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TechnologyChangesGame forToymakersDuring theHolidays

LeapFrog Scrambles to Meet

DemandWith New Data,

Flexible ChineseWorkshop

Baby-Drool-Resistant Paper

HowTwoOfficials Got Caught

By Pentagon’s Revolving Door

Amid Lease Deal, Ms. Druyun

At Air Force Talked Jobs

With Boeing’s Mr. Sears

‘Mom’ Plans for RetirementBy FARNAZ FASSIHI

TIKRIT, Iraq—The capture of Sad-dam Hussein began with four namesMaj. Stan Murphy scribbled on threepieces of paper and ripped from a smallgreen notebook.

The 41-year-old intelligence officerwith the First Brigade of the Fourth In-fantry Division knew these names werejust a small part of a much larger web ofnames and families likely to be hidingMr. Hussein.

He handed the names to two juniorU.S. military-intelligence analysts in

Tikrit: Lt. AngelaSantana, 31, andCpl. Harold Eng-strom, 36, bothwith Alpha Com-pany, 104th Mili-tary IntelligenceBattalion. Theunit’s job in Tikritwas to support theFourth Infantry Di-vision with intelli-gence data, helpingthe troops break upthe resistance cellsthreatening the

postwar stability of Iraq—and ultimatelyto arrest Mr. Hussein.

The two officers say Maj. Murphy’sorders to them were: “Figure it out, drawthe lines, make me a chart and find ev-ery crucial person connected to Sad-dam.”

Their first thought: “Is he joking?This is impossible. We can’t even pro-nounce these names,” says Lt. Santana.

But soon Lt. Santana, a former execu-tive secretary in Ohio and Cpl. Eng-strom, a former high-school Englishteacher in Phoenix, started poring overabout 9,000 other names.

By mid-September, after many sleep-less nights spent sifting through tens ofthousands of pages of information, Lt.Santana and Cpl. Engstrom had nar-rowed their list to 300 names.

The two say the task of creating Mr.Hussein’s Who’s Who chart was beyondthe scope of their training. “Completelysurreal,” is how Lt. Santana describesthe job. “Like we are detectives sud-denly.”

Indeed, this was the pair’s first fieldexperience in military intelligence. Theirformal training included making chartsand putting together intelligence data.But making sense of complicated Arabtribal culture and Mr. Hussein’s strangeties wasn’t part of it.

The duo read through sheaves of inter-rogation reports from detainees and in-terviews with local Iraqis. They plumbeda huge databaseprovided by centralmilitary intelli-gence. Eventually,they created whatthey nicknamed“Mongo Link,” afour page,46-by-42-inch color-coded chart withtheir 300 names onit. It was basicallya family tree, withMr. Hussein’s pic-ture at the center,and lines connect-ing his tribal and blood ties to the sixmain tribes of the Sunni triangle: theHusseins, al-Douris, Hadouthis,Masliyats, Hassans and Harimyths. Themilitary believed members of these clansshielded Saddam for eight months, fi-nanced the resistance, and planned as-sassinations and attacks against Iraqisand coalition forces.

Next to each of the names, Lt. San-tana and Cpl. Engstrom scribbled downbits of information they were able togather about individuals: their ages,home village, spouses and children,where the names came from, whetherpeople on the list were in custody andhow they got there.

Lt. Santana and Cpl. Engstrom’schart, the contents of which are classi-

Please Turn to Page A6, Column 3

Early in the morning of Monday, Aug.11, toy executive Kevin Carlson checkedhis nationwide weekend sales numbersand got a surprising glimpse of Christ-mas future.

Stores had sold 360 of his company’sLittleTouch LeapPads in the product’s in-troductory weekend. Parents hunting foran educational toy for infants and tod-dlers were reaching for the new gadget,which makes noises when a child touches

parts of an illustratedbook. That smallnumber had huge im-plications. Forecast-ing software told Mr.Carlson that hewould need about700,000 units to meetprojected holiday de-mand—twice asmany as he hadplanned to ship.

So his company,LeapFrog Enterprises Inc., did some-thing unusual. At a time when other toycompanies were unloading their finalChristmas shipments from cargo shipsout of China, LeapFrog began placingwhat would turn into a huge new orderfor LeapPads. Its factory, privately heldCapable Toys Ltd. of Zhongshan, China,scrambled for extra plastic molds, cus-tom-designed electronics and scarcebaby-drool-proof paper, and pumped outLeapPads around the clock.

