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

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

The Company will continue to experience a higher than normal quantity of used airplanes through 2003 as a result of commitments entered into through purchase agreements with customers for new aircraft and services. Due to the current market for used airplanes, the Company’s used airplane inventory may increase and these purchases and commitments to purchase may result in future charges.

Accounting Quantity

A program consists of the estimated accounting quantity for each aircraft to be produced for delivery under existing and anticipated contracts. The Company has a policy that determines the appropriate accounting quantity for each commercial aircraft program. This policy takes into account several factors influenced by the demand for the particular product. The Company reviews and reassesses its program accounting quantities on a quarterly basis in compliance with relevant program accounting guidance.

The current market for commercial aircraft is adversely affecting all of Commercial Airplanes commercial aircraft programs. The resulting reduction in production rates is extending the time frame for production and delivery of the accounting quantities used for program accounting. This is particularly true for the 747, 757 and 767 programs. The 757 and 767 programs have been experiencing the most difficulty acquiring new orders. Current market projections indicate that the Company will be successful in selling the unsold units within the current accounting quantity for all programs, therefore no accounting quantities have been reduced.

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

The accounting quantity for the 717 program continues to be based on firm orders as it has been since fourth quarter of 2001.The increase of five units in the 717 program accounting quantity during the second quarter of 2002 was the result of net new order activity on the program. The reduction of 65 units in the 717 program accounting quantity during the fourth quarter of 2001 was driven by a lack of firm demand for the 717 aircraft subsequent to September 11, 2001. See Note 3. This decrease in demand is demonstrated in the table below by the sharp decrease in the 717 program’s anticipated orders as a percentage of cumulative firm orders between December 31, 2001 and December 31, 2000. Program accounting quantity increases between December 31, 2002 and December 31, 2000 on other programs were the result of the normal progression of business; delivering aircraft; and obtaining additional orders.

Within the accounting quantity for all programs there are units that have been delivered, undelivered units under contract, and units anticipated to be under contract in the future (anticipated orders). In developing total program estimates all of these conditions within the accounting quantity must be addressed. The percentage of anticipated orders included in the program accounting estimates as compared to the number of cumulative firm orders* as of December 31 were as follows: