TEXTRON INC.
Consolidated Statements of Operations (unaudited)
(Dollars in millions, except per share amounts)

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TEXTRON INC.
Consolidated Balance Sheets (unaudited)
(Dollars in millions)

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Item 1.     FINANCIAL STATEMENTS (Continued)

TEXTRON INC.
Consolidated Statements of Cash Flows (unaudited)
(In millions)

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TEXTRON INC.
Notes to Consolidated Financial Statements (unaudited)

The consolidated financial statements should be read in conjunction with the financial statements included in Textron's Annual Report on Form 10-K for the year ended January 3, 2004. The consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of Textron's consolidated financial position at October 2, 2004, and its consolidated results of operations and cash flows for each of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain prior year balances have been reclassified to conform to the current year presentation.

Textron's financings are conducted through two borrowing groups, Textron Finance and Textron Manufacturing. This framework is designed to enhance Textron's borrowing power by separating the Finance segment. Textron Finance consists of Textron Financial Corporation consolidated with its subsidiaries, which are the entities through which Textron operates its Finance segment. Textron Finance finances its operations by borrowing from its own group of external creditors. Textron Manufacturing is Textron Inc., the parent company, consolidated with the entities that operate in the Bell, Cessna, Fastening Systems and Industrial business segments. All significant intercompany transactions are eliminated.

Textron accounts for its interest in unconsolidated joint ventures under the equity method of accounting. At October 2, 2004 and January 3, 2004, other assets includes $15 million and $34 million, respectively, attributable to investments in unconsolidated joint ventures. Since Textron's equity in the losses of these joint ventures is not material, this amount is reported in cost of sales rather than as a separate line item. Textron's loss from unconsolidated joint ventures totaled $2 million and $8 million for the three and nine months ended October 2, 2004, and $2 million and $6 million for the three and nine months ended September 27, 2003, respectively.

Bell Helicopter has a joint venture with The Boeing Company ("Boeing") to provide engineering, development, test services and support related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (the "V-22 Contracts"). Textron does not account for the joint venture under the equity method of accounting as the joint venture agreement creates contractual, rather than ownership, rights. Textron accounts for all of Bell Helicopter's rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell Helicopter under the joint venture agreement. Revenues and cost of sales reflect Bell Helicopter's performance under the V-22 Contracts. All assets used in performance of the V-22 Contracts owned by Bell Helicopter, including inventory and unpaid receivables, and all liabilities arising from Bell Helicopter's obligations under the V-22 Contracts, are included in the balance sheet.

A summary of all of the significant accounting policies is provided in Textron's 2003 Annual Report.

Revenue Recognition
Revenue is generally recognized when products are delivered or services are performed. With respect to aircraft, delivery is upon completion of manufacturing, customer acceptance and the transfer of the risk and rewards of ownership.

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When a sale arrangement involves multiple elements, such as sales of products that include customization services, the deliverables in the arrangement are evaluated to determine whether they represent separate units of accounting. This evaluation occurs at inception of the arrangement and as each item in the arrangement is delivered. The total fee from the arrangement is allocated to each unit of accounting based on its relative fair value, taking into consideration any performance, cancellation, termination or refund type provisions. Fair value for each element is established generally based on the sales price charged when the same or similar element is sold separately. Revenue is recognized when revenue recognition criteria for each unit of accounting are met. The adoption of Emerging Issues Task Force ("EITF") 00-21 "Revenue Arrangements with Multiple Deliverables" in the third quarter of 2003 did not have a material impact on Textron's results of operations or financial position.

Revenue from certain qualifying noncancelable aircraft and other product lease contracts are accounted for as sales-type leases. The present value of all payments (net of executory costs and any guaranteed residual values) is recorded as revenue, and the related costs of the product are charged to cost of sales. Generally, these leases are financed through Textron Finance and the associated interest is recorded over the term of the lease agreement using the interest method. Lease financing transactions that do not qualify as sales-type leases are accounted for under the operating method wherein revenue is recorded as earned over the lease period.

Long-term Contracts
Long-term contracts are accounted for under American Institute of Certified Public Accountants ("AICPA") Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". Revenue under fixed-price contracts is generally recorded as deliveries are made under the units-of-delivery method. Certain long-term fixed-price contracts provide for periodic delivery after a lengthy period of time over which significant costs are incurred or require a significant amount of development effort in relation to total contract volume. Revenues under those contracts and all cost-reimbursement-type contracts are recorded as costs are incurred under the cost-to-cost method. Certain contracts are awarded with fixed-price incentive fees. Incentive fees are considered when estimating revenues and profit rates, and are recorded when these amounts are reasonably determined. Long-term contract profits are based on estimates of total sales value and costs at completion. Such estimates are reviewed and revised periodically throughout the contract life. Revisions to contract profits are recorded when the revisions to estimated sales value or costs are made. Estimated contract losses are recorded when identified.

The V-22 Contracts include the development contract and various production release contracts (i.e., lots) that may run concurrently with multiple earlier lots still being produced as new lots are started. The development contract and the first three production lots are under cost-reimbursement-type contracts, while subsequent lots are under fixed-price incentive contracts. The first three lots under fixed-price incentive contracts have been accounted for under the cost-to-cost method, primarily as a result of the significant engineering effort required over a lengthy period of time during the initial development phase in relation to total contract volume. The production releases on the first six production lots include separately contracted modifications to meet the additional requirements of the U.S. Government's Blue Ribbon Panel. In 2003, the development effort was considered substantially complete for the new production releases beginning in 2003 and management believed a consistent production specification had been met as these units incorporate many of these modifications on the production line. Accordingly, revenue on the new production releases that began in 2003 is recognized under the units-of-delivery method.

Finance Revenues
Finance revenues include interest on finance receivables, which is recognized using the interest method to provide a constant rate of return over the terms of the receivables. Finance revenues also include direct loan origination costs and fees received, which are deferred and amortized over the contractual lives of the respective receivables using the interest method. Unamortized amounts are recognized in revenues when receivables are sold or pre-paid. Accrual of interest income is suspended for accounts that are contractually delinquent by more than three months, unless collection is not doubtful. In addition, detailed reviews of loans may result in earlier suspension if

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collection is doubtful. Accrual of interest is resumed when the loan becomes contractually current, and suspended interest income is recognized at that time.

Textron has a joint venture ("CitationShares") with TAG Aviation USA ("TAG") to sell fractional share interests in business jets. On June 30, 2004, Textron acquired an additional 25% interest in CitationShares from TAG for cash and the assumption of debt guarantees previously provided by TAG. Additional cash consideration may also be payable to TAG based on CitationShares' future operating results. TAG has the right to sell its remaining 25% interest to Textron in the years 2009 through 2011, and Textron has the right to purchase the remaining interest in 2010 or 2011, for an amount based on a multiple of earnings.

As a result of this transaction, Textron owns 75% of CitationShares and has consolidated its financial results prospectively as of June 30, 2004. Assets acquired of $47 million included $22 million of inventory, primarily Citation jets, and liabilities acquired of $59 million included $47 million of third-party debt that was immediately repaid. Additionally, CitationShares has approximately $31 million of operating lease obligations that Textron has fully guaranteed.

On May 20, 2004, Textron sold its Energy Manufacturing and Williams Machine and Tool business ("E&W") in the Industrial Segment. There was no gain or loss on the sale as the proceeds received approximated the book value, including goodwill.

On June 3, 2004, Textron sold its interest in two Brazilian-based joint ventures in the Industrial segment to its joint venture partner and realized a gain of $7 million (approximately $1 million after-tax).

A summary of changes in goodwill is as follows:

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All of Textron's acquired intangible assets are subject to amortization and are comprised of the following as of October 2, 2004:

Amortization expense for the three and nine months ended October 2, 2004 totaled $1 million and $4 million, respectively, and is expected to be approximately $2 million in the fourth quarter of 2004. Amortization expense for the three and nine months ended September 27, 2003 totaled $3 million and $7 million, respectively.