The LeapPad’s frantic race againstthe holiday deadline shows how technol-ogy and global supply chains are trans-forming a great business challenge. Foryears, toy makers would place their en-tire holiday orders in January and Febru-ary, blindly betting on demand for theirproducts. By Christmas, they’d haveshortages of their hit products and hugestockpiles of their duds.

In 1983, parents camped outsidestores for Cabbage Patch Dolls, followed

by Teenage Mutant Ninja Turtles in 1988and the Little Mermaid in 1989. In 1993,executives at Bandai Inc. were slow toreact to the popularity of Mighty Mor-phin Power Rangers. Only 600,000 of anestimated demand for 12 million made itto stores by Christmas. In 1996, TycoToys Inc. was also caught short on TickleMe Elmo. The company rolled out aboutone million units of the giggly plush toybut could have sold almost a millionmore.

Despite the industry’s better forecast-ing and factory-response systems todaythere are still a few shortages this holi-day season. Among the hard-to-find arecertain items in Mattel Inc.’s Swan LakeBarbie and Bandai Ltd.’s StrawberryShortcake lines. LeapFrog, too, it seems,could sell lots more of its newly intro-duced Leapster, a $80 portable learningsystem that plays like a video game.

Mr. Carlson, 44 years old, is Leap-Frog’s director of sales and systems anal-ysis. He worked for Mattel Inc. in the1980s, when the biggest U.S. toy companywould send staffers into stores each week

Please Turn to Page A12, Column 1

Two Novice Gumshoes

Charted the Capture

Of Saddam Husseini i i

Their Mission: Make a List

Of People With Links;

On It Was ‘The Source’

By NEIL KING JR.

WASHINGTON—TheBushadministra-tion reached agreement on a free-tradedealwith four Central American countriesbut now faces an election-year fight thatcould mirror the brawl in the early 1990sover opening up trade with Mexico.

Free-trade skeptics in Congress saythe agreement must overcome stiff oppo-sition amid rising anxiety in the U.S.over the flight of jobs overseas and themerits of trade liberalization.

U.S. Trade Representative RobertZoellick, scrambling to end a year of con-tentious trade negotiations on a highnote, said the agreement with El Salva-dor, Guatemala, Honduras and Nicara-gua would give immediate duty-free ac-cess in the region to half of all U.S. farmexports, and more than 80% of all con-sumer goods.

The pact is expected to be presentedto Congress for approval in the spring. Inthe interim, trade officials hope to wrapup agreements that would include twomore nations in the deal: Costa Rica andthe Dominican Republic, which is in theCaribbean. U.S. trade with all six coun-tries last year was $30 billion, or morethan the total of goods and servicestraded with Russia and India combined.All countries would then gain duty-freeaccess to one another’s markets fornearly all products over coming years.

Costa Rica, the largest economyamong the Central American countries,walked out of the talks Tuesday citingwhat it called excessive U.S. demands foropening its telecommunications and in-surance industries to foreign competi-

tion. The impasse isn’t necessarily fatalto the pact, however, as Costa Rican offi-cials said they hope to resume discus-sions next month.

The Central American Free TradeAgreement, known as Cafta, will stir

controversy in Congress because ofwhat opponents describe as its weakprovisions on labor and environmentalrules, and tough patent protections thatcould limit access by Central Americansto important medicines. Many lawmak-ers also are concerned that increasingtrade with Latin America could lead to

Please Turn to Page A8, Column 1

7

i i i

Business and Finance

i i i

World-Wide

Harold Engstrom

n U.S. TROOPS MADE a show ofheavy force against Iraq insurgents.Hundreds participated in house-to-

house searches in Samarra, a townthat had become a particular thornin the Americans’ side and the siteof two large-scale guerrilla assaultsthat left dozens dead recently. A fueltruck exploded in a crash at an inter-section in Baghdad, killing at least10 Iraqis. The blast was initially re-ported as a suicide bombing. SouthKorea agreed to send 3,000 troops toIraq in 2004. It already has 375 engi-neering and medical personnel there.Occupation officials are giving Iraq’soil ministry $600 million. (Page A4)Baker continued his Iraq debt-relieftour of Paris Club nations, receiv-ing support from Italy’s Berlusconifor the U.S. burden-easing proposal.

