Note 2 – Standards Issued and Not Yet Implemented

In January 2004, FASB Staff Position (FSP) No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was issued. FSP No. 106-1 permits the deferral of recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for postretirement health care plan under SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and in providing disclosures related to the plan required by SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The deferral of the accounting for the Act continues to apply until authoritative guidance is issued on the accounting for the federal subsidy provided by the Act or until certain other events requiring plan remeasurement. We have elected the deferral provided by this FSP and are evaluating the magnitude of the potential favorable impact of this FSP on our results of operations and financial position. The authoritative guidance, when issued, could require us to change our previously reported information. See Note 15 for discussion of postretirement benefits.

Note 3 – Accounting for the Impact of the September 11, 2001 Terrorist Attacks

On September 11, 2001, the U.S. was the target of severe terrorist attacks that involved the use of U.S. commercial aircraft we manufactured. These attacks resulted in a significant loss of life and property and caused major disruptions in business activities and in the U.S. economy overall.

To address the widespread financial impact of the attacks, the Emerging Issues Task Force (EITF) released Issue No. 01-10, Accounting for the Impact of Terrorist Attacks of September 11, 2001. This issue specifically prohibits treating costs and losses resulting from the events of September 11, 2001, as extraordinary items; however, it observes that any portion of these costs and losses deemed to be unusual or infrequently occurring should be presented as a separate line item in income from continuing operations.

For the year ended December 31, 2001, we recorded a charge in the caption ‘Impact of September 11, 2001, recoveries/ (charges)’. Of this charge, $908 was related to the Commercial Airplanes segment and $27 was related to the Other segment. During the years ended December 31, 2003 and 2002, we reassessed the impact of the events of September 11, 2001, and recorded a net reduction to expense in the caption ‘Impact of September 11, 2001, recoveries/(charges)’. These adjustments related to the Commercial Airplanes segment.

The following table summarizes the (expense)/reduction to expense recorded in the caption ‘Impact of September 11, 2001, recoveries/(charges)’ for the years ended December 31:

A description of the nature of the charges incurred as a result of the events of September 11, 2001, is listed below.

Employee severance
We incurred employment reductions resulting from the decrease in aircraft demand, which directly related to the attacks of September 11, 2001.

717 forward loss
As a result of the decrease in aircraft demand subsequent to September 11, 2001, we sharply reduced our production rate on multiple airplane programs during the fourth quarter of 2001 due to changes in the order forecast and customer delivery requirements. Although all airplane programs were affected by the events of September 11, 2001, through reduced margins on future deliveries, the 717 program was the only program in a forward loss position.

Due to a lack of firm demand for the 717 aircraft subsequent to September 11, 2001, we 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 forward loss. The estimates for the revised December 31, 2001 accounting quantity assumed 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 and increased our asset purchase obligations relating to trade-in of used aircraft.

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.

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.

Guarantee commitments
We have extended certain guarantees and commitments, such as asset related guarantees, discussed in Note 19. The events of September 11, 2001, adversely impacted aircraft market prices and aircraft demand of customers who are counter parties in these guarantees.

Outstanding liabilities
As of December 31, 2003 and 2002, our outstanding liabilities attributable to the events of September 11, 2001, were $46 and $146. Of these amounts, $9 and $53 related to liabilities to be primarily settled in cash and the remaining $37 and $93 were recorded as asset impairments to reflect the decrease in the anticipated fair value of aircraft under 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
We will continue to assess any adjustments to our accrued estimates that remain for the above liabilities. Any adjustments will continue to be recognized as a separate component of earnings from operations entitled ‘Impact of September 11, 2001, recoveries/(charges)’ .

Note 4 – Goodwill and Acquired Intangibles

As a result of adopting SFAS No. 142 on January 1, 2002, we 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 our segments as follows: Launch and Orbital Systems $1,586; Commercial Airplanes $430; and Other $394. The Other segment charge related to Connexion by Boeing^SM and Air Traffic Management.

We reorganized our Military Aircraft and Missile Systems and Space and Communications segments into IDS. This reorganization triggered a goodwill impairment analysis as of January 1, 2003. Our analysis took into consideration the lower stock price as of April 1, 2003, to include the impact of the required annual impairment test. As a result of this impairment analysis, we recorded a goodwill impairment charge during the three months ended March 31, 2003 of $913 ($818 net of tax), presented separately on our Consolidated Statements of Operations. This charge related to our segments as follows: Launch and Orbital Systems $572 and Commercial Airplanes $341.

The following table reconciles net earnings, basic earnings per share and diluted earnings per share to reflect the January 1, 2002 adoption of SFAS No. 142, for the years ended December 31:

The changes in the carrying amount of goodwill by reportable segment (restated for the new IDS business segments) for the year ended December 31, 2003, were as follows:

During 2000, we acquired the space and communications and related businesses of Hughes Electronics Corporation. During the period from acquisition to the third quarter of 2001, we completed our assessment of the net assets acquired, and increased the related goodwill balance by $1,426. In determining the goodwill balance, we included receivables for claims, representing purchase price contingencies. These contingencies were resolved by a settlement in July 2003, which resulted in our receipt of payment for the claims. The settlement resolved all existing claims for purchase price adjustments, and did not result in a change to our goodwill balance.

Our finite-lived acquired intangible assets are being amortized on a straight-line basis over the following weighted-average useful lives:

Amortization expense for acquired finite-lived intangible assets for the years ended December 31, 2003 and 2002 was $94 and $88. Amortization expense for the year ended 2001 was $302, which included goodwill and intangible amortization. Estimated amortization expense for the five succeeding years are as follows:

As of December 31, 2003 and 2002, we had one indefinite-lived intangible asset, a trademark, with a carrying amount of $197.