Due to a lack of firm demand for the 717 aircraft subsequent to September 11, 2001, the Company reduced the program quantity to 135 units from 200 units and decreased the 717 production rate from 3.5 per month to 1.0 per month. This decrease in the production rate in conjunction with its order quantity reduction significantly impacted the 717 annual revenue and cost structure. Decreasing the number of airplanes in the program quantity accelerates tooling and special equipment costs over a reduced number of units, thereby reducing the gross margin of the program. As a function of reducing the number of employees and other production disruptions, costs to be incurred for the program increased. All of these factors, which were directly attributable to the events of September 11, 2001, contributed to the program incurring an additional $250 forward loss. The estimates for the revised accounting quantity assume that the 717 would remain an ongoing program.

Used aircraft valuation The events of September 11, 2001, resulted in a significant decrease in the market value of used aircraft held for resale as well as asset purchase obligations relating to trade-in of used aircraft. For the year ended December 31, 2002, the Company recorded a charge of $22 related to a further decrease in used airplane values. For the year ended December 31, 2001, the Company recorded a charge of $185.

Inventory valuation Subsequent to September 11, 2001, commercial airline customers worldwide removed a substantial number of aircraft from service. The ultimate realization of future sales for specific spare parts held in inventory is highly dependent on the active aircraft fleet in which that spare part supports. The revised projections for future demand of certain spare parts indicated that current inventory quantities were in excess of total expected future demand. For the year ended December 31, 2001, the Company recorded a charge of $98 relating to excess and obsolete commercial airplane spares inventory.

Vendor penalties The decrease in production rates on certain commercial airplane models and related products triggered contractual penalty clauses with various vendors and subcontractors. The decrease in production rates resulted directly from the change in aircraft demand after the events of September 11, 2001. For the year ended December 31, 2002, the Company revised its estimate related to its outstanding vendor penalties obligations and recorded a reduction to expense of $12. For the year ended December 31, 2001, the Company recorded a charge of $68 for these penalties.

Guarantee commitments The Company has extended certain guarantees and commitments, such as asset related guarantees, discussed in Note 20. The events of September 11, 2001, adversely impacted aircraft market prices and aircraft demand of customers who are counterparties in these guarantees. For the year ended December 31, 2002, the Company recorded a net reduction to expense of $7 as a result of favorable contract negotiations. For the year ended December 31, 2001, the Company recorded a charge of $49 related to the adverse exposure.

Outstanding liabilities As of December 31, 2002, the Company’s outstanding liabilities attributable to the events of September 11, 2001, were $146. Of this amount, $53 relates to liabilities to be primarily settled in cash and the remaining $93 was recorded as asset

impairments to reflect the decrease in the anticipated fair value of aircraft under purchase commitments. As of December 31, 2001, the outstanding liabilities were $542. Of this amount, $402 related to liabilities to be primarily settled in cash and $140 related to used aircraft purchase commitments.

Liabilities to be primarily settled in cash attributable to the events of September 11, 2001, as of December 31 were as follows:

Ongoing assessment The Company will continue to assess other losses and costs it might incur in relation to the events of September 11, 2001. Any costs or adjustments in estimates will continue to be recognized as a separate component of earnings from operations entitled ‘Impact of September 11, 2001, charges/(recoveries).’

Note 4 – Acquisitions

On October 6, 2000, the Company acquired the Hughes Electronics Corporation (Hughes) space and communications and related businesses. The acquisition was accounted for under the purchase method, by which the purchase price was allocated to the net assets acquired based on their fair values. The original purchase price was $3,849, initial goodwill was valued at $740 and the other intangible assets were valued at $631. The initial recording relied on asset and liability values reported by Hughes as of the date of the acquisition with adjustments based on preliminary valuation assessments of property and equipment, purchased intangibles and retirement plan assets and liabilities. During the period from acquisition to the third quarter of 2001, the Company completed its assessment of the net assets acquired and goodwill increased to $2,166. The increased goodwill reflects finalization of fair value assessments for the net assets acquired and the impact of the Company’s accounting policies on acquired balances. Changes to the fair value for the net assets acquired primarily relate to the valuation of acquired longterm contracts and completion of the valuation of property and equipment. The impact of the Company’s accounting policies on acquired balances relate primarily to the application of the Company’s recognition of contract revenue using percentage completion based on completed work effort.

Note 5 – Goodwill and Acquired Intangibles

Effective January 1, 2002, the Company adopted SFAS No. 142. This statement changed the accounting for goodwill and indefinite-lived intangible assets from an amortization approach to an impairment-only approach. As a result of the adoption of SFAS No. 142, the Company recorded a transitional goodwill impairment charge during the first quarter of 2002 of $2,410 ($1,827 net of tax), presented as a cumulative effect of accounting change. This charge related to the Company’s segments as follows: Space and Communications $1,586; Commercial Airplanes $430; and Other $394. The Other segment charge related to Connexion by Boeing^SM and Air Traffic Management.