i i in John Hinckley can make unsuper-vised visits to his parents for thefirst time since being institutional-ized for shooting President Reaganin 1982, a federal judge decided. TheReagan family had opposed the move.

i i in The State Department urged non-essential staff and families to leaveSaudi Arabia because of a deepeningbut unspecified terrorism threat. Pri-vate citizens should also get out, itwarned, or register with a consulate.

i i in Israel’s Sharon gives a major ad-dress today expected to lay out a uni-lateral map to resolve territorial dis-putes with the Palestinians in the ab-sence of a negotiated accord. Somesettlers made plans to fight eviction.

i i in Turkish officials said interroga-tions of bombing suspects indicatedal Qaeda turned to synagogues andBritish targets after a base used bythe U.S. military proved too tough,and the Muslim toll upset bin Laden.n Pakistan’s leader sees al Qaeda’shand in Sunday’s failed assassinationbid. Aides say an electronic jammerin his car delayed a bomb detonation.

i i in The last sentence was handed outin the so-called Lackawanna Six alQaeda case in New York. The prisonterms ranged from seven to 10 years.

i i in Afghan delegates began to bickerover a new constitution, with presi-dential powers and a greater role forwomen among the sources of friction.

i i in Iran, after a delay, is set to signtoday a nuclear accord allowing morefrequent and intrusive inspections,the chief U.N. atomic inspector said.

i i in French President Chirac angeredMuslims by calling for a law barringreligious symbols like headscarvesfrom the public schools. (Page A15)

i i in Former Illinois Gov. Ryan was in-dicted on federal corruption charges.Word of the probe cut short a careermarked by an execution moratorium.

i i in Snowmobilers sought a stay of afederal judge’s decision to reject aBush plan and curb use of the vehi-cles in Yellowstone and Grand Teton.

i i in A federal appeals court upheld anOhio law barring certain late abor-tions with a narrow exception onlywhen a mother’s health is in danger.

i i in Singapore ordered 70 people quar-antined after a recent Taiwanese visi-tor tested positive for SARS. A studyassessed infection risks. (Page D5)

i i in Flu experts predict this year’s out-break will exceed the average num-ber of deaths of children, and in theWest may be the worst since 1968-69.

i i in Prostate researchers found Pfizer’sCardura and Merck’s Proscar aremuch more powerful in combinationthan when used separately. (Page D5)

i i in Motherhood is being put off laterby U.S. women, with average first-child age at a record 25.1 years, upfrom 21.4 in 1970, the CDC reported.

i i in Airport security waits are longestin Los Angeles and Miami, shortestat Chicago O’Hare, Washington Dullesand in Dallas-Fort Worth. (Page D1)

i i in Bush attended ceremonies to markthe 100th anniversary of the Wrightbrothers’ flight, but a replica flyingmachine failed to get off the ground.

S IX FRENCH BUSINESSMENwere indicted and billionaire

François Pinault and three othersagreed to cooperate and pay finesin exchange for criminal immu-nity in the Executive Life case.Crédit Lyonnais’s ex-chairmanand the others were charged witha fraud conspiracy to hide thebank’s role in the acquisition ofthe insurer’s junk-bond portfolio.

(Article on Page A3)

i i in Boeing could face civil dam-ages to cover the government’scost of switching satellite-launchproviders due to Boeing’s acquisi-tion of Lockheed documents.

(Article on Page A3)

i i in FedEx’s profit tumbled 63%,hurt by retirement and sever-ance costs. Growth in packagesshipped was lower than expected.

(Article on Page A3)i i i

n Oil and natural-gas prices areclimbing due to a strong econ-omy and recent cold snap, rais-ing fears inventories are too low.n Yukos confirmed that it andSibneft are discussing terms tounwind their $13 billion merger.

(Articles on Page B2)i i i

n The SEC approved governancechanges at the NYSE and pledgedto consider broad regulatoryand market-structure changes.

(Article on Page C1)i i i

n Five new stocks hit the mar-ket, including the U.S. portion ofthe $3 billion China Life IPOand online travel concern Orbitz.n The industrials edged up 15.70points in a late rebound to10145.26, another 19-month high.

(Articles on Pages C1 and C5)i i i

n The White House reached afree-trade deal with four CentralAmerican countries, but the pactfaces opposition in Congress.

(Article in Column 5)

i i in ECB chief Trichet reaffirmedthat Europe is pursuing a strongeuro, even as the currency tradesat record highs against the dollar.

