beechjet 400A light jet, the Hawker 800XP midsize business jet, and the Beechcraft Premier I entry-level business jet. A new super midsize business jet, the Hawker Horizon, is currently in development, with anticipated certification in 2003 or the first half of 2004, however, the Company’s primary objective is to produce a jet that meets all performance expectations and is ready to ship in 2004. Additionally, RAC produces special mission aircraft, including military versions of the King Air and the U-125 search-and-rescue variant of the Hawker 800. RAC also sells a 19-passenger regional airliner.

The segment supplies aircraft training systems, including the T-6A trainer selected as the next-generation trainer for the U.S. Air Force and Navy under the Joint Primary Aircraft Training System (JPATS). Raytheon Aircraft produces special mission aircraft, including militarized versions of the King Airs and the U-125 search-and-rescue variant of the Hawker 800.

In the third quarter of 2002, the Company announced the realignment of its government and defense businesses into the following six segments:

Missile Systems. The Missile Systems (“MS”) segment will design, develop, and produce missile systems for critical requirements, including air-to-air, strike, surface Navy air defense, land combat missiles, guided projectiles, exoatmospheric kill vehicles, and directed energy weapons.

Integrated Defense Systems. The Integrated Defense Systems (“IDS”) segment will provide integrated air and missile defense and naval and maritime warfighting systems, including modeling and simulation capabilities for the Missile Defense Agency and global integrated capabilities for Army, Navy, Marine Corps, and technology customers. IDS combines the former Electronic Systems segment units of Air & Missile Defense Systems and Naval & Maritime Integrated Systems.

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Intelligence and Information Systems. The Intelligence and Information Systems (“IIS”) segment will provide intelligence and information technology solutions drawing on capabilities in signals, imaging and geospatial intelligence; space and airborne command and control; ground engineering support; and weather and environmental management. IIS combines the former Command, Control, Communication and Information Systems segment units of Imagery and Geospatial Systems and Strategic Systems.

Space and Airborne Systems. The Space and Airborne Systems (“SAS”) segment will provide technology solutions for critical space and airborne missions. SAS is a combination of the former Electronic Systems segment units of Surveillance & Reconnaissance Systems and Air Combat & Strike Systems.

Network Centric Systems. The Network Centric Systems (“NCS”) segment will develop and produce network centric solutions that integrate sensors, systems and secure communications to manage the battlespace and airspace. NCS combines the former Electronic Systems segment unit of Tactical Systems and the former Command, Control, Communication and Information Systems segment unit of C3S.

Technical Services. RTSC continues to provide technical, scientific and professional services for defense, federal, and commercial customers.

The Company has also announced that its newly-formed Homeland Security business unit will provide systems and services to assess combat and respond to terrorism and the terrorist threat.

In the fourth quarter of 2002, the Company announced that it would realign its Commercial Electronics business units into its new IDS and NCS defense segments, effective January 1, 2003.

The Company will begin reporting financial results in the new business structure in 2003. Information reflecting the Company’s segment results during 2002 and 2001 in the realigned structure is set forth in “Segment Reorganization” within Item 7 of this Form 10-K.

SALES TO THE UNITED STATES GOVERNMENT

Sales to the United States Government (the “Government”), principally to the Department of Defense (“DoD”), were $12.3 billion in 2002 and $11.2 billion in 2001, representing 73% of total sales in 2002 and 70% of total sales in 2001. Of these sales, $0.8 billion in 2002 and $0.6 billion in 2001 represented purchases made by the Government on behalf of foreign governments.

GOVERNMENT CONTRACTS

The Company and its various subsidiaries act as a prime contractor or major subcontractor for many different Government programs, including those that involve the development and production of new or improved weapons or other types of electronic systems or major components of such systems. Over its lifetime, a program may be implemented by the award of many different individual contracts and subcontracts. The funding of Government programs is subject to congressional appropriations. Although multi-year contracts may be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for many years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The Government is required to adjust equitably a contract price for additions or reductions in scope or other changes ordered by it.

Generally, government contracts are subject to oversight audits by Government representatives, and, in addition, they include provisions permitting termination, in whole or in part, without prior notice at the Government’s convenience upon the payment of compensation only for work done and commitments made at the time of termination. In the event of termination for convenience, the contractor will receive some allowance for profit on the work performed. The right to terminate for convenience has not had any material adverse effect upon Raytheon’s business in light of its total government business.

The Company’s government business is performed under both cost reimbursement and fixed price prime contracts and subcontracts. Cost reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fee.

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These contracts fall into three basic types: (i) cost plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance; (ii) cost plus incentive fee contracts which provide for increases or decreases in the fee, within specified limits, based upon actual results as compared to contractual targets relating to such factors as cost, performance and delivery schedule; and (iii) cost plus award fee contracts which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor against pre-established criteria. Under cost reimbursement type contracts, Raytheon is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Some costs incident to performing contracts have been made partially or wholly unallowable by statute or regulation. Examples are charitable contributions, certain merger and acquisition costs, lobbying costs and certain litigation defense costs.

The Company’s fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under firm fixed-price contracts, Raytheon agrees to perform a specific scope of work for a fixed price and as a result, benefits from cost savings and carries the burden of cost overruns. Under fixed-price incentive contracts, Raytheon shares with the Government savings accrued from contracts performed for less than target costs and costs incurred in excess of targets up to a negotiated ceiling price (which is higher than the target cost) and carries the entire burden of costs exceeding the negotiated ceiling price. Accordingly, under such incentive contracts, the Company’s profit may also be adjusted up or down depending upon whether specified performance objectives are met. Under firm fixed-price and fixed-price incentive type contracts, the Company usually receives either milestone payments equaling 90% of the contract price or monthly progress payments from the Government generally in amounts equaling 80% of costs incurred under Government contracts.

The remaining amount, including profits or incentive fees, is billed upon delivery and final acceptance of end items under the contract.

The Company’s government business is subject to specific procurement regulations and a variety of socio-economic and other requirements. Failure to comply with such regulations and requirements could lead to suspension or debarment, for cause, from Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to procurement integrity, export control, government security regulations, employment practices, the protection of the environment, the accuracy of records and the recording of costs.

Under many government contracts, the Company is required to maintain facility and personnel security clearances complying with DoD requirements.

Companies which are engaged in supplying defense-related equipment to the Government are subject to certain business risks, some of which are peculiar to that industry. Among these are: the cost of obtaining trained and skilled employees; the uncertainty and instability of prices for raw materials and supplies; the problems associated with advanced designs, which may result in unforeseen technological difficulties and cost overruns; and the intense competition and the constant necessity for improvement in facilities and personnel training. Sales to the Government may be affected by changes in procurement policies, budget considerations, changing concepts of national defense, political developments abroad and other factors. See the “Risk Factors” section beginning on page 10 of this Form 10-K, for a description of additional business risks.

See “Sales to the United States Government” on page 7 of this Form 10-K for information regarding the percentage of the Company’s revenues generated from sales to the Government.

BACKLOG

The Company’s backlog of orders was $25.7 billion at December 31, 2002 and $25.6 billion at December 31, 2001. The 2002 amount includes backlog of approximately $18.3 billion from the Government compared with $16.9 billion at the end of 2001.

Approximately $3.3 billion of the overall backlog figure represents the unperformed portion of direct orders from foreign governments. Approximately $1.4 billion of the overall backlog represents non-government foreign backlog.

Approximately $13.6 billion of the $25.7 billion 2002 year-end backlog is not expected to be filled during the following twelve months. For additional information related to backlog figures, see “Segment Results” within Item 7 of this Form 10-K.

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RESEARCH AND DEVELOPMENT

During 2002, Raytheon expended $449 million on research and development efforts compared with $456 million in 2001 and $507 million in 2000. These expenditures principally have been for product development for the Government and for aircraft products. In addition, Raytheon conducts funded research and development activities under Government contracts which is included in net sales. For additional information related to research and development efforts, see “Note A – Accounting Policies” within Item 8 of this Form 10-K.

RAW MATERIALS, SUPPLIERS AND SEASONALITY

Delivery of raw materials and supplies to Raytheon is generally satisfactory. Raytheon is sometimes dependent, for a variety of reasons, upon sole-source suppliers for procurement requirements. However, Raytheon has experienced no significant difficulties in meeting production and delivery obligations because of delays in delivery or reliance on such suppliers. In recent years, revenues in the second half of the year have generally exceeded revenues in the first half. The timing of Government awards, the availability of Government funding, product deliveries and customer acceptance are among the factors affecting the periods in which revenues are recorded. Management expects this trend to continue in 2003.

COMPETITION

The Company’s defense electronics businesses are direct participants in most major areas of development in the defense, space, information gathering, data reduction and automation fields. Technical superiority and reputation, price, delivery schedules, financing, and reliability are among the principal competitive factors considered by defense electronics customers. The on-going consolidation of the U.S. and global defense, space and aerospace industries continues to intensify competition. Consolidation among U.S. defense, space and aerospace companies has resulted in a reduction in the number of principal prime contractors. As a result of this consolidation, the Company frequently partners on various programs with its major suppliers, some of whom are, from time to time, competitors on other programs.

The Aircraft segment competes primarily with four other companies in the business aviation industry. The principal factors for competition in the industry are price, financing, operating costs, product reliability, cabin size and comfort, product quality, travel range and speed, and product support. The Company believes it possesses competitive advantages in the breadth of our product line, the performance of our product line, and the strength of our product support.

PATENTS AND LICENSES

Raytheon and its subsidiaries own a large intellectual property portfolio which includes, by way of example, United States and foreign patents, unpatented know-how, trademarks and copyrights, all of which contribute significantly to the preservation of the Company’s competitive position in the market. In certain instances, Raytheon has augmented its technology base by licensing the proprietary intellectual property of others. Although these patents and licenses are, in the aggregate, important to the operation of the Company’s business, no existing patent, license, or similar intellectual property right is of such importance that its loss or termination would, in the opinion of management, have a material effect on the Company’s business.

EMPLOYMENT

As of December 31, 2002, Raytheon had approximately 76,400 employees compared with approximately 87,200 employees at the end of 2001. The decrease is mainly due to divestitures during 2002.

Raytheon considers its union-management relationships to be satisfactory. In 2002, there was one work stoppage of 17 weeks involving less than one half of 1% of the workforce.

INTERNATIONAL SALES

Raytheon’s sales to customers outside the United States (including foreign military sales) were 21% of total sales in 2002, 22% of total sales in 2001 and 20% of total sales in 2000. These sales were principally in the fields of air defense systems, air traffic control systems, sonar systems, aircraft products, electronic equipment, computer software and systems, personnel training, equipment maintenance and microwave communication. Foreign subsidiary working capital requirements generally are financed in the countries concerned. Sales and income from international operations are subject

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to changes in currency values, domestic and foreign government policies (including requirements to expend a portion of program funds in-country) and regulations, embargoes and international hostilities. Exchange restrictions imposed by various countries could restrict the transfer of funds between countries and between Raytheon and its subsidiaries. Raytheon generally has been able to protect itself against most undue risks through insurance, foreign exchange contracts, contract provisions, government guarantees or progress payments. See revenues derived from external customers and long-lived assets by geographical areas set forth in “Note P – Business Segment Reporting” within Item 8 of this Form 10-K.

Raytheon utilizes the services of sales representatives and distributors in connection with foreign sales. Normally representatives are paid commissions and distributors are granted resale discounts in return for services rendered.

The export from the U.S. of many of Raytheon’s products may require the issuance of a license by the U.S. Department of State under the Arms Export Control Act of 1976, as amended (formerly the Foreign Military Sales Act); or by the U.S. Department of Commerce under the Export Administration Act, as amended, and its implementing Regulations as kept in force by the International Emergency Economic Powers Act of 1977, as amended (“IEEPA”); or by the U.S. Department of the Treasury under IEEPA or the Trading with the Enemy Act of 1917, as amended. Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain exports of defense equipment and services, the Department of State must notify Congress at least 15 or 30 days (depending on the identity of the country that will utilize the equipment and services) prior to authorizing such exports. During that time, the Congress may take action to block a proposed export by joint resolution which is subject to Presidential veto.

RISK FACTORS

The following are some of the factors the Company believes could cause its actual results to differ materially from expected and historical results.

Because we have sold a number of our business units in recent years, our business is less diversified, which could reduce our earnings and might make us more susceptible to negative conditions in our remaining businesses.

Consistent with our strategy of focusing on and streamlining our core businesses and paying down our debt, during 2000, 2001 and 2002, we divested several non-core business units. In March 2002, we sold our Aircraft Integration Systems business. As a result of these divestitures, we no longer receive revenues from these operations and, without offsetting increases in revenues in our other businesses, our overall revenues would decrease, which would have a negative effect on our financial condition.

In addition, as a result of these divestitures, our business is now less diversified and thus more dependent on our remaining businesses. As a result, we are now more sensitive to conditions and trends in the remaining industries in which we operate. Negative conditions and trends in these remaining industries could cause our financial condition and results of operations to suffer more heavily than would occur when our business lines were more diversified. Our inability to overcome these negative conditions and trends could have a negative impact on our financial condition.

We heavily depend on our government contracts, which are only partially funded, subject to immediate termination and heavily regulated and audited, and the termination or failure to fund one or more of these contracts could have a negative impact on our operations.

We act as prime contractor or major subcontractor for many different Government programs. Over its lifetime, a program may be implemented by the award of many different individual contracts and subcontracts. The funding of Government programs is subject to congressional appropriations. Although multiple year contracts may be planned in connection with major procurements, Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations. The termination of funding for a Government program would result in a loss of anticipated future revenues attributable to that program. That could have a negative impact on our operations. In addition, the termination of a program or failure to commit additional funds to a program already started could increase our overall costs of doing business.

Generally, Government contracts are subject to oversight audits by Government representatives and contain provisions permitting termination, in whole or in part, without prior notice at the Government’s convenience upon the payment of compensation only for work done and commitments made at the time of termination. We can give no assurance that one or more of our Government contracts will not be terminated under these circumstances. Also, we can give no assurance that we

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would be able to procure new Government contracts to offset the revenues lost as a result of any termination of our contracts. As our revenues are dependent on our procurement, performance and payment under our contracts, the loss of one or more critical contracts could have a negative impact on our financial condition.

Our government business is also subject to specific procurement regulations and a variety of socio-economic and other requirements. These requirements, although customary in Government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from Government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to:

The termination of a Government contract or relationship as a result of any of these acts would have a negative impact on our operations and could have a negative effect on our reputation and ability to procure other Government contracts in the future.

In addition, sales to the Government may be affected by:

The influence of any of these factors, which are largely beyond our control, could also negatively impact our financial condition. We also may experience problems associated with advanced designs required by the Government which may result in unforeseen technological difficulties and cost overruns. Failure to overcome these technological difficulties and the occurrence of cost overruns would have a negative impact on our results.

We depend on the U.S. Government for a significant portion of our sales, and the loss of this relationship or a shift in Government funding could have severe consequences on the financial condition of Raytheon.

Approximately 73% of our net sales in 2002 were for the U.S. Government. Therefore, any significant disruption or deterioration of our relationship with the U.S. Government would significantly reduce our revenues. Our U.S. Government programs must compete with programs managed by other defense contractors for a limited number of programs and for uncertain levels of funding. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government at our expense and are likely to continue these efforts in the future. The U.S. Government may choose to use other defense contractors for its limited number of defense programs. In addition, the funding of defense programs also competes with non-defense spending of the U.S. Government. Budget decisions made by the U.S. Government are outside of our control and have long-term consequences for the size and structure of Raytheon. A shift in Government defense spending to other programs in which we are not involved or a reduction in U.S. Government defense spending generally could have severe consequences for our results of operations.

We derive a significant portion of our revenues from international sales and are subject to the risks of doing business in foreign countries.

In 2002, sales to international customers accounted for approximately 21% of our net sales. We expect that international sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, we are subject to risks of doing business internationally, including:

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While these factors or the impact of these factors are difficult to predict, any one or more of these factors could adversely affect our operations in the future.

We may not be successful in obtaining the necessary licenses to conduct operations abroad, and Congress may prevent proposed sales to foreign governments.

Licenses for the export of many of our products are required from government agencies in accordance with various statutory authorities, including the Export Administration Act of 1979, the International Emergency Economic Powers Act, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. We can give no assurance that we will be successful in obtaining these necessary licenses in order to conduct business abroad. In the case of certain sales of defense equipment and services to foreign governments, the U.S. Department of State must notify the Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing these sales. During that time, the Congress may take action to block the proposed sale.

Competition within our markets may reduce our procurement of future contracts and our sales.

The military and commercial industries in which we operate are highly competitive. Our competitors range from highly resourceful small concerns, which engineer and produce specialized items, to large, diversified firms. Several established and emerging companies offer a variety of products for applications similar to those of our products. Our competitors may have more extensive or more specialized engineering, manufacturing and marketing capabilities than we do in some areas. There can be no assurance that we can continue to compete effectively with these firms. In addition, some of our largest customers could develop the capability to manufacture products similar to products that we manufacture. This would result in these customers supplying their own products and competing directly with us for sales of these products, all of which could significantly reduce our revenues and seriously harm our business.

Furthermore, we are facing increased international competition and cross-border consolidation of competition. There can be no assurance that we will be able to compete successfully against our current or future competitors or that the competitive pressures we face will not result in reduced revenues and market share or seriously harm our business.

Our future success will depend on our ability to develop new technologies that achieve market acceptance.

Both our commercial and defense markets are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future performance depends on a number of factors, including our ability to:

Specifically, at Raytheon Aircraft Company, our future success is dependent on our ability to meet scheduled timetables for

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the development, certification and delivery of new product offerings.

We believe that, in order to remain competitive in the future, we will need to continue to develop new products, which will require the investment of significant financial resources. The need to make these expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures will ultimately lead to the timely development of new technology. Due to the design complexity of our products, we may in the future experience delays in completing development and introduction of new products. Any delays could result in increased costs of development or deflect resources from other projects. In addition, there can be no assurance that the market for our products will develop or continue to expand as we currently anticipate. The failure of our technology to gain market acceptance could significantly reduce our revenues and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing technologies which gain market acceptance in advance of our products. The possibility that our competitors might develop new technology or products might cause our existing technology and products to become obsolete. If we fail in our new product development efforts or our products fail to achieve market acceptance more rapidly than our competitors, our revenues will decline and our business, financial condition and results of operations will be negatively affected.

We enter into fixed-price contracts which could subject us to losses in the event that we have cost overruns.

Generally we enter into contracts on a firm, fixed-price basis. This allows us to benefit from cost savings, but we carry the burden of cost overruns. If our initial estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts then we may not realize their full benefits. Our financial condition is dependent on our ability to maximize our earnings from our contracts. Lower earnings caused by cost overruns and cost controls would have a negative impact on our financial results.

We may incur additional charges in connection with the sale of the Company’s Engineering and Construction Business to Washington Group International, Inc. (“WGI”), including in connection with the satisfaction of support agreement obligations.

We have significant letters of credit, surety bonds, guarantees and other support agreements in place related to a number of leases and other agreements of our engineering and construction business unit (“E&C Business”), which we sold to WGI in July 2000. Many of these relate to ongoing engineering and construction projects, including two large power plants being built in Massachusetts that WGI has abandoned (the “Massachusetts Projects”).

To the extent the Company has outstanding support agreements, the Company has honored those agreements and is working on those projects. There are risks that the costs incurred on these projects will increase beyond the Company’s estimates because of factors such as: equipment and subcontractor performance; performance of critical suppliers; the timing of project completion and customer acceptance; the continued decline of craft labor productivity and the successful completion of performance tests at the Massachusetts Projects; the Company’s inability to recover amounts required to be paid in connection with pre-funded liquidated damages; the Company’s lack of construction industry expertise resulting from the sale of the E&C Business to WGI; the recoverability of claims and the outcome of defending claims asserted against the Company; in connection with projects where construction has been completed, the risks associated with punch list items, warranty, retesting, commercial closeout and claims resolution phase of the project; and risks inherent with large long-term fixed price contracts and their final resolution and close out.

During 2002, we recorded charges totaling $796 million relating to the Massachusetts Projects. We also recorded charges totaling $53 million for warranty and start-up costs, final reliability testing and punch list items, and a contract adjustment relating to three other construction projects.

While these potential obligations, liabilities and risks or the impact of them are difficult to predict, any one or more of these factors could have a material adverse impact on our financial condition.

The outcome of litigation in which we have been named as a defendant is unpredictable and an adverse decision in any such matter could have a material adverse affect on our financial position and results of operations.

We are defendants in a number of litigation matters. These claims may divert financial and management resources that would otherwise be used to benefit our operations. Although we believe that we have meritorious defenses to the claims made in each and all of the litigation matters to which we have been named a party, and intend to contest each lawsuit

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vigorously, no assurances can be given that the results of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material adverse affect on our financial position and results of operations.

We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.

Due to the specialized nature of our businesses, our future performance is highly dependent upon the continued services of our key engineering personnel and executive officers. Our prospects depend upon our ability to attract and retain qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel could seriously harm our business, results of operations and financial condition.

Some of our workforce is represented by labor unions.

Approximately 12,000 of our employees are unionized, which represented approximately 16% of our employees at December 31, 2002. As a result, we may experience prolonged work stoppages, which could adversely affect our business, and we are vulnerable to the demands imposed by our collective bargaining relationships. We cannot predict how stable these relationships, currently with 9 different U.S. labor organizations and 4 different non-U.S. labor organizations, will be or whether we will be able to meet the requirements of these unions without impacting the financial condition of Raytheon. In addition, the presence of unions may limit our flexibility in dealing with our workforce. Work stoppages and instability in our union relationships could negatively impact our ability to manufacture our products on a timely basis, resulting in strain on our relationships with our customers, as well as a loss of revenues. That would adversely affect our results of operations.

We may be unable to adequately protect our intellectual property rights, which could affect our ability to compete.

Protecting our intellectual property rights is critical to our ability to compete and succeed as a company. We own a large number of United States and foreign patents and patent applications, as well as trademark, copyright and semiconductor chip mask work registrations which are necessary and contribute significantly to the preservation of our competitive position in the market. There can be no assurance that any of these patents and other intellectual property will not be challenged, invalidated or circumvented by third parties. In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. In the future, we may not be able to obtain necessary licenses on commercially reasonable terms. We enter into confidentiality and invention assignment agreements with our employees, and enter into non-disclosure agreements with our suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Moreover, the protection provided to our intellectual property by the laws and courts of foreign nations may not be as advantageous to us as the remedies available under United States law.

Our operations expose us to the risk of material environmental liabilities.

Because we use and generate large quantities of hazardous substances and wastes in our manufacturing operations, we are subject to potentially material liabilities related to personal injuries or property damages that may be caused by hazardous substance releases and exposures. For example, we are investigating and remediating contamination related to our current or past practices at numerous properties and, in some cases, have been named as a defendant in related personal injury or “toxic tort” claims.

