Raytheon had a strong year in 2004. We said that we would focus on predictable performance, strong relationships and innovative customer solutions. We did what we said we were going to do and then some. Our focus on the customer is paying dividends and, more importantly, we continue to build on the trust and confidence our customers have in Raytheon, which is reflected in our growth.

Total sales rose 12 percent in 2004 to $20.2 billion, Government and Defense operating income increased 30 percent, and Government and Defense backlog was $29.6 billion at the end of the year, up $4.5 billion over year-end 2003. Raytheon Aircraft's performance was much improved, reflecting a continued focus on the fundamentals, a better general aviation market and a renewed luster to the Beechcraft® and Hawker® aircraft brands. While Raytheon's income from continuing operations was lower in 2004 than 2003, this was primarily due to the settlement of a class action shareholder lawsuit, which put the uncertainty of this litigation behind us.

Raytheon's operating cash flow was $2.1 billion for the year. The company's net debt was $4.6 billion at the end of 2004 compared with $6.7 billion at the end of 2003. Since the beginning of 2000, we have reduced net debt by more than half.

The improvement in our balance sheet enabled the Board of Directors near the end of the year to approve plans to increase the annual dividend by 10 percent and to authorize the repurchase of up to $700 million of outstanding common stock. We also plan to continue to pay down debt, which will make our balance sheet even stronger.

RAYTHEON GOING FORWARD

That's what we accomplished. But what is the context for our accomplishments?

Customer focus. This is primary. We believe that customer focus creates customer success, that customer success drives growth and that growth creates shareholder value.

Performance. Performance is basic to everything we do, which is why we want to take it to a new level. We believe that customer and shareholder confidence are earned by meeting commitments.

Relationships. We are a company that listens and builds on trust.

Solutions. This starts with understanding our customers' needs and then responding with appropriate solutions. We have a diversified portfolio of thousands of programs. Our strength is in developing and integrating the electronic and information systems that empower defense "platforms" such as ships, tanks and planes. Our engineers and scientists are domain experts in all elements that make up a mission — from "intelligence" to "effects." In other words, we have an understanding of the elements and we know how to put the pieces together to achieve the objectives of the mission. This knowledge enables us to make the elements work better together, allowing us to be a trusted partner on any mission.

Technology leadership. Raytheon engineers and scientists are working on an incredible range of exciting solutions, from an X-band thin radar aperture for advanced airborne systems to research into fields that would once have been considered science fiction at places like our Missile Systems' "Bike Shop" in Tucson, which was featured in a front-page article in The Wall Street Journal.

Process discipline. We believe this helps us become more predictable in everything we do, from program management to software development. Raytheon Six Sigma^TM (R6σ^TM), for example, has become part of the DNA structure of our company. With tens of thousands of R6σ Specialists, hundreds of Experts, and dozens of Master Experts, R6σ is embedded in the company. Over the years, the application of R6σ has transitioned from cash management to program performance, engineering and suppliers, and now to growth.

Global presence. Our focus on relationships and solutions helped drive growth in our international business in 2004. Progress included selection for the assessment phase of the British Army's Joint Effects Tactical Targeting System; an award for F/A-18 Hornet flight simulators for the Royal Australian Air Force; and the selection of upgrades and other elements for Japan's emerging missile defense capabilities.

Talent. Raytheon is blessed with highly skilled employees. It is essential that we attract and retain talent to develop the innovative solutions to meet our customers' future needs. If we are to do this successfully, we will need to draw on a large, diverse pool of talent and to take the societal steps necessary to ensure we have future generations of engineers and scientists. Along these lines, Raytheon was proud to pledge $850,000 to Tuskegee University to provide scholarships for highly talented undergraduate students majoring in engineering and computer science.

Integrity. I define integrity as treating the company's name as if it were one's own. This stewardship starts with me and with the Board of Directors, and ultimately extends to all 80,000 employees. For this reason, all of us on the Board have participated in an ethics training program tailored to the Board's unique responsibilities, and we have a well established ethics training program for all of our employees.

Mission Assurance. We want our customers to never, ever have a doubt when they see the Raytheon name on anything. Whether the user of our systems and services is a soldier, sailor, airman or Marine; a researcher in the Antarctic; an air traffic controller; or a passenger or pilot in one of our Beechcraft® or Hawker® aircraft — our customers depend on us to do the job right. The emotional link with those who count on us is strong. We care and want to help. We have tried, for example, to bridge some of the aching distance between deployed servicemen and women and their families by supporting a program sponsored by the Freedom Calls Foundation, a nonprofit, charitable organization. Supporting the foundation's efforts, we have opened some of our facilities to service families so they can talk to and see their loved ones in Iraq via video teleconference. Each "visit" has been profoundly emotional and uplifting. To all of us at Raytheon, the importance of Mission Assurance is something we feel deeply.

CUSTOMER SUCCESS AND SHAREHOLDER VALUE

All of these aspects are important and they are all related to being a company that is focused on customer success and shareholder value. That's because we believe that if we help our customers succeed, we will create the right conditions to meet the needs of our shareholders and our other stakeholders.

There's nothing magic about it. We will concentrate on the fundamentals and on harnessing the energy of our entire team. We believe this is the way to meet the needs of all who rely on us.

Thank you for your support. We will do our very best to continue to earn it.

Sincerely,




William H. Swanson
Chairman and CEO
February 18, 2005