(Article on Page C1)i i i

n Lehman and Bear Stearnsposted strong quarterly results,boosted by bond-trading revenue.n Lehman plans to continue out-sourcing computer tasks to Indiadespite help-desk problems.

(Articles on Page A16 and C5)

i i in The Midwest grid operator istaking steps to avert anotherblackout, including expandingthe volume of data it monitors.

(Article on Page A2)i i i

n Parmalat skirted default as in-vestors agreed to negotiate a pos-sible postponement of a $400 mil-lion payment due yesterday.

(Article on Page A6)i i i

n Solutia filed for Chapter 11,saying it is hobbled by liabili-ties from former parent Monsantoand by chemical-industry woes.

(Article on Page B2)

i i in New Hampshire and other statesare trying to make it easier tobuy cheap drugs from Canada.

(Article on Page B1)i i i

n Microsoft and Spitzer are join-ing forces to attack spam, takingaction against three companies.

(Article on Page B5)i i i

n Google has begun testing aservice that allows users tosearch for excerpts from books.

(Article on Page B5)i i i

n Intel plans to unveil a chip forlarge-screen TVs that couldmake the sets more affordable.

(Article on Page B5)

i i i

Abreast of the Market.......C3Amex Stocks .................. C10Bond Data Bank............. C15Commodities ............... C1,13Corrections ....................... A2Credit Markets ................C15Currency Trading ............. C15Deals & Deal Makers....... C5Directory of Services.........C6Dividend News.................. C9DJ Specialty Indexes ........ C4Earnings Digest............... C14Economy............................A2Editorials ................... A18,19Health & Family ...............D5Heard on the Street..........C1Index/Listed Options ...... C12

International News .... A16,17Leisure & Arts .................. D6Markets Lineup..................C2Media & Marketing .......... B8Money Rates................... C15Mutual Funds ................... D8Nasdaq Stocks ................. C7New Securities Issues.....C15NYSE Stocks......................C3Personal Finance...............D2Politics & Policy ............... A4Small-Stock Focus ............C8Technology .....................B4,5Travel ................................ D3Treasury/Agency Issues.....C9Weather Watch ............... C16World Stock Markets.......C16

7

By Geoffrey A.Fowler in

Zhongshan, China,and Joseph Pereirain Emeryville,

Calif.

7 77

Stocking Feat

—Online Today—

Angela Santana

New Hampshire Diary: Sad-dam Hussein’s capture hasour panel of voters focusing

more on national security—and giv-ing Wesley Clark a closer look.

i i in Fiscally Fit: Terri Cullen exam-ines the costs and limitations ofcredit-counseling services, urgingconsumers to use caution.

i i inWaldholz on Health: Bush restric-tions have crimped stem-cell research,but private funds push it forward.

–Markets–Stocks:NYSE vol. 1,406,166,530shares, Nasdaq vol. 1,441,515,962.DJ industrials 10145.26, s +15.70;Nasdaq composite 1921.33, t –2.96;S&P 500 index 1076.48, s +1.35.Bonds (4 p.m.):10-yr Treasurys +13/32, yld 4.180%; 30-yrTreasurys +26/32, yld 5.020%.Dollar:107.42 yen, –0.10; euro$1.2403, +0.80 cent against the dollar.Commodities:Oil futures $33.35 abarrel, s +$0.46; Dow Jones-AIGfutures 136.791, s +1.024; DJ-AIGspot 174.225, s +1.303.

U.S. Reaches a Trade Agreement

With 4 Central American Nations

Index to Businesses ................................................B2What’s News Online ............................................... B6Global Business Briefs ........................................C11Classifieds.............................................................B7,D4

INDEX

Plane Dealing Darleen Druyun’s recent ties to Boeing

n Late 2001: Ms. Druyun, a senior Air Forceacquisition officer, begins negotiatingcontroversial plan to lease Boeing jets asrefueling tankers.

n Sept. 2002: Her daughter, a Boeingemployee, e-mails Boeing CFO Michael Searsabout her mother's retirement and job search.

n Oct. 2002: Ms. Druyun negotiates a NATOaircraft order that went to Boeing. Two dayslater, she and Mr. Sears meet to discussemployment. She agrees to sell her house toa Boeing attorney working on tanker deal.

n Nov. 2002: Ms. Druyun officially recusesherself from Boeing decisions, retiresmid-month.

n Jan. 2003: Boeing announces Ms. Druyunjoined its missile-defense operation.

n Summer 2003: Under scrutiny by JusticeDepartment and Pentagon, Boeing launchesinternal probe of ethics policies.

n Sept. 2003: Pentagon launches probe ofwhether Ms. Druyun discussed a rival’spricing with Boeing.

n Nov. 2003: Boeing fires Ms. Druyun and Mr.Sears. U.S. attorney in Virginia launchescriminal probe, which could lead to jail time.