We are also subject to increasingly stringent laws and regulations that impose strict requirements for the proper management, treatment, storage and disposal of hazardous substances and wastes, restrict air and water emissions from our manufacturing operations, and require maintenance of a safe workplace. These laws and regulations can impose substantial fines and criminal sanctions for violations, and require the installation of costly pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. We incur, and expect to continue to incur, substantial capital and operating costs to comply with these laws and regulations. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require us to incur costs in the future that would have a negative effect on our financial condition or results of operations.

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Provisions in our charter documents and rights agreement could make it more difficult to acquire Raytheon and may reduce the market price of our stock.

Our certificate of incorporation and by-laws contain certain provisions, such as a classified board of directors, a provision prohibiting stockholder action by written consent, a provision prohibiting stockholders from calling special meetings and a provision authorizing our Board of Directors to consider factors other than stockholders’ short-term interests in evaluating an offer involving a change in control. Also, we have a shareholder rights plan, which limits the ability of any person to acquire more than 15% of our common stock. These provisions could have the effect of delaying or preventing a change in control of Raytheon or the removal of Raytheon management, of deterring potential acquirors from making an offer to our stockholders and of limiting any opportunity to realize premiums over prevailing market prices for Raytheon common stock. Provisions of the shareholder rights agreement, which is incorporated as an exhibit to this filing, could also have the effect of deterring changes of control of Raytheon.

We depend on component availability, subcontractor performance and our key suppliers to manufacture and deliver our products and services.

Our manufacturing operations are highly dependent upon the delivery of materials by outside suppliers in a timely manner. In addition, we depend in part upon subcontractors to assemble major components and subsystems used in our products in a timely and satisfactory manner. While we enter into long-term or volume purchase agreements with a few of our suppliers, we cannot be sure that materials, components, and subsystems will be available in the quantities we require, if at all. We are dependent for some purposes on sole-source suppliers. If any of these sole-source suppliers fails to meet our needs, we may not have readily available alternatives. Our inability to fill our supply needs would jeopardize our ability to satisfactorily and timely complete our obligations under government and other contracts. This might result in reduced sales, termination of one or more of these contracts and damage to our reputation and relationships with our customers. All of these events could have a negative effect on our financial condition.

The unpredictability of our results may harm the trading price of our securities, or contribute to volatility.

Our operating results may vary significantly over time for a variety of reasons, many of which are outside of our control, and any of which may harm our business. The value of our securities may fluctuate as a result of considerations that are difficult to forecast, such as:

FORWARD-LOOKING STATEMENTS — SAFE HARBOR PROVISIONS

This filing and the information we are incorporating by reference, including any statements relating to the Company’s future plans, objectives, and projected future financial performance, contain or are based on, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Specifically, statements that are not historical facts, including statements accompanied by words such as “believe,” “expect,” “estimate,” “intend,” or “plan,” variations of these words, and similar expressions, are intended to identify forward-looking statements and convey the uncertainty of future

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events or outcomes. The Company cautions readers that any such forward-looking statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks, and actual results may differ materially. Given these uncertainties, readers of this filing should not rely on forward-looking statements. Forward-looking statements also represent the Company’s estimates and assumptions only as of the date that they were made. The Company expressly disclaims any current intention to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing. Important factors that could cause actual results to differ include, but are not limited to those discussed in the immediately preceding section of this Item, under “Risk Factors.”

Item 2. Properties

The Company and its subsidiaries operate in a number of plants, laboratories, warehouses and office facilities in the United States and abroad.

At December 31, 2002, the Company utilized approximately 34 million square feet of floor space for manufacturing, engineering, research, administration, sales and warehousing, approximately 95% of which was located in the United States. Of this total, approximately 44% was owned, approximately 52% was leased, and approximately 4% was made available under facilities contracts for use in the performance of U.S. Government contracts. At December 31, 2002 the Company had approximately 1.4 million square feet of additional floor space that was not in use, including approximately 525,000 square feet in Company-owned facilities.

There are no major encumbrances on any of the Company’s facilities other than financing arrangements which in the aggregate are not material. In the opinion of management, the Company’s properties have been well maintained, are in sound operating condition and are adequate for the Company to operate at present levels.

At December 31, 2002, our business segments had major operations at the following locations:

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A summary of the utilized floor space at December 31, 2002, by business segment, follows:

(in square feet with 000’s omitted)

Additional information regarding the effect of compliance with environmental protection requirements and the resolution of environmental claims against the Company and its operations is contained in the “Risk Factors” section beginning on page 10 of this Form 10-K, in Item 3. “Legal Proceedings” immediately below, in “Commitments and Contingencies” within Item 7 of this Form 10-K and in “Note M – Commitments and Contingencies” within Item 8 of this Form 10-K.

Item 3. Legal Proceedings

The Company is primarily engaged in providing products and services under contracts with the U.S. Government and, to a lesser degree, under direct foreign sales contracts, some of which are funded by the U.S. Government. These contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether the Company’s operations are being conducted in accordance with these requirements. U.S. Government investigations of the Company, whether relating to these contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon the Company, the suspension of government export licenses, or the suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against the Company. Defense contractors are also subject to many levels of audit and investigation. Agencies which oversee contract performance include: the Defense Contract Audit Agency, the Department of Defense Inspector General, the General Accounting Office, the Department of Justice and Congressional Committees. The Department of Justice from time to time has convened grand juries to investigate possible irregularities by the Company.

As previously reported, during late 1999, the Company and two of its officers were named as defendants in several purported class action lawsuits. These lawsuits were consolidated into a single complaint in June 2000, when four additional former or present officers were named as defendants in a Consolidated and Amended Class Action Complaint (the “Consolidated Complaint”) with the caption, In Re Raytheon Securities Litigation (Civil Action No. 12142-PBS), filed in the U.S. District Court in Massachusetts. The Consolidated Complaint principally alleges that the defendants violated federal securities laws by purportedly making misleading statements and by failing to disclose material information concerning the Company’s financial performance during the purported class period. In September 2000, the Company and the individual defendants filed a motion to dismiss the Consolidated Complaint. The plaintiffs opposed the motions. The court heard arguments in February 2001, and in August 2001 the court issued an order dismissing most of the claims asserted against the Company and the individual defendants. In March 2002, the court certified the class of plaintiffs as

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those people who purchased Raytheon stock between October 7, 1998 through October 12, 1999. On March 17, 2003 the named plaintiff filed a Second Consolidated and Amended Complaint which did not change the claims against the Company or the individual defendants, but which seeks to add the Company’s auditor as an additional defendant. Discovery is proceeding on the two circumstances that remain the subject of claims.

As previously reported, the Company also was named as a nominal defendant and all of its directors at the time (except one) were named as defendants in purported derivative lawsuits filed on October 25, 1999 in the Court of Chancery of the State of Delaware in and for New Castle County by Ralph Mirarchi and others (No. 17495- NC), and on November 24, 1999 in Middlesex County, Massachusetts, Superior Court by John Chevedden (No. 99-5782). On February 28, 2000, Mr. Chevedden filed another derivative action in the Delaware Chancery Court entitled John Chevedden v. Daniel P. Burnham, et al., (No. 17838- NC) and on March 22, 2000, Mr. Chevedden’s Massachusetts derivative action was dismissed. The Mirarchi and Chevedden derivative complaints contain allegations similar to those included in the Consolidated Complaint in the In Re Raytheon Securities Litigation, and further allege that the defendants purportedly breached fiduciary duties to the Company and allegedly failed to exercise due care and diligence in the management and administration of the affairs of the Company. In December 2001 the Company and the individual defendants filed a motion to dismiss the Mirarchi complaint (the only one of these actions for which service of process of the complaint was by then completed.) The court has since consolidated the Mirachi and Chevedden actions, and plaintiffs have filed a Consolidated Amended Complaint. The defendants have advised the court that they intend to file a motion to dismiss the Consolidated Amended Complaint.

As previously reported, in June 2001, a purported class action lawsuit entitled, Muzinich & Co., Inc. et al v. Raytheon Company, et. al., (Civil Action No. 01-0284-S-BLW) was filed in federal court in Boise, Idaho allegedly on behalf of all purchasers of common stock or senior notes of Washington Group International, Inc. (“WGI”) during the period April 17, 2000 through March 1, 2001 (the class period). The putative plaintiff class claims to have suffered harm by purchasing WGI securities because the Company and certain of its officers allegedly violated federal securities laws by purportedly misrepresenting the true financial condition of RE&C in order to sell RE&C to WGI at an artificially inflated price. An amended complaint was filed on October 1, 2001 alleging similar claims. The Company and the individual defendants filed a motion seeking to dismiss the action in mid-November 2001. On April 30, 2002, the Court denied the Company’s and the individual defendants’ motion to dismiss the complaint. Thereafter, the defendants filed a petition with the District Court requesting permission to seek an immediate appeal of the District Court’s decision to the United States Court of Appeals for the Ninth Circuit, which the District Court granted on July 1, 2002. In August 2002, the Ninth Circuit issued an order denying the petition for interlocutory appeal. Defendants have filed their answer to the amended complaint and discovery is proceeding.

As previously reported, the Company has been named as a nominal defendant and all of its directors at the time have been named as defendants in two identical purported derivative lawsuits filed in Chancery Court in New Castle County, Delaware in July 2001, entitled Melvin P. Haar v. Barbara M. Barrett, et. al., (Civil Action No. 19018) and Howard Lasker v. Barbara M. Barrett, et. al., (Civil Action No. 19027). The Haar and Lasker derivative complaints contain allegations similar to those included in the Muzinich class action complaint and further allege that the individual defendants breached fiduciary duties to the Company and purportedly failed to maintain systems necessary for prudent management and control of the Company’s operations. In December 2001 the Company and the individual defendants filed a motion to dismiss the Haar complaint, the only one of these actions for which service was by then completed. In addition, the Company has been named as a nominal defendant and members of its Board of Directors and several current and former officers have been named as defendants in another purported shareholder derivative action entitled Richard J. Kager v. Daniel P. Burnham, et. al., (Civil Action No. 01-11180-JLT) filed in July 2001 in the U. S. District Court in Massachusetts. The Kager derivative complaint contains allegations similar to those included in the Muzinich complaint, and further alleges that the individual defendants breached fiduciary duties to the Company and purportedly failed to maintain systems necessary for prudent management and control of the Company’s operations. On June 28, 2002, all of the defendants in the Kager matter filed a motion to dismiss the complaint. In September 2002, the plaintiff agreed voluntarily to dismiss this action without prejudice so that the plaintiff may re-file the action in Delaware.

Although the Company believes that it has meritorious defenses to the claims made in each and all of the aforementioned complaints and intends to contest each proceeding vigorously, an adverse resolution of any of the proceedings could have a material adverse effect on the Company’s financial position and results of operations in the period in which the lawsuits are resolved. The Company is not presently able to reasonably estimate potential losses, if any, related to any of the lawsuits.

On November 25, 2002, the SEC instituted and settled cease-and-desist proceedings against the Company and a former executive officer of the Company for alleged violations of Regulation FD in February 2001. The settlement did not impose any civil penalty or other monetary sanctions against the Company or any of its employees. The Company neither admitted nor denied the findings in the SEC’s cease-and-desist order.

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On February 27, 2003, the Company entered into a settlement agreement with the U.S. Attorney for the District of Massachusetts, the U.S. Customs Service, and the office of Defense Trade Controls of the U.S. Department of State to resolve the U.S. government’s investigation of the contemplated sale by the Company of troposcatter radio equipment to a customer in Pakistan. According to the terms of the settlement, the Company paid a $23 million civil penalty, and will spend $2 million to improve the Company’s export compliance program. In addition, the Company has agreed to appoint a special compliance officer from outside the Company to oversee the Company’s export activities principally at the communications business of NCS. The amount of the civil penalty was fully reserved and, therefore, will not affect the Company’s results of operations.

As previously reported, in June 2002 the Company received service of a grand jury subpoena issued by the United States District Court for the Central District of California. The subpoena seeks documents relating to the activities of an international sales representative engaged by the Company relating to a foreign military sales contract in Korea in the late 1990s. The Company has in place appropriate compliance policies and procedures, and believes its conduct has been consistent with those policies and procedures. The Company continues to cooperate fully with the Government’s investigation.

The Company continues to cooperate with the staff of the SEC on an investigation related to the Company’s accounting practices primarily related to the commuter aircraft business and the timing of revenue recognition at Raytheon Aircraft from 1997 to 2001. The Company has been providing documents and information to the SEC staff. The Company is unable to predict the outcome of the investigation or any action that the SEC might take.

Several claims have been asserted and certain proceedings have been commenced against the Company and certain third parties seeking schedule and performance liquidated damages and payment under certain outstanding Company guarantees in connection with the Jindal, Posven, Ratchaburi, Saltend, Ilijan and Red Oak construction contracts. These contracts were rejected by WGI in bankruptcy. Additionally, several other proceedings have been commenced against the Company by parties that had contractual relationships with certain former indirect subsidiaries of the Company which comprised its engineering and construction business. These former indirect subsidiaries were transferred to WGI in the sale of the engineering and construction business to WGI. The plaintiffs in these proceedings have alleged that the Company is responsible to them on various theories including alter ego liability and the assignment to, and/or the assumption by, the Company of the former indirect subsidiaries’ obligations. While the Company cannot predict the outcome of these matters, in the opinion of management, any liability arising from them will not have a material adverse effect on the Company’s financial position, liquidity or results of operations after giving effect to provisions already recorded.

The Company is involved in various stages of investigation and cleanup relative to remediation of various environmental sites. All appropriate costs expected to be incurred in connection therewith have been accrued. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage and the unresolved extent of the Company’s responsibility, it is difficult to determine the ultimate outcome of these matters. However, in the opinion of management, any liability will not have a material effect on the Company’s financial position, liquidity or results of operations. Additional information regarding the effect of compliance with environmental protection requirements and the resolution of environmental claims against the Company and its operations is contained in the “Risk Factors” section beginning on page 10 of this Report, in “Commitments and Contingencies” within Item 7 of this Form 10-K and in “Note M – Commitments and Contingencies” within Item 8 of this Form 10-K.

Accidents involving personal injuries and property damage occur in general aviation travel. When permitted by appropriate government agencies, Raytheon Aircraft investigates accidents related to its products involving fatalities or serious injuries. Through a relationship with FlightSafety International, Raytheon Aircraft provides initial and recurrent pilot and maintenance training services to reduce the frequency of accidents involving its products.

Raytheon Aircraft is a defendant in a number of product liability lawsuits that allege personal injury and property damage and seek substantial recoveries including, in some cases, punitive and exemplary damages. Raytheon Aircraft maintains partial insurance coverage against such claims and maintains a level of uninsured risk determined by management to be prudent. Additional information regarding aircraft product liability insurance is contained in “Note M – Commitments and Contingencies” within Item 8 of this Form 10-K.

The insurance policies for product liability coverage held by Raytheon Aircraft do not exclude punitive damages, and it is the position of Raytheon Aircraft and its counsel that punitive damage claims are therefore covered. Historically, the defense of punitive damage claims has been undertaken and paid by insurance carriers. Under the law of some states,

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however, insurers are not required to respond to judgments for punitive damages. Nevertheless, to date no judgments for punitive damages have been sustained.

Various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While the Company cannot predict the outcome of these matters, in the opinion of management, any liability arising from them will not have a material adverse effect on the Company’s financial position, liquidity or results of operations after giving effect to provisions already recorded.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

Item 4(A). Executive Officers of the Registrant

The executive officers of the Company are listed below. Each executive officer was elected by the Board of Directors to serve for a term of one year and until his or her successor is elected and qualified or until his or her earlier removal, resignation or death.

Daniel P. Burnham: Chairman and Chief Executive Officer since July 31, 1999. Prior thereto, Mr. Burnham served as President and Chief Executive Officer from December 1, 1998 to July 31, 1999 and as President and Chief Operating Officer from July 1, 1998 to December 1, 1998. Prior to joining the Company, Mr. Burnham was Vice Chairman of AlliedSignal, Inc. from October 1997 and President of AlliedSignal Aerospace and an Executive Vice President of AlliedSignal, Inc. from 1992 until becoming Vice Chairman in 1997. Director: FleetBoston Corporation. Age: 56.

Thomas M. Culligan: Executive Vice President for business development and CEO of Raytheon International, Inc. since March 2001. From 1999 to March 2001, Mr. Culligan was vice president and general manager of Defense and Space at Honeywell International Inc. Prior thereto, from 1994 to 1999, Mr. Culligan held various positions at Allied Signal, including Vice President, Europe, Africa and the Middle East for Allied Signal’s Marketing, Sales & Service unit and President of Government Operations. Age: 51.

Bryan J. Even: Vice President of Raytheon Company since April 2002 and President of Raytheon Technical Services Company (RTSC) since October 2001. Before assuming leadership of RTSC, Mr. Even had oversight for the Engineering and Production Support business unit in Indianapolis, formerly the Naval Air Warfare Center, from 1999 to 2001. Between 1998 and 1999, Mr. Even was Director of East Coast Depot Operations for RTSC and prior thereto, was the Deputy General Manager of the Engineering and Depots Group of Raytheon Service Company. Age 42.

Richard J. Foley: Vice President – Contracts since February 1999. Prior to assuming his present position, Mr. Foley was appointed Corporate Director of Contracts in April 1998. Between 1995 and 1998, Mr. Foley was the Manager of Contracts of Raytheon’s Electronic Systems Division. Mr. Foley has served Raytheon for more than 35 years holding senior contract management positions with the Company. Age: 58.

Louise L. Francesconi: Vice President of Raytheon Company and President of Missile Systems since September 2002. From November 1999 to September 2002, Ms. Francesconi was Vice President of Raytheon Company and General Manager of the Missile Systems business unit within Electronic Systems. Previously, she was a Senior Vice President of the former Raytheon Systems Company and Deputy General Manager of the company’s Defense Systems segment from February 1998 to November 1999. Between 1996 and the merger of Raytheon Company and Hughes Aircraft Company in 1998, Ms. Francesconi was president of the Hughes Missile Company. Age: 49.

Charles E. Franklin: Vice President of Raytheon Company and President of Integrated Defense Systems (IDS) since September 2002. Mr. Franklin joined Raytheon Company in 1998 and until his current assignment served as Vice President and General Manager of the Air and Missile Defense Systems business unit within Electronic Systems. Prior to that, Mr. Franklin was Vice President, Programs and Mission Success at Lockheed Martin Sanders Company for two years. Age: 64.

Richard A. Goglia: Vice President and Treasurer since January 1999. Prior to that, Mr. Goglia was Director, International Finance from March 1997. Prior to joining the Company, Mr. Goglia spent 16 years at GE and GE Capital Corporation. Age: 51.

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Jack R. Kelble: Vice President of Raytheon Company and President of Space and Airborne Systems (SAS) since September 2002. From October 2001 to September 2002, Mr. Kelble was Vice President and General Manager of the Surveillance and Reconnaissance business unit within Electronic Systems. Prior thereto, Mr. Kelble was Vice President of Engineering for Electronic Systems between January 2000 and October 2001, Senior Vice President and Deputy General Manager of the Sensors and Electronic Systems business unit within Electronic Systems between October 1998 and January 2000 and Vice President and General Manager of the Integrated Systems business unit within Electronic Systems between January 1998 and October 1998. Age 60.

Michael D. Keebaugh: Vice President of Raytheon Company and President of Intelligence and Information Systems (IIS) since September 2002. From February 1998 to September 2002, Mr. Keebaugh was Vice President and General Manager of the Imagery and Geospatial Systems business unit within Command, Control, Communication and Information Systems. Prior thereto, Mr. Keebaugh was Vice President and General Manager of Imagery and Geospatial Systems within Raytheon Systems Company. Age: 57.

Francis S. Marchilena: Executive Vice President of Raytheon Company and Director of Discontinued Business since July 2002. Executive Vice President and President of Raytheon’s Command, Control, Communication and Information Systems segment from 1999 to June 2002. Executive Vice President and General Manager of the Command, Control and Communication Systems segment of Raytheon Systems Company (1998-1999); Executive Vice President and General Manager of the Training and Services Segment of Raytheon Systems Company from January 1998 to June 1998; between 1996 and 1998, Mr. Marchilena was the Assistant General Manager for Raytheon Electronic Systems. Mr. Marchilena has served Raytheon for more than 34 years holding increasingly responsible management positions with the Company. Age: 57.

Keith J. Peden: Senior Vice President – Human Resources since March 2001. Prior to assuming his present position, Mr. Peden was Vice President Deputy Director – Human Resources since November 1997 and Corporate Director of Benefits and Compensation since April 1993. Age: 52.

Edward S. Pliner: Senior Vice President and Chief Financial Officer since December 2002. Prior to assuming his present position, Mr. Pliner was Vice President and Corporate Controller since April 2000. Between April 2000 and September 1995, Mr. Pliner was a Partner of PricewaterhouseCoopers LLP. Age: 45.

Rebecca B. Rhoads: Vice President and Chief Information Officer since April 2001. Prior to assuming her present position, Ms. Rhoads was Vice President of Information Systems Technology of Raytheon’s Electronic Systems segment from February 2000 and Vice President of Information Technology, Defense Systems business unit of Raytheon Systems Company since July 1999. Between 1996 and 1999, Ms. Rhoads was Director of the Raytheon Test Systems Design Center. Age: 45.

Colin Schottlaender: Vice President of Raytheon Company and President of Network Centric Systems (NCS) since September 2002. From November 1999 to September 2002, Mr. Schottlaender was Vice President and General Manager of the Tactical Systems business unit within Electronic Systems. Between December 1997 and November 1999, Mr. Schottlaender was Vice President of Tactical Systems within the Sensors and Electronic Systems business unit of Raytheon Systems Company. Prior assignments included domestic and international business development, program management, quality assurance, test engineering and product design/manufacture. Age: 47.

James E. Schuster: Executive Vice President of Raytheon Company and Chairman and Chief Executive Officer—Raytheon Aircraft Company since May 2001. Prior to assuming his present position, Mr. Schuster was Vice President of Raytheon Company and President of Aircraft Integration Systems from April 2000 and Senior Vice President and Deputy General Manager for Aircraft Integration Systems since September 1999. Prior to joining the Company, Mr. Schuster was President, Motors & Generators, Magnetex, Inc. since 1996. Age: 49.

Gregory S. Shelton: Vice President – Engineering and Technology since May 2001. Prior to assuming his present position, Mr. Shelton served as Vice President of Engineering for Raytheon’s Missile Systems business unit within the Electronic Systems segment since 1998. Prior to that, he was Vice President, Engineering for Hughes Weapons Systems segment from 1996 to 1997. He also served as Vice President and Product Line Manager, Air Missiles and Advanced Programs and Technology for Hughes Missile Systems Company from 1995 to 1996. Age: 52.

Jay B. Stephens: Senior Vice President and General Counsel of Raytheon since October 2002. Prior to joining Raytheon, Mr. Stephens was Associate Attorney General of the United States from January 2002 to October 2002. Before becoming

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Associate Attorney General, Mr. Stephens was Corporate Vice President and Deputy General Counsel for Honeywell International (formerly AlliedSignal) from 1997 to 2001. From 1993 to 1997, he was a partner in the Washington office of the law firm of Pillsbury, Madison & Sutro (now Pillsbury and Winthrop). Mr. Stephens served as United States Attorney for the District of Columbia from 1988 to 1993. From 1986 to 1988, he served in the White House as Deputy Counsel to the President. Age 56.