On June 30, 2004 Textron Financial Corporation redeemed all of its $26 million Litchfield 10% Series A Junior Subordinated Debentures, due 2029. The debentures were held by a trust sponsored and wholly-owned by Litchfield Financial Corporation, a subsidiary of Textron Financial Corporation. The proceeds from the redemption were used to redeem all of the $26 million Litchfield Capital Trust I 10% Series A Trust Preferred Securities at par value of $10 per share. There was no gain or loss on the redemption.

The components of accumulated other comprehensive loss, net of related taxes, are as follows:

Comprehensive income is summarized below:

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The dilutive effect of convertible preferred shares and stock options was approximately 2,722,000 and 1,201,000 shares for the three months ended October 2, 2004 and September 27, 2003, respectively, and approximately 2,722,000 and 1,080,000 shares for the nine months ended October 2, 2004 and September 27, 2003, respectively. Income available to common shareholders, used to calculate both basic and diluted earnings per share, approximated net income for both periods.

The following table illustrates the effect on net income and earnings per share if Textron had applied the fair-value recognition provisions of Financial Accounting Standards Board ("FASB") Statement No. 123 "Accounting for Stock-Based Compensation" to stock-based employee compensation.

Textron manages the expense related to stock-based compensation awards using cash settlement forward contracts on its common stock. The use of these forward contracts modifies compensation expense exposure to changes in the stock price with the intent to reduce potential variability. The fair value of these instruments at October 2, 2004 and January 3, 2004 was a receivable of $15 million and $25 million, respectively. Gains and losses on these instruments are recorded as an adjustment to compensation expense when the award is charged to expense. Cash received or paid on the contract settlement is included in cash flows from operating activities, consistent with the classification of the cash flows on the underlying hedged compensation expense.

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The components of net periodic benefit cost for the three months ended October 2, 2004 and September 27, 2003 are as follows:

The components of net periodic benefit cost for the nine months ended October 2, 2004 and September 27, 2003 are as follows:

During the third quarter of 2004, Textron adopted FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act provides for a prescription drug benefit under Medicare ("Medicare Part D") as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. Textron has determined that the benefits it provides meet the equivalency tests as defined in the Act, and has included the effects of the subsidy as a reduction to the accumulated projected benefit obligation of approximately $50 million. The total impact of the subsidy on the net periodic benefit cost for postretirement benefits other than pensions in 2004 is approximately $7 million, of which $5 million was recorded in the third quarter.

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Textron recorded $18 million and $103 million in special charges for the three and nine months ended October 2, 2004, respectively. Special charges for the three and nine months ended September 27, 2003 were $42 million and $94 million, respectively. These charges are summarized below for the applicable segments:

To improve returns at core businesses and to complete the integration of certain acquisitions, Textron approved and committed to a restructuring program in the fourth quarter of 2000 based upon targeted cost reductions. This program was expanded in 2001, and in October 2002, Textron announced a further expansion of the program as part of its strategic effort to improve operating efficiencies, primarily in its industrial businesses. Textron's restructuring program includes corporate and segment direct and indirect workforce reductions, consolidation of facilities primarily in the United States and Europe, rationalization of certain product lines, outsourcing of non-core production activity, the divestiture of non-core businesses, and streamlining of sales and administrative overhead. Under this restructuring program, Textron has reduced its workforce by approximately 11,000 employees from continuing operations and has closed 112 facilities, including 50 manufacturing plants, primarily in the Industrial and Fastening Systems segments. Excluding approximately 700 Trim employees, Textron expects a total reduction of about 11,000 employees from continuing operations, representing approximately 19% of its global workforce since the restructuring was first announced.

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As of October 2, 2004, $504 million of cost has been incurred relating to continuing operations (including $11 million related to the divested Automotive Trim business ("Trim")), with $223 million in the Industrial segment, $194 million in the Fastening Systems segment, $38 million in the Cessna segment, $29 million in the Bell segment, $9 million in the Finance segment and $11 million at Corporate. Costs incurred through October 2, 2004 include $250 million in severance costs, $112 million in asset impairment charges, $51 million in contract termination costs and $95 million in other associated costs, net of gains on sales of assets of $4 million.