Drawing of a 767tanker refueling afighter jet.

AP

By ANNE MARIE SQUEOAnd J. LYNN LUNSFORD

Darleen Druyun was a hot prospectwhen she retired from the Department ofthe Air Force in November 2002.

In three decades in various acquisi-tion roles there, the lanky, no-nonsensecivilian administrator had negotiated bil-lion-dollar weapons contracts andamassed valuable insights into Pentagonpolicy and the strengths and weaknessesof defense contractors. At a retirementlunch at an Italian restaurant in north-ern Virginia near the Pentagon, morethan a hundred industry executives andgovernment officials gathered, some anx-iously scanning the room for clues as towhere she might land next.

By that Nov. 21 fete, Ms. Druyun hadquietly talked about job opportunitieswiththree of the nation’s largest defense con-tractors—Boeing Co., Lockheed MartinCorp. and Raytheon Co. Lockheed Presi-dent Robert Stevens attended. So did Boe-ing Chief Financial Officer Michael Sears

andJamesAlbaugh, theheadof the compa-ny’s space and defense businesses. WhenMr. Sears sat down at Ms. Druyun’s tableto chatwith her family, other executives inthe room took note.

A year later, the winner in the race toland Ms. Druyun—Boeing—turned out tobe the big loser. Actions related to Ms.Druyun’s hiring in January 2003 are nowthe subject of Pentagon and Justice De-partment probes as well as Congressionalscrutiny into thenation’sNo. 2defensecon-tractor. Boeing fired both Mr. Sears andMs. Druyun for what it called “unethical”conduct in late November. Their dealingswere a major factor in the resignation aweek later of the company’s chairmanandchief executive, Phil Condit.

Talk of a job at Boeing for Ms.Druyun began as early as Sept. 3, 2002,more than two months before she re-cused herself from overseeing Boeingcontracts, according to people familiarwith the investigation. While those jobnegotiations were under way, she wasalso continuing to push a controversial$21 billion plan to have the governmentlease and later buy 100 Boeing-made air-planes. Separately, Pentagon investiga-tors are looking into whether Ms. Druyunbroke the law by sharing a rival compa-ny’s information with Boeing.

Federal law bars government acquisi-tion officers from discussing jobs withoutside companies unless they disqualify

Please Turn to Page A14, Column 3

Not Enough Craft at Kraft

Behind the ousterof co-CEOBetsy Holdenwas a stale

marketing strategy.Too many Oreos, too little innova-tion. PAGE B1

Opera: It’s Just

Supply and Demand

And it’s out of whack, with a dearthof great singers, a rash of slogsthrough “Bohème” and a lot ofempty seats. Piangi!LEISURE &ARTS, D6

A Full-Time Job

The woman charged with findingemployment for millions of Iraqishas her work cut out for her, as thejobless grow angrier. A16

Hard Sell for Software

Companies thatonce bought applications to

handle finance orhuman resources

now often outsourcethe work. Some software

makers are worried. TECHNOLOGY

JOURNAL, B4

Prosperity Paradox

They were communists. Now they’reburghers. Sowhy doesn’tRussia’s newmiddle classvote for thefast-track capitalists? The answer will affectthe nation’s fate. A15

A Budget Calculus

David Wessel considers whetherPresident Bush can cut the deficit inhalf in five years—and how much itmatters. CAPITAL, A2

I N S I D E T O DAY ’S J O U R N A L

s 2003 Dow Jones & Company. All Rights Reserved

Southern PartnersTotal 2002 trade with the six countriesthat the U.S. hopes to include in a CentralAmerican free-trade deal, in billions