William H. Swanson: President of Raytheon Company since July 2002. Before assuming this position, he was Executive Vice President of Raytheon Company and President of Raytheon’s Electronic Systems segment from January 2000 to July 2002. Mr. Swanson was Executive Vice President of Raytheon Company and Chairman and CEO of Raytheon Systems Company from January 1998 to January 2000. He was Executive Vice President of Raytheon Company and General Manager of Raytheon’s Electronic Systems segment from March 1995 to January 1998 and Senior Vice President and General Manager of Missile Systems Division from August 1990 to March 1995. Mr. Swanson has served Raytheon for more than 30 years holding increasingly responsible management positions with the Company. Age 54.

PART II

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

At December 31, 2002, there were approximately 74,900 record holders of the Company’s common stock. The Company’s common stock is traded on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the symbol RTN. For information concerning stock prices and dividends paid during the past two years, see “Note Q – Quarterly Operating Results (unaudited)” within Item 8 of this Form 10-K.

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Item 6.     Selected Financial Data

Five-Year Statistical Summary

Note: In 2002, the Company changed its method of inventory costing at Raytheon Aircraft from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The change decreased the net loss in 2002 by $7 million or $0.02 per diluted share. Prior periods have been restated to reflect this change. The effect of the change on the reported net loss in 2001 was a decrease of $8 million or $0.02 per diluted share. The effect of the change on reported net income was a decrease of $3 million or $0.01 per diluted share in 2000, $5 million or $0.01 per diluted share in 1999, and $4 million or $0.01 per diluted share in 1998. In addition, certain prior year amounts have been reclassified to conform with the current year presentation.

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

Overview

Raytheon Company (the “Company”) is one of the largest defense electronics contractors in the world, serving all branches of the U.S. military and other U.S. government agencies, NATO, and many allied governments. The Company is a leader in defense electronics, including missiles; radar; sensors and electro-optics; intelligence, surveillance, and reconnaissance (ISR); command, control, communication, and information systems; naval systems; air traffic control systems; and technical services. The Company’s defense electronics businesses are well positioned to capitalize on emerging opportunities in missile defense; precision engagement; intelligence, surveillance, and reconnaissance; and homeland security. Due to the multi-year defense spending cycle, recent increased budget authorizations in these areas are expected to favorably impact the Company’s defense electronics businesses over the next several years. Raytheon’s commercial electronics businesses leverage defense technologies in commercial markets.

Raytheon Aircraft is a leading provider of business and special mission aircraft and delivers a broad line of jet, turboprop, and piston-powered airplanes to corporate and government customers worldwide. The Company continues to see soft demand for new and used aircraft in 2003.

Defense Industry Considerations

Few recent developments have altered the defense and security environment of the United States as dramatically as the events of September 11, 2001. In response, the U.S. has committed itself to a long-term war on terrorism. Simultaneously, the U.S. must also replenish war materials consumed during operations in Afghanistan while also making progress toward Secretary Rumsfeld’s goal of military transformation. The latest U.S. Department of Defense budget reflects these three diverse objectives.

Military transformation, which had been under review prior to September 11^th, is expected to gain momentum. Secretary Rumsfeld is focused on 4 pillars of transformation:

Ÿ Strengthening joint operations

Ÿ Experimenting with new approaches to warfare

Ÿ Exploiting U.S. intelligence advantages

Ÿ Developing transformational capabilities

Transformation is focused on meeting the military challenges of the future. In this new environment, the need for advanced technology and defense electronics is clear. In order to respond quickly to global threats and protect our forces in-theater, the U.S. will have to rely more heavily on intelligence and instantaneous, secure communication. At the same time, our military must also help defend the homeland against terrorist and missile attack.

The Company’s strategy is focused on meeting domestic and international customers’ needs in areas where the Company has both experience and technology discriminators. The Company’s growth strategy is focused on four strategic business areas:

Ÿ Missile Defense

Ÿ Precision Engagement

Ÿ Intelligence, Surveillance and Reconnaissance

Ÿ Homeland Security

The President has made a commitment to have a U.S. missile defense system operational by 2004. The Company has a broad array of technology and capabilities in this growing area. From the Company’s hit-to-kill weapons, to radar sensors, to space-based infrared sensors, to command and control, the Company is positioned to meet the nation’s needs.

While the Company’s position as a leader in Missile Defense is well recognized, Precision Engagement is a much broader concept. It includes the identification and tracking of targets as well as engagement and effectiveness assessment. The Company produces products across the entire engagement chain.

The Company’s innovative sensing, processing, and dissemination technologies effectively compress the information gap from hours to minutes. The Company’s Intelligence, Surveillance and Reconnaissance programs cover the full spectrum of information management, providing the ability to task, collect, process, exploit, and disseminate national and tactical target data. These abilities are crucial for warfighters to achieve information dominance throughout the entire battlespace.

In the area of Homeland Security, the Company has skills, experience, and technology in areas such as airport security; command, control, and communications; and the integration and fusion of sensory inputs for real-time decision support. This is still a new market with significant uncertainty and the ultimate customers and available funding have yet to be determined.

Unlike many major defense contractors, the Company provides electronics for a wide range of missions and platforms. The Company has several thousand programs. This reduces some of the risk and volatility often inherent in the defense industry.

The Company generally acts as a prime contractor or subcontractor on its programs. The funding of U.S. government programs is subject to Congressional authorization and appropriation. While Congress generally appropriates funds on a fiscal year basis, major defense programs are usually conducted under binding contracts over multiple years, which provides a level of continuity uncommon to many industries. The termination of funding for a U.S. government program could result in a loss of future revenues, which would have a negative effect on the Company’s financial position and results of operations. U.S. government contracts are generally subject to oversight audits and contain provisions for termination. Failure to comply with U.S. government regulations could lead to suspension or debarment from U.S. government contracting.

Sales to the U.S. government may be affected by changes in procurement policies, budget considerations, changing defense requirements, and political developments. The influence of these factors, which are largely beyond the Company’s control, could impact the Company’s operations.

Consolidated Results of Operations

Net sales were $16.8 billion in 2002, $16.0 billion in 2001, and $15.8 billion in 2000. Sales to the U.S. Department of Defense were 62 percent of sales in 2002 and 59 percent in 2001 and 2000. Total sales to the U.S. government, including foreign military sales, were 73 percent of sales in 2002, 70 percent in 2001, and 65 percent in 2000. International sales, including foreign military sales, were 21 percent of sales in 2002, 22 percent in 2001, and 20 percent in 2000.

Gross margin, net sales less cost of sales, was $3.4 billion in 2002, $2.4 billion in 2001, and $3.2 billion in 2000, or 20.3 percent of sales in 2002, 14.7 percent in 2001, and 20.3 percent in 2000. Included in gross margin in 2001 were charges of $745 million at Raytheon Aircraft, described below in Segment Results, and goodwill amortization of $334 million which was discontinued January 1, 2002 in accordance with SFAS No. 142, described below. Included in gross margin in 2000 was a $74 million favorable adjustment to restructuring-related reserves that was more than offset by unfavorable contract adjustments. Also included in gross margin in 2000 was goodwill amortization of $337 million. Excluding the Raytheon Aircraft charges and goodwill amortization, gross margin was $3.4 billion or 21.4 percent of sales in 2001. Excluding goodwill amortization, gross margin was $3.5 billion or 22.4 percent of sales in 2000. The decrease in gross margin as a percent of sales in 2002 was due to lower pension income. The decrease in gross margin as a percent of sales in 2001 was due to lower margins at Raytheon Aircraft. Included in gross margin was pension income of $89 million, $297 million, and $143 million in 2002, 2001, and 2000, respectively. Beginning in the first quarter of 2003, the Company will change the way pension expense or income is reported in the Company’s segment results, described below in Segment Reorganization.

Administrative and selling expenses were $1,199 million or 7.2 percent of sales in 2002, $1,131 million or 7.1 percent of sales in 2001, and $1,117 million or 7.1 percent of sales in 2000.

Research and development expenses were $449 million or 2.7 percent of sales in 2002, $456 million or 2.8 percent of sales in 2001, and $507 million or 3.2 percent of sales in 2000. The decrease in research and development expenses in 2002 and 2001 was due to more focused research and development efforts and new program investments made in 2000.

Operating income was $1,754 million or 10.5 percent of sales in 2002, $766 million or 4.8 percent of sales in 2001, and $1,580 million or 10.0 percent of sales in 2000. Excluding the Raytheon Aircraft charges and goodwill amortization, operating income was $1,845 million or 11.5 percent of sales in 2001. Excluding goodwill amortization,

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operating income was $1,917 million or 12.1 percent of sales in 2000. The changes in operating income by segment are described below in Segment Results.

Interest expense from continuing operations was $497 million in 2002, $696 million in 2001, and $761 million in 2000. In 2002 and 2001, the Company allocated $79 million and $18 million, respectively, of interest expense to discontinued operations. The Company will not allocate interest expense to discontinued operations in 2003. Total interest expense was $576 million in 2002 and $714 million in 2001. The decrease in 2002 and 2001 was due to lower average debt and lower weighted-average cost of borrowing due, in part, to the interest rate swaps entered into in 2001, described below in Capital Structure and Resources. The weighted-average cost of borrowing was 6.7 percent in 2002, 7.1 percent in 2001, and 7.3 percent in 2000.

Interest income was $27 million in 2002, $36 million in 2001, and $25 million in 2000.

Other expense, net was $210 million in 2002 versus other income, net of $18 million in 2001 and other expense, net of $12 million in 2000. Included in other expense, net in 2002 was a $175 million charge to write off the Company’s investment in Space Imaging^® and accrue for a related credit facility guarantee on which the Company expects to make payment in 2003, described below in Major Affiliated Entities, and a $29 million gain on the sale of the Company’s corporate headquarters. Other income and expense also included gains and losses on divestitures and equity losses in unconsolidated subsidiaries, as described in Note S, Other Income and Expense of the Notes to Consolidated Financial Statements.

The effective tax rate was 29.7 percent in 2002, reflecting the U.S. statutory rate of 35 percent reduced by foreign sales corporation tax credits, ESOP dividend deductions, and research and development tax credits applicable to certain government contracts. The effective tax rate was 85.5 percent in 2001, reflecting the U.S. statutory rate of 35 percent reduced by foreign sales corporation tax credits, ESOP dividend deductions, and research and development tax credits applicable to certain government contracts, and increased by non-deductible amortization of goodwill. The effective tax rate was 42.7 percent in 2000, reflecting the U.S. statutory rate of 35 percent reduced by foreign sales corporation tax credits and research and development tax credits applicable to certain government contracts, and increased by non-deductible amortization of goodwill. Excluding the effect of the Raytheon Aircraft charges and goodwill amortization, the effective tax rate was 32.9 percent in 2001. Excluding the effect of goodwill amortization, the effective tax rate was 32.7 percent in 2000. At December 31, 2002, the Company had net operating loss carryforwards of $1.2 billion that expire in 2020 through 2022 and foreign tax credit carryforwards of $87 million that expire in 2005 through 2007. The Company believes it will be able to utilize all of these carryforwards over the next 3 to 4 years.

Income from continuing operations was $755 million or $1.85 per diluted share on 408.0 million average shares outstanding in 2002, $18 million or $0.05 per diluted share on 361.3 million average shares outstanding in 2001, and $477 million or $1.40 per diluted share on 341.1 million average shares outstanding in 2000. Excluding the Raytheon Aircraft charges and goodwill amortization, income from continuing operations was $807 million or $2.23 per diluted share in 2001. Excluding goodwill amortization, income from continuing operations was $787 million or $2.31 per diluted share in 2000. The increase in average shares outstanding was due primarily to the issuance of 14,375,000 and 31,578,900 shares of common stock in May and October 2001, respectively.

The loss from discontinued operations, net of tax, described below in Discontinued Operations, was $887 million or $2.17 per diluted share in 2002, $757 million or $2.10 per diluted share in 2001, and $339 million or $0.99 per diluted share in 2000.

There was an extraordinary gain from debt repurchases of $1 million after-tax in 2002 and an extraordinary loss from debt repurchases of $16 million after-tax or $0.04 per diluted share in 2001.

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This accounting standard addresses financial accounting and reporting for goodwill and other intangible assets and requires that goodwill amortization be discontinued and replaced with periodic tests of impairment. In accordance with SFAS No. 142, goodwill amortization was discontinued as of January 1, 2002. In 2002, the Company recorded a goodwill impairment charge of $360 million related to its former Aircraft Integration Systems business (AIS) as a cumulative effect of change in accounting principle. Due to the non-deductibility of this goodwill, the Company did not record a tax benefit in connection with this impairment. Also in 2002, the Company completed its transitional review for potential goodwill impairment in accordance with SFAS No. 142, whereby the Company utilized a market multiple approach to determine the fair value of the 13 reporting units within the defense businesses and allocated goodwill to the defense businesses based upon an estimate of the fair value of the portion of a previously acquired company contribution to the new segment. The Company utilized a discounted cash flow approach to determine the fair value of the commercial business reporting units. As a result, the Company recorded a goodwill impairment charge of $185 million pretax or $149 million after-tax, which represented all of the goodwill at Raytheon Aircraft, as a cumulative effect of change in accounting principle. The Company also determined that there was no impairment of goodwill related to any of its defense businesses beyond the $360 million related to AIS. The total goodwill impairment charge in 2002 was $545 million pretax, $509 million after-tax, or $1.25 per diluted share.

The net loss was $640 million or $1.57 per diluted share in 2002 versus $755 million or $2.09 per diluted share in 2001 and net income of $138 million or $0.40 per diluted share in 2000. Excluding the Raytheon Aircraft charges and goodwill amortization, net income was $62 million or $0.17 per diluted share in 2001. Excluding goodwill amortization, net income was $481 million or $1.41 per diluted share in 2000.

Prior Period Restructuring Initiatives

The Company essentially completed all prior period restructuring initiatives in 2000 except for ongoing idle facility costs. At December 31, 2002, the accrued liability related to prior period restructuring initiatives was $4 million.

In 2002, the Company determined that the cost of certain prior period restructuring initiatives would be lower than originally planned and recorded a $4 million favorable adjustment to cost of sales, a $3 million favorable adjustment to general and administrative expenses, and a $1 million reduction in goodwill.

In 2001, the Company determined that the cost of certain prior period restructuring initiatives would be lower than originally planned and recorded an $8 million favorable adjustment to cost of sales.

In 2000, the Company determined that the cost of certain prior period restructuring initiatives would be lower than originally planned and recorded a $74 million favorable adjustment to cost of sales and an $11 million reduction in goodwill.

Segment Descriptions

Electronic Systems (ES) is the largest segment and represents the majority of the Company’s defense electronics businesses. ES focuses on missile systems including anti-ballistic missile systems; air defense; air-to-air, surface-to-air, and air-to-surface missiles; naval and maritime systems; ship self-defense systems; strike, interdiction, and cruise missiles; and advanced munitions. ES also specializes in radar, electronic warfare, infrared, laser, and GPS technologies with programs focusing on land, naval, airborne, and spaceborne systems used for surveillance, reconnaissance, targeting, navigation, commercial, and scientific applications. Some of the leading programs in ES include: the Patriot Air Defense System; the Ground-Based Radar for the THAAD system; technologies for the U.S. Missile Defense Agency; the Tomahawk Cruise Missile program; airborne radar systems for the B-2, F-14, F-15, F/A-18, AV-8B, and the next generation F-22 programs; sensors for applications such as the Global Hawk^® and Predator Unmanned Aerial Vehicle Reconnaissance Systems; and advanced night vision technologies.

Command, Control, Communication and Information Systems (C3I) is involved in battle management systems; communication systems; network security software; fire control systems; high resolution space-based imaging systems; air traffic control systems; tactical radios; satellite communication ground control terminals; wide area surveillance systems;

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ground-based information processing systems; image processing; large scale information retrieval, processing, and distribution systems; and global broadcast systems. Some of the leading programs in C3I include: the U.S. Navy’s Cooperative Engagement Capability (CEC) program that integrates sensor information from multiple sources to provide ships, aircraft, and land-based installations an integrated air picture; the Brazilian System for the Vigilance of the Amazon (SIVAM^®), which provides an integrated information network linking numerous sensors to regional and national coordination centers; and air traffic control and weather systems at airports worldwide, including the Federal Aviation Administration/Department of Defense Standard Terminal Automation Replacement System (STARS) program. Through C3I, the Company operates a trans-atlantic joint venture, Thales Raytheon Systems^™ (TRS^™), encompassing air defense/command and control centers, and ground-based air surveillance and weapon-locating radars.

Technical Services (TS) provides information technology services, training programs, and logistics and base operations support throughout the U.S. and other countries. TS performs complete engineering and depot-level cradle-to-grave support for the Company’s manufactured equipment and to various commercial and military customers. TS is a world leader in providing and supporting range instrumentation systems and bases worldwide for the Department of Defense. TS also provides missile range calibration services for the U.S. Air Force, trains U.S. Army personnel in battlefield tactics, and supports undersea testing and evaluation for the U.S. Navy. TS provides operations and engineering support to the Atlantic Underwater Test and Evaluation Center and range technical support and facilities maintenance at several Department of Defense facilities.

The Company’s commercial electronics businesses produce, among other things, precision optical products for defense, commercial, and telecommunications customers; gallium arsenide integrated circuits and power amplifiers for defense and wireless communications customers; thermal imaging products for the public safety, industrial, and transportation markets; navigation and communication systems for the commercial and military marine markets; and other electronic components for a wide range of applications.

Raytheon Aircraft Company (RAC) offers a broad product line of aircraft and aviation services in the general aviation market. RAC manufactures, markets, and supports business jets, turboprops, and piston-powered aircraft for the world’s commercial, regional airline, fractional ownership, and military aircraft markets. RAC’s piston-powered aircraft line includes the single-engine Beech^® Bonanza^® and the twin-engine Beech Baron^® aircraft for business and personal flying. The King Air^® turboprop series includes the Beech King Air C90B, B200, and 350. The jet line includes the Beechjet^® 400A light jet, the Hawker^® 800XP midsize business jet, and the Beechcraft Premier I^™ entry-level business jet. A new super midsize business jet, the Hawker Horizon^®, is currently in development, with anticipated certification in late 2003 or the first half of 2004, however, the Company’s primary objective is to produce a jet that meets all performance expectations and is ready to ship in 2004. RAC also supplies aircraft training systems, including the T-6A trainer selected as the next-generation trainer for the U.S. Air Force and Navy under the Joint Primary Aircraft Training System. Additionally, RAC produces special mission aircraft, including military versions of the King Air and the U-125 search-and-rescue variant of the Hawker 800. RAC also sells a 19-passenger regional airliner.

Segment Results

ES had 2002 sales of $9.0 billion versus $8.2 billion in 2001 and $7.7 billion in 2000. The increase in sales in 2002 was due to higher U.S. Department of Defense (DoD) expenditures. The increase in sales in 2001 was due to higher volume across most business units. Operating income was $1,260 million in 2002 versus $1,111 million in 2001 and $1,044 million in 2000. Excluding goodwill amortization, operating income was $1,302 million in 2001 and $1,237 million in 2000. The decrease in operating income in 2002 was due to lower pension income, offset by higher volume. The increase in operating income in 2001 was due to higher volume and higher pension income.

C3I had 2002 sales of $4.1 billion versus $3.8 billion in 2001 and $3.4 billion in 2000. The increase in sales in 2002 was due to higher U.S. DoD expenditures. The increase in sales in 2001 was due to higher volume in U.S. Navy, domestic air traffic control, classified, and secure network programs. Operating income was $420 million in 2002 versus $396 million in 2001 and $358 million in 2000. Included in operating income in 2002 was a charge related to a dispute on a previously terminated commercial contract and a charge related to a current contract dispute that could affect the collection of amounts due. These charges totaled $20 million. Also included was a charge of $19 million to write down receivables related to programs that ended in prior years. Excluding goodwill amortization, operating income was $496 million in 2001 and $458 million in 2000. The decrease in operating income in 2002 was due to the charges described above, cost growth on certain programs, and lower pension income, offset by higher volume. The increase in operating income in 2001 was due to higher volume and higher pension income.

TS had 2002 and 2001 sales of $2.1 billion versus $1.8 billion in 2000. The sales volume at TS remained flat in 2002 despite higher U.S. DoD expenditures due to the loss of several key programs. The increase in sales in 2001 was due to higher volume from new programs. Operating income was $128 million in 2002 versus $158 million in 2001 and $123 million in 2000. Excluding goodwill amortization, operating income was $186 million in 2001 and $152 million in 2000. The decrease in operating income in 2002 was due to a $28 million write-off of contract costs that the Company determined were unbillable. The decrease was offset by a similarly sized reserve at corporate established by the Company in the second half of 2001 to address the issue. The increase in operating income in 2001 was due to higher volume and higher pension income.

Commercial Electronics (CE) had 2002 sales of $423 million versus $453 million in 2001 and $666 million in 2000. The decrease in sales in 2002 and 2001 was due to the divestiture of the Company’s recreational marine business in January 2001 and lower

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volume at RF Components due to reduced industry-wide demand and pricing pressures for cellular handset components. The operating loss was $4 million in 2002 versus $57 million in 2001 and $4 million in 2000. The decrease in the operating loss in 2002 was due to the closure of certain unprofitable businesses and cost reduction actions taken. The increase in the operating loss in 2001 was due to the decline in volume. Contributing to the loss in 2000 was an $8 million restructuring charge at Raytheon Marine’s High Seas division and investments in new technology ventures, offset by a $21 million favorable settlement on a commercial training contract. Excluding goodwill amortization, CE had an operating loss of $50 million in 2001 and operating income of $4 million in 2000.

RAC had 2002 sales of $2.2 billion versus $2.6 billion in 2001 and $3.2 billion in 2000. The decrease in sales was due to lower aircraft deliveries, the divestiture of a majority interest in the Company’s fractional ownership business in March 2002, and the divestiture of a majority interest in the Company’s aviation support business in June 2001. The operating loss was $4 million in 2002 versus $760 million in 2001 and operating income of $159 million in 2000.

Included in the 2001 results was a charge of $693 million related to the Company’s commuter aircraft business. This was a result of continued weakness in the commuter aircraft market and the impact of the events of September 11, 2001 on the commuter airline industry. During the first half of 2001, the Company experienced a significant decrease in the volume of used commuter aircraft sales. An evaluation of commuter aircraft market conditions and the events of September 11, 2001 indicated that the market weakness would continue into the foreseeable future. As a result, the Company completed an analysis of the estimated fair value of the various models of commuter aircraft and reduced the book value of commuter aircraft inventory and equipment leased to others accordingly. In addition, the Company adjusted the book value of long-term receivables and established a reserve for off balance sheet receivables based on the Company’s estimate of exposures on customer financed assets due to defaults, refinancing, and remarketing of these aircraft. In 2002, the Company bought back the remaining off balance sheet receivables, described below in Off Balance Sheet Financing Arrangements. The Company also recorded a $52 million charge related to a fleet of Starship^® aircraft in 2001. During the first three quarters of 2001, the Company had not sold any of these aircraft and recorded a charge to reduce the value of the aircraft to their estimated fair value.