Source: U.S. Census Bureau

Imports fromU.S. exports to

El Salvador 1.671.98

Guatemala2.04

2.8

Honduras2.57

3.26

Nicaragua .44.68

Costa Rica3.123.14

DominicanRepublic

$4.25$4.17

Missed Connection

n 1983: CabbagePatch Dolls

n 1988: Teenage Mutant Ninja Turtles

n 1989: LittleMermaid

n 1993: MightyMorphin PowerRangers

1996: Tickle MeElmo

Get

ty Im

ages

CO

RB

IS

s

s

Waaah!Major toy-supplyshortages in recenthistory

>

What’s News–

1

* * * * * * * * *! THURSDAY, DECEMBER 18, 2003 ~ VOL. CCXLII NO. 120 ~ HHHH $1 .00 WSJ.com

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themselves from contract decisions con-nected to those companies. The law alsobans contractors from having job talkswith an official if they know that he orshe still has authority over contractslinked to them. The criminal part of theprobe, which could result in jail time,centers on obstruction of justice chargesrelated to alleged efforts in recentmonths by Mr. Sears and Ms. Druyun tocover up their early discussions.

Ms. Druyun’s attorney didn’t respondto repeated phone calls for this article. Inan October interview that predated Ms.Druyun’s firing, her attorney defendedher career as beyond reproach. Mr.Sears’s attorney also declined to com-ment; after the firing, Mr. Sears in astatement said he had done nothingwrong.

The ethics scandals at Boeing, theworld’s largest aerospace company, aresending tremors through the industry asother companies fear intensified scrutinyover the revolvingdoorbetween thePenta-gon and the industry. The Boeing-Druyunrelationship highlights the longstandingcoziness between military contractorsand their No. 1 customer and major over-seer: the Pentagon. In 1961, PresidentDwight Eisenhower warned of a military-

industrial complex and its “potential forthedisastrous rise ofmisplacedpower.” Inthe 1980s, the military came under fire forsuch things as paying $435 for hammersandsharing internal, often classified, doc-umentswith industry executives vying forPentagon work.

Now critics say the situation is worsethan ever. Post-Cold War consolidationmeldeddozens of smaller defense contrac-tors intoahandful ofgiants.As thegovern-ment modernizes its armed forces, it hasbecome increasingly reliant on contrac-tors suchasBoeing to pull together sophis-ticated weapons systems with productsand services from different companies;military officials admit they lack the tech-nical expertise for the job. And becauseweapons programs cost billions and cantakeadecade to cometo fruition, their offi-cial overseers often find their interestsclosely aligned with the companies theyare supposed to police.

Mr. Sears and Ms. Druyun, now both57 years old, entered the military-pro-curement world around 1970. With theU.S. deep into a losing war in Vietnamand facing mounting fears about Sovietmilitary power, the military and defenseindustry were under pressure to modern-ize. Both executives climbed the careerladder, Ms. Druyun as a civilian at the

Air Force and Mr. Sears as an avionicsengineer at McDonnell Douglas Corp.,later purchased by Boeing.

Throughout her career, Ms. Druyunstood out in the nearly all-male world ofdefense acquisition. The industry is domi-nated by swaggering, cigar-smoking menwho are members of a secretive, all-malegroup of senior aerospace executivescalled the Conquistadores del Cielo (Con-querors of the Sky). But Ms. Druyun,with her short brown hair, navy-bluesuits and plain style, had immense powerover their fates. As the Air Force’s senioracquisition officer, she evaluated compet-ing bids for contracts and had great influ-ence in deciding winners.

If Ms. Druyun saw problems in a pro-gram, she didn’t mince words. If shedidn’t like a personassigned to workon a program un-der her charge,she’d pressure thecompany to replacehim. In September1999, when Lock-heed was experienc-ing financial set-backs and prob-lems managing itsweapons programs,Ms. Druyun metwith the then-headof Lockheed’s aero-space unit, James “Mickey” Blackwell.In a memo on the meeting that turned upshortly afterward on the Internet, Mr.Blackwell wrote that Ms. Druyun saidLockheed had lost one major satellite con-tract because of “crappy design” andwarned she better not “detect B.S.” onanother bid or Lockheed “would go to thebottom of the chart.” Mr. Blackwell hasconfirmed the memo was his.

Mr. Sears, meanwhile, moved up fromengineer to manager to high-level execu-tive. A brawny man with an iron-griphandshake, he became known as some-one who could size up any situation andturn it to his advantage. When McDon-nell Douglas brought in Harry Stoneci-pher, a former General Electric Co. exec-utive, as its CEO in 1994, Mr. Sears be-came his protege and confidant, keepinghis new boss informed about develop-ments around the company, according topeople who know both men.