In connection with the buyback of the off balance sheet receivables, the Company recorded the long-term receivables at estimated fair value, which included an assessment of the value of the underlying aircraft. As a result of this assessment, the Company adjusted the value of certain underlying aircraft, including both commuter and Starship aircraft, some of which were written down to scrap value. There was no net income statement impact as a result of this activity.

Excluding the 2001 charges and goodwill amortization, the operating loss was $7 million in 2001. Excluding goodwill amortization, operating income was $166 million in 2000. The decrease in the operating loss in 2002 was due to cost reductions and an $18 million favorable contract adjustment recorded in 2002, partially offset by lower pension income and lower volume. The decrease in operating income in 2001 was due to adverse sales mix and margin pressure on T-6A, Beechjet, and used aircraft due to the market environment. The Company remains concerned about the market outlook for both new and used aircraft.

Included in Aircraft backlog is approximately $900 million related to an order for the Hawker Horizon which, due to current market conditions and development and certification delays, could be restructured or cancelled. Also included in Aircraft backlog is approximately $850 million related to an order received from Flight Options^®. If the Company consolidates Flight Options, as described below in Major Affiliated Entities, the Company would reduce its reported Aircraft backlog by approximately $850 million. In addition, in connection with the sale of a majority interest in the Company’s aviation support business in June 2001, Aircraft backlog was reduced by $228 million. Approximately $275 million of backlog was reclassified from Electronic Systems to Command, Control, Communication and Information Systems in 2001 in connection with the formation of TRS, described above.

Significant bookings in 2002 included the U.S. Navy’s contract award for the DD(X) program of $1.1 billion at ES and the National Polar-orbiting Operational Environmental Satellite System of $900 million at C3I. The decrease in bookings in 2001 was due to the impact of divestitures as well as several large bookings with extended periods of performance at C3I and TS in 1999. In addition, the Company’s commercial businesses have been affected by softening market conditions, resulting in declining orders.

Segment Reorganization

Effective January 1, 2003, the Company will begin reporting its government and defense businesses in six segments. In addition, the Company’s Commercial Electronics businesses have been reassigned to the new government and defense businesses. The Company’s Aircraft segment will continue to be reported separately. Accordingly, beginning in the first quarter of 2003, the Company will report its financial results in the following segments: IDS, IIS, MS, NCS, SAS, TS, and RAC.

Integrated Defense Systems (IDS) provides integrated air and missile defense and naval and maritime war-fighting systems and modeling and simulation capabilities.

Intelligence and Information Systems (IIS) provides signal and image processing, geospatial intelligence, airborne and spaceborne command and control, ground engineering support, and weather and environmental management.

Missile Systems (MS) provides air-to-air, precision strike, surface Navy air defense, land combat missiles, guided projectiles, kinetic kill vehicles, and directed energy weapons.

Network Centric Systems (NCS) provides network centric solutions to integrate sensors, communications, and command and control to manage the battlespace.

Space and Airborne Systems (SAS) provides electro-optical/infrared sensors, airborne radars, solid state high energy lasers, precision guidance systems, electronic warfare systems, and space-qualified systems for civil and military applications.

Technical Services (TS) provides technical, scientific, and professional services for defense, federal, and commercial customers worldwide.

Raytheon Aircraft Company (RAC) manufactures, markets, and supports business jets, turboprops, and piston-powered aircraft for the world’s commercial, regional airline, fractional ownership, and military aircraft markets.

Also beginning in the first quarter of 2003, the Company will change the way pension expense or income is reported in the Company’s segment results. Statement of Financial Accounting Standards (SFAS) No. 87, Employers’ Accounting for Pensions, outlines the methodology used to determine pension expense or income for financial reporting purposes, which is not necessarily indicative of the funding requirements of pension plans,

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which are determined by other factors. A major factor for determining pension funding requirements are Cost Accounting Standards (CAS) that proscribe the allocation to and recovery of pension costs on U.S. government contracts. The Company will report the difference between SFAS No. 87 (FAS) pension expense or income and CAS pension expense as a separate line item in the Company’s segment results called FAS/CAS Income Adjustment. The Company’s individual segment results will now only include pension expense as determined under CAS, which can generally be recovered through the pricing of products and services to the U.S. government. Previously, the Company’s individual segment results included FAS pension expense or income, which consisted of CAS pension expense and an adjustment to reconcile CAS pension expense to FAS pension expense or income.

The following information reflects the Company’s segment results during 2002 and 2001 in the realigned structure. In addition, the individual segment results below include pension expense determined under CAS.

Operating cash flow, as defined by the Company to evaluate cash flow performance by the segments, includes capital expenditures and expenditures for internal use software. Corporate operating cash flow includes the difference between amounts charged to the segments for interest and taxes on an intercompany basis and the amounts actually paid by the Company.

Intersegment sales in 2002 and 2001, respectively, were $102 million and $106 million for Integrated Defense Systems, $35 million and $26 million for Intelligence and Information Systems, $219 million and $226 million for Network Centric Systems, $299 million and $324 million for Space and Airborne Systems, $593 million and $545 million for Technical Services, and $4 million and $4 million for Aircraft.

Discontinued Operations

In 2002, the Company sold its Aircraft Integration Systems business (AIS) for $1,123 million, net, subject to purchase price adjustments. The Company is currently involved in a purchase price dispute related to the sale of AIS. There was no pretax gain or loss on the sale of AIS, however, due to the non-deductible goodwill associated with AIS, the Company recorded a tax provision of $212 million, resulting in a $212 million after-tax loss on the sale of AIS. As part of the transaction, the Company retained the responsibility for performance of the Boeing Business Jet^® (BBJ) program. The Company also retained $106 million of BBJ-related assets, $18 million of receivables and other assets, and rights to a $25 million jury award related to a 1999 claim against Learjet^®. At December 31, 2002, the balance of these retained assets was $64 million. Schedule delays, cost growth, and other variables could continue to have a negative effect on these retained assets. The timing and amount of net realizable value of these retained assets are uncertain and subject to a number of unpredictable market forces.

In 2002, the Company recorded charges related to AIS of $66 million, which included a $23 million write-down of a BBJ-related aircraft owned by the Company, a $28 million charge for cost growth on one of the two BBJ aircraft not yet delivered, and a $10 million

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charge to write down other BBJ-related assets to net realizable value, offset by a $13 million gain resulting from the finalization of the 1999 claim, described above. The write-down of the BBJ-related aircraft resulted from the Company’s decision to market this aircraft unfinished due to the current environment of declining prices for BBJ-related aircraft. The Company was previously marketing this aircraft as a customized executive BBJ. The write-down of other BBJ-related assets reflects the difficulty the Company has been experiencing in liquidating these assets.

In 2002, the pretax loss from discontinued operations related to AIS was $47 million. In 2001 and 2000, pretax income from discontinued operations related to AIS was $5 million and $40 million, respectively.

In 2000, the Company sold its Raytheon Engineers & Constructors businesses (RE&C) to Washington Group^™ International, Inc. (WGI) for $73 million in cash plus assumption of debt and other obligations. At the time of the sale, the Company had, either directly or through a subsidiary that it still owns, outstanding letters of credit, performance bonds, and parent guarantees of performance and payment (the “Support Agreements”) on many long-term construction contracts and certain leases. The Support Agreements were provided to customers at the time of contract award as security to the customers for the underlying contract obligations. Often, the total security was capped at the value of the contract price to secure full performance, including, in some cases, the payment of liquidated damages available under the contract. At December 31, 2002, the maximum exposure on outstanding Support Agreements for which there were stated values was $367 million for letters of credit, $344 million for performance bonds, and $25 million for parent guarantees. Of these amounts, $49 million of letters of credit and $258 million of performance bonds relate to projects assumed by WGI in its bankruptcy, as described below. There are additional guarantees of project performance for which there is no stated maximum value that also remain outstanding. Of the guarantees that have no maximum stated value, many relate to contract obligations that, by their terms, include caps on liability for certain types of obligations, and all of the underlying projects have substantially completed construction and are in the punchlist, warranty, commercial closeout, and claims resolution phase, except the two Massachusetts construction projects, described below. Some of these contingent obligations and guarantees include warranty provisions and extend for a number of years.

In connection with the sale of RE&C, the Company was entitled to the financial rewards of certain claims, equity investments, and receivables totaling $159 million that were sold to WGI. In addition, the Company was obligated to indemnify WGI against certain obligations and liabilities totaling $88 million. As a result of WGI’s bankruptcy filing, described below, the realization of these various assets through WGI was no longer probable, however, the obligations and liabilities could be set off against the assets pursuant to the terms of the purchase and sale agreement. In 2001, the Company recorded a charge of $71 million to write off these assets and liabilities.

In March 2001, WGI abandoned two Massachusetts construction projects, triggering the Company’s guarantees to the customer. The Company honored the guarantees and commenced work on these projects. Construction and start-up activities continue on the two projects—the Mystic Station plant and the Fore River plant. Pursuant to the construction contract, since the Mystic Station plant had not achieved performance test completion by January 14, 2003, the Company made payments totaling $68 million, which pre-funded the delay and performance liquidated damages to the maximum amount specified by the construction contract. Also pursuant to the construction contract, the customer has taken the position that a similar missed deadline occurred on February 24, 2003 for the Fore River plant and that a payment of $67 million was required from the Company on that date to pre-fund the delay and performance liquidated damages to the maximum amount specified by the construction contract. The Company believes that this February 24, 2003 deadline was incorrect and should have been extended as a result of changes for which the Company is entitled to change orders, an issue that is now being arbitrated between the Company and the customer. Accordingly, the Company did not make the requested payment to the customer on that date and has informed the customer that the deadline and requested payment are in dispute. As a result, the customer drew down on certain letters of credit totaling $27 million that had been posted by the Company as contract performance security. A resolution of the current dispute between the Company and the customer over the contract deadline and the applicable liquidated damages is dependent upon the outcome of the pending arbitration, which should be concluded later this year. In addition, risks remain in completing the two projects, including costs associated with the possibility of further delays, labor productivity, and the successful completion of required performance tests on the two projects. In 2002, the Company recorded a charge of $796 million resulting from an increase in the estimated cost to complete (ETC) for the two projects. The Company had previously recorded a charge of $814 million in 2001. The cost increases have resulted from declining productivity, schedule delays, misestimates of field engineered materials, and unbudgeted hours worked on the two projects. The Company expects to complete construction and performance testing on the two projects and turn them over to the customer during the second quarter of 2003.

In May 2001, WGI filed for bankruptcy protection. In the course of the bankruptcy proceeding, WGI rejected some ongoing construction contracts and assumed others. In January 2002, WGI emerged from bankruptcy and as part of that process, the stock purchase agreement between WGI and the Company was terminated and WGI and the Company entered into a settlement agreement that provided, among other things, that WGI take reasonable actions to protect the Company against future exposure under Support Agreements related to contracts assumed by WGI and that WGI reimburse the Company for any associated costs incurred. For those contracts rejected by WGI, the Company’s obligations depend on the extent to which the Company has any outstanding Support Agreements. The contracts rejected by WGI included four large fixed price international turnkey projects that were close to completion. Construction has been completed on these projects and they are now in the commercial closeout and claims resolution phase. The Company recorded a charge of $18 million in 2002 related to warranty and start-up costs associated with the last project to be completed. In 2001, the Company recorded a charge of $54 million related to these projects.

The contracts rejected by WGI also included two large construction projects that have been provisionally accepted by the customer (Red Oak and Ilijan) on which the Company had Support Agreements. In 2002, the Company recorded a charge of $14 million related to final reliability testing and punch list items. The Company also recorded a charge of $21 million resulting from a contract adjustment on one of these projects due to turbine-related delays. In 2001, the Company recorded a charge of $156 million related to these and the other WGI construction projects on which the Company has Support Agreements. Risks and exposures on the contracts rejected by WGI include equipment and subcontractor performance, punch list and warranty closeout and performance, schedule and performance liquidated damages, final resolution of contract closeout issues, collection of amounts due under the contracts, potential adverse claims resolution including possible subcontractor claims, lease exposures, availability guarantees, surety bonds, and warranties. For the contracts assumed by WGI, the Company’s obligations under existing Support Agreements would arise if WGI does not meet the obligations that it has assumed. Risks on the contracts assumed by WGI that are subject to Support Agreements relate to non-performance or defaults by WGI.

The Company’s cost estimates for construction projects are heavily dependent upon third parties, including WGI, and their ability to perform construction management and other tasks that require industry expertise the Company no longer possesses. In addition, there are risks that the ultimate costs to complete and close out the projects will increase beyond the Company’s current estimates due to factors such as labor productivity and availability of labor, the nature and complexity of the work to be performed, the impact of change orders, the recoverability of claims included in the ETC, and the outcome of defending claims asserted against the Company. There also are claims asserted against the Company by vendors, subcontractors, and other project participants that are not beneficiaries of the Support Agreements. A significant change in an estimate on one or more of the projects could have a material adverse effect on the Company’s financial position or results of operations.

In 2002, the Company allocated $79 million of interest expense to RE&C versus $18 million in 2001. Interest expense was allocated to RE&C based upon actual cash outflows since the date of disposition. The Company will not allocate interest expense to RE&C in

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2003. In 2002, the Company recorded charges of $38 million for legal, management, and other costs versus $30 million in 2001.

In 2002, 2001, and 2000, the pretax loss from discontinued operations related to RE&C was $966 million, $1,143 million, and $513 million, respectively.

Net cash used in operating activities from discontinued operations related to RE&C was $1,129 million in 2002 versus $635 million in 2001 and $100 million in 2000. The Company expects its operating cash flow to be negatively affected by approximately $300 million to $375 million in 2003 which includes project completion, legal, and management costs related to RE&C. Further increases in project costs may increase the estimated operating cash outflow for RE&C in 2003.

Financial Condition and Liquidity

Net cash provided by operating activities in 2002 was $1,039 million versus $193 million in 2001 and $980 million in 2000. Net cash provided by operating activities from continuing operations was $2,235 million in 2002 versus $789 million in 2001 and $1,009 million in 2000. The increase in net cash provided by operating activities from continuing operations in 2002 was due to better working capital management at the defense businesses, better inventory management at Raytheon Aircraft, a $156 million tax refund received as a result of the Job Creation and Worker Assistance Act of 2002, and $95 million received from the closeout of the Company’s interest rate swaps, described below in Capital Structure and Resources. The decrease in net cash provided by operating activities from continuing operations in 2001 was due to an increase in used aircraft inventory at Raytheon Aircraft resulting from lower demand for new and used aircraft, advance payments received in 2000, and accelerated collections on several large programs in 2000.

Net cash used in investing activities was $719 million in 2002 versus $47 million in 2001 and $213 million in 2000. The Company provides long-term financing to its aircraft customers and maintained a program under which it sold general aviation and commuter aircraft long-term receivables under a receivables purchase facility, described below in Off Balance Sheet Financing Arrangements. Origination of financing receivables was $431 million in 2002, $663 million in 2001, and $969 million in 2000. Sale of financing receivables was $263 million in 2002, $696 million in 2001, and $1,034 million in 2000. Repurchase of financing receivables was $347 million in 2002, $329 million in 2001, and $258 million in 2000. Since the receivables purchase facility no longer provided any real economic benefit, the Company bought out the receivables that remained in the facility in 2002 for $1,029 million, eliminating the cost of maintaining it, and brought the related assets onto the Company’s books.

Capital expenditures were $458 million in 2002, $461 million in 2001, and $421 million in 2000. Capital expenditures in 2003 are expected to approximate $500 million. Proceeds from sales of property, plant, and equipment were $11 million in 2002, $9 million in 2001, and $40 million in 2000. Expenditures for internal use software were $138 million in 2002, $149 million in 2001, and $110 million in 2000. Expenditures for internal use software in 2003 are expected to approximate $95 million as the Company continues to convert significant portions of its existing financial systems to a new integrated financial package.

Proceeds from the sale of operating units and investments were $1,166 million in 2002 versus $266 million in 2001, and $403 million in 2000. In 2002, the Company sold its AIS business for $1,123 million, described above in Discontinued Operations, and an investment for $43 million, described below in Major Affiliated Entities.

In 2001, the Company sold a majority interest in its aviation support business for $154 million, its recreational marine business for $100 million, and other investments for $12 million. Total sales and operating income related to these divested businesses were $248 million and $13 million, respectively, in 2001.

In 2000, The Company sold its RE&C business for $73 million, described above in Discontinued Operations. The Company also sold its flight simulation business for $160 million, its optical systems business for $153 million, and other non-core business operations for $17 million. Total sales and operating income related to these divested businesses (excluding RE&C) were $166 million and $2 million, respectively, in 2000.

In October 2001, the Company and Hughes^® Electronics Corporation agreed to a settlement regarding the purchase price adjustment related to the Company’s 1997 merger with Hughes Defense. Under the terms of the agreement, Hughes Electronics agreed to reimburse the Company approximately $635 million of its purchase price, with $500 million received in 2001 and the balance received in 2002. The settlement resulted in a $555 million reduction in goodwill. The $135 million receivable was included in prepaid expenses and other current assets at December 31, 2001.

Net cash used in financing activities was $990 million in 2002 versus net cash provided of $197 million in 2001 and net cash used of $126 million in 2000. Dividends paid to stockholders were $321 million in 2002, $281 million in 2001, and $272 million in 2000. The quarterly dividend rate was $0.20 per share for each of the four quarters of 2002, 2001, and 2000.

Capital Structure and Resources

Total debt was $7.4 billion at December 31, 2002 and $8.2 billion at December 31, 2001. Cash and cash equivalents were $544 million at December 31, 2002 and $1,214 million at December 31, 2001. The Company’s outstanding debt has interest rates ranging from 4.5% to 8.3% and matures at various dates through 2028. Total debt as a percentage of total capital was 43.3 percent and 40.2 percent at December 31, 2002 and 2001, respectively.

In 2002, the Company issued $575 million of long-term debt to reduce the amounts outstanding under the Company’s lines of credit. Also in 2002, the Company repurchased debt with a par value of $96 million. In addition, the Company eliminated its $1.4 billion receivables purchase facility in 2002, described below in Off Balance Sheet Financing Arrangements. The Company has on file a shelf registration with the Securities and Exchange Commission registering the issuance of up to $2.4 billion in debt securities, common or preferred stock, warrants to purchase any of the aforementioned securities, and/or stock purchase contracts.

In 2001, the Company entered into various interest rate swaps that corresponded to a portion of the Company’s fixed rate debt in order to effectively hedge interest rate risk. The $1.2 billion notional value of the interest rate swaps effectively converted approximately 15 percent of the Company’s total debt to variable rate debt. In 2002, the Company closed out these interest rate swaps in order to reduce market rate risk. The Company received proceeds of $95 million in 2002 for the fair value of the swaps. The $95 million of value will be amortized over the remaining life of the corresponding debt as a reduction to interest expense. Also in 2001, the Company repurchased long-term debt with a par value of $1,375 million.

In 2000, the Company issued $2.25 billion of long-term debt to repay outstanding short-term debt, extending the maturity of the Company’s debt obligations.

Also in 2000, the Company issued $350 million of floating rate notes due in 2001 to partially refinance $500 million of long-term debt that matured in 2000.

The Company’s most restrictive bank agreement covenant is an interest coverage ratio that currently requires earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding certain charges, to be at least 2.5 times net interest expense for the prior four quarters. In July 2002, the covenant was amended to exclude charges of $450 million related to discontinued operations. The Company was in compliance with the interest coverage ratio covenant, as amended, during 2002 and expects to continue to be in compliance throughout 2003.

Credit ratings for the Company were assigned by Fitch’s at F3 for short-term borrowing and BBB- for senior debt, by Moody’s at P-3 for short-term borrowing and Baa3 for senior debt, and by Standard and Poor’s at A-3 for short-term borrowing and BBB- for senior debt.

Lines of credit with certain commercial banks exist to provide short-term liquidity. The lines of credit bear interest based upon LIBOR and were $2.85 billion at December 31, 2002, consisting of $1.55 billion which matures in November 2003, and $1.3 billion which matures in 2006. The lines of credit were $2.4 billion at December 31, 2001. There were no borrowings under the lines of credit at December 31, 2002, however, the Company had $306 million of outstanding letters of credit which reduced the Company’s borrowing capacity under the lines of credit to $2.5 billion. There was $140 million outstanding under the lines of credit at December 31, 2001. Credit lines with banks are also maintained by certain foreign subsidiaries to provide them with a limited amount of short-term liquidity. These lines of credit were $79 million and $129 million at December 31, 2002 and 2001,

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respectively. There was $1 million and $26 million outstanding under these lines of credit at December 31, 2002 and 2001, respectively. In addition, the Company maintains other credit and synthetic lease facilities, described below in Off Balance Sheet Financing Arrangements.

In May 2001, the Company issued 17,250,000, 8.25% equity security units for $50 per unit totaling $837 million, net of offering costs of $26 million. The net proceeds of the offering were used to reduce debt and for general corporate purposes. Each equity security unit consists of a contract to purchase shares of the Company’s common stock on May 15, 2004, which will result in cash proceeds to the Company of $863 million, and a mandatorily redeemable equity security, with a stated liquidation amount of $50, due on May 15, 2006, which will require a cash payment by the Company of $863 million. The contract obligates the holder to purchase, for $50, shares of common stock equal to the settlement rate. The settlement rate is equal to $50 divided by the average market value of the Company’s common stock at that time. The settlement rate cannot be greater than 1.8182 or less than 1.4903 shares of common stock per purchase contract. Using the treasury stock method, there is no effect on the computation of shares for diluted earnings per share if the average market value of the Company’s common stock is between $27.50 and $33.55 per share. For example, if the Company’s average stock price during the period was $40 per share, the diluted shares outstanding would increase by 4.1 million shares or one percent of total shares outstanding at December 31, 2002. At an average stock price of $45 per share, the diluted shares outstanding would increase by 6.5 million shares, or two percent. During 2002, the average market value of the Company’s common stock was $35.41 per share, therefore, the Company included 1.4 million shares in its computation of shares for diluted earnings per share.

In May 2001, the Company issued 14,375,000 shares of common stock for $27.50 per share. In October 2001, the Company issued 31,578,900 shares of common stock for $33.25 per share. The proceeds of the offerings were $1,388 million, net of $56 million of offering costs, and were used to reduce debt and for general corporate purposes.

In 2001, the Company eliminated its dual class capital structure and reclassified its Class A and Class B common stock into a single new class of common stock. The Company also effected a 20-for-1 reverse-forward stock split that resulted in holders of fewer than 20 shares of common stock being cashed out of their holdings.