Over the years, the paths of Mr. Searsand Ms. Druyun crossed frequently. Bothworked on a program to develop the F-15Eagle fighter jet in the 1970s. Ms.Druyun proclaimed herself “the god-mother” of McDonnell Douglas’s C-17 mil-itary cargo plane, whose developmentprogram she was overseeing in the late1980s. A 1993 report released by the Penta-gon named Ms. Druyun as one of five AirForce officials who secretly funneled $500million to a near-bankrupt McDonnellDouglas in 1990 to stave off a cash crisis;at the time, the company was behindschedule and over budget on its C-17cargo plane. The Air Force and the com-pany denied any wrongdoing, but then-Defense Secretary Les Aspin fired oneAir Force general and disciplined two oth-ers over the matter. Ms. Druyun waslater exonerated.

Ms. Druyun and Mr. Sears had some-thing else in common. While beingsteadily promoted in their respective or-ganizations, both failed to snare topspots. In 2001, Ms. Druyun was passedover for the top civilian acquisition job atthe Air Force even though she had heldthat role in an acting capacity. For hispart, Mr. Sears had been positioning him-self to be Mr. Condit’s successor. Despitelobbying Mr. Condit for more responsibil-ity and building a base of allies withinthe company, it had become clear by thisyear that Mr. Sears would be unlikely tosucceed Mr. Condit.

Ms. Druyun remained a high-profilechampion of the defense industry duringthe 1990s cutbacks in military spending.In the wake of the Sept. 11 terrorist at-tacks and the subsequent slump in theaviation industry, Ms. Druyun becamean active promoter of a plan to have theAir Force lease 100 modified Boeing jetsas air-refueling tankers. Critics of theplan said it was merely a bailout for Boe-ing and would cost taxpayers billionsmore than buying the planes outright.Top Air Force officials, including Ms.Druyun, contended the tankers were ur-gently needed to replace an aging fleetand that leasing would get them into ser-vice sooner.

On Sept. 3, 2002, an e-mail arrived inMr. Sears’s inbox. The sender, a 26-year-old employee in Boeing’s St. Louis opera-tion named Heather McKee, wrote that“mom” was making post-retirementplans. In a tone described by people fa-miliar with it as a “friendly heads-up,”the note told Mr. Sears that the womanwas negotiating with other companiesbut would rather “live in Chicago,”where Boeing is based.

The mom was Ms. Druyun. Ms. Mc-Kee is her daughter, who started workingin Boeing’s human-resources departmentin 2000. Mr. Sears tapped out a quickresponse, asking her to keep him in-formed. Over the next six weeks, Ms.McKee and the Boeing senior executiveexchanged several more e-mails.

People familiar with the company’scontinuing internal probe into theDruyun-Sears relationship say Ms. McK-ee’s role is still being reviewed. The in-vestigation is trying to determinewhether Ms. Druyun used her daughteras an intermediary rather than approach-ing Mr. Sears directly, in an attempt tosidestep the law. The daughter’s hiringby Boeing had been cleared, at Ms.Druyun’s request, by Air Force ethics of-ficials. Ms. McKee declined to comment.

On Oct. 15, Ms. Druyun wrapped upnegotiations on a $278 million NATO air-craft contract that was awarded to Boe-ing. Two days later, Mr. Sears and Ms.Druyun met at a restaurant in Orlando,Fla. Both were in town for a meeting ofthe Air Force Association, a civilian non-profit that promotes aerospace interests.The two discussed a possible job for Ms.Druyun, according to people familiarwith the investigation.

The following week, on Oct. 21, Ms.Druyun and her husband William, a mid-level manager at military contractor Gen-eral Dynamics Corp., signed a contractto sell their four-bedroom house in DunnLoring, Va., to Boeing attorney JohnJudy and his wife for $692,000. They’dpurchased the house 14 months earlierfor $614,523, according to real-estaterecords. At the time, Mr. Judy, who’dbeen overseeing legal aspects of the air-craft tanker lease, was relocating to Boe-ing’s Washington office.

On Nov. 5, two months after herdaughter’s first e-mail to Mr. Sears, Ms.Druyun submitted a letter to the AirForce ethics office, recusing herself fromfurther negotiations with Boeing. Penta-gon and federal investigators now areexamining all conversations between Ms.Druyun and Boeing during those twomonths as well as contract decisions dat-ing back several years. Ms. Druyun hadsubmitted recusal letters on Aug. 29 cov-ering both Lockheed and Raytheon.

Five days after her retirement lun-cheon, on Nov. 26, Lockheed upped theante and made her a written job offer,people familiar with the offer said. Afterseveral weeks of stalling, Ms. Druyundeclined. On Jan. 3, 2003, Boeing an-nounced that she was taking the post ofdeputy general manager for the compa-ny’s missile-defense unit, which plays alead role among contractors in assem-bling the Bush administration’s nationalantimissile shield. By law, she couldn’twork on Air Force programs for at least ayear after her retirement. Her jobwouldn’t fall into that category becausethere is a separate missile-defenseagency within the Pentagon.

That same day, Ms. Druyun finalizedthe sale of her home to her new col-league, Mr. Judy, making a 12.6% grossprofit after 14 months of ownership. BothMr. Judy and Ms. Druyun’s attorneyhave previously said that his purchase ofher home had nothing to do with theirwork relationship and was one of manyshown to him by a real-estate agent.Asked about the house sale, an Air Forceethics officer says the service had no ob-jection to it.

As she was settling into her new job,Ms. Druyun’s new employer was comingunder harsh scrutiny. In May, The WallStreet Journal disclosed Boeing was be-ing investigated for having obtained thou-sands of pages of proprietary Lockheeddocuments during the course of a 1998competition for a rocket contract.

In July, the Air Force stripped Boeingof $1 billion in business after concludingthat the documents had been improperlyobtained. The same month, Boeinglaunched a sweeping internal probe of itsethics policies.

The revelations about the documentsbuttressed the arguments of Arizona Re-

publican Sen. JohnMcCain, a seniormember of the Sen-ate Armed ServicesCommittee and theloudest detractor ofBoeing’s leasingdeal. The numberof planes to beleased has nowbeen cut back to 20from 100. Thisyear, Mr. McCainhas subpoenaeddocuments fromBoeing, the Penta-

gon and the Air Force related to the tank-ers and held public hearings. The Penta-gon has refused to turn over many docu-ments related to the lease.

But Boeing turned over more than8,000 e-mails, including many involvingMs. Druyun. Many of the e-mails, whichMr. McCain later made public, indicatedthat internal Air Force memos about thetanker negotiations were passed on tosenior Boeing executives. One April 2002e-mail from a Boeing executive workingon the deal to a colleague said that Ms.Druyun had told Boeing executives aboutrival company bids. The e-mail said thatMs. Druyun had told the company “sev-eral times” that rival European Aeronau-tic Defense and Space Co.’s offering ofAirbus planes “was $5 million to $17 mil-lion cheaper” per aircraft than Boeing’stanker bid.

Following the release of this e-mail,the Pentagon launched a formal probe inSeptember to investigate whether Ms.Druyun violated federal procurementlaws, which forbid the disclosure of biddata. Boeing officials have said the com-pany didn’t receive privileged data fromMs. Druyun or any other Air Force offi-cial.

Boeing has hired an outside law firmto investigate the events surroundingMs. Druyun’s hiring. The company gavethe firm authority to look at e-mails andinterview executives of their choosing. ABoeing spokesman declined to name thefirm.

The company’s investigators foundMs. Druyun had sent Mr. Sears a lengthye-mail in July laying out a chronology ofthe employment courtship. An e-mailedresponse from Mr. Sears affirmed the se-quence. The order of events differedfrom what investigators had found dur-ing their reconstruction of contacts be-tween the two, according to people famil-iar with the contents.

On Nov. 24, a Monday morning—justover a year after the retirement lunchthey had both attended—Mr. Sears andMr. Druyun were fired when they arrivedat work. Soon afterward, the U.S. attor-ney in northern Virginia launched a crim-inal probe into whether the two brokegovernment procurement laws or ob-structed justice.

Next March was the scheduled pub-lishing date for a book of managementtips by Mr. Sears, called “SoaringThrough Turbulence.” The book offered,among other things, advice on ethicalconduct. As a leader, Mr. Sears wrote,“Your job is not only to tell people to beethical, to take the high road, but also totell them where the lane lines are.” Thebook has since been pulled from releaseby its publisher.

Continued From First Page

Darleen Druyun

Michael Sears

How Two Officials Got Caught by Pentagon’s Revolving DoorFLY ONE WAY

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* * * * * * * * *A14 THURSDAY, DECEMBER 18, 2003 THE WALL STREET JOURNAL.