Textron estimates that approximately $62 million in additional program costs will be incurred primarily in the Fastening Systems and Industrial segments. In total, Textron estimates that the entire program cost for continuing operations will be within the range of $536 million to $561 million (including $11 million related to Trim) and will be substantially complete by the end of 2004. This estimate includes amounts for projects that have not been formally approved and initiated as of October 2, 2004. For projects that have been formally approved and initiated as of October 2, 2004, Textron expects to incur approximately $21 million in additional severance costs, $8 million in other associated costs and $2 million in contract termination costs.

An analysis of the restructuring program and related reserve accounts is summarized below:

The specific restructuring measures and associated estimated costs are based on Textron's best judgment under prevailing circumstances. Textron believes that the restructuring reserve balance of $59 million is adequate to cover the costs presently accruable for accounting purposes relating to activities formally identified and committed to under approved plans as of October 2, 2004 and anticipates that actions related to these liabilities will be substantially complete by the end of 2004. Approximately $35 million of this reserve represents the present value of contractual obligations related to one lease that, under the terms of the lease, will be paid over the remaining lease term through March 2019.

During the first quarter of 2004, Textron sold its remaining investment in Collins & Aikman common stock for cash proceeds of $34 million, resulting in a pre-tax gain of $12 million that is included in special charges.

During the third quarter of 2003, Textron Manufacturing wrote-off $15 million in unamortized issuance costs to special charges upon the redemption of its 7.92% Junior Subordinated Deferrable Interest Debentures.

A portion of Textron Finance's business involves financing retail purchases and leases for new and used aircraft and equipment manufactured by Textron Manufacturing's Bell, Cessna and Industrial segments. The related finance receivables are recorded on Textron Finance's balance sheet. For those receivables for which collection has been guaranteed by Textron Manufacturing, reserves have been established for losses on Textron Manufacturing's balance sheet and are recorded in other current or long-term liabilities. These reserves are established for amounts that are potentially uncollectible, or if the collateral values may be insufficient to cover the outstanding receivable. If an account is deemed uncollectible and the collateral is repossessed, Textron

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Finance will charge Textron Manufacturing for any deficiency. In some cases, the collateral is not repossessed by Textron Finance and the receivable is transferred to Textron Manufacturing's balance sheet for additional collection efforts. When this occurs, any related reserve previously established is reclassified from Textron Manufacturing's other liabilities and is netted against either accounts receivable or notes receivable within other assets.

The activity in the reserves recorded by Textron Manufacturing for finance receivables held by Textron Finance with recourse (including reserves related to the discontinued operations of OmniQuip) is as follows:

Textron is subject to legal proceedings and other claims arising out of the conduct of Textron's business, including proceedings and claims relating to private sector transactions; government contracts; production partners; product liability; employment; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in Textron's suspension or debarment from U.S. Government contracting for a period of time. On the basis of information presently available, Textron believes that these proceedings and claims will not have a material effect on Textron's financial position or results of operations.

During 2002, the Lycoming aircraft engine business, in conjunction with the Federal Aviation Administration, recalled approximately 950 turbocharged airplane engines and mandated the inspection of another 736 engines to replace potentially faulty crankshafts manufactured by a third-party supplier. Lycoming initiated a comprehensive customer care program to replace the defective crankshafts, make any necessary related repairs, and compensate its customers for the loss of use of their aircraft during the recall. This program is substantially complete. It is possible, however, that additional engines outside the scope of this recall could potentially be affected. Accordingly, Textron has continued to monitor the performance of the crankshafts previously supplied by the third party to ensure that the reserve adequately covers all engines with potentially faulty crankshafts. Textron has reserves of $11 million for costs directly related to potential crankshaft issues that may not specifically be a part of the recall program. Lycoming's program for the inspection and replacement of potentially defective zinc-plated bolts manufactured by a third-party supplier for use in certain aircraft engines has been completed and there are no remaining reserves for this recall as of October 2, 2004.

On September 20, 2004, the third-party supplier of crankshafts utilized in Lycoming engines filed for bankruptcy protection and ceased delivering crankshafts to Lycoming. Management estimates that current crankshaft inventories on hand should be adequate to cover planned production requirements through early 2005. In conjunction with the Federal Aviation Administration, Lycoming is in the process of certifying a new supplier. Management estimates that production of crankshafts by the new supplier will begin in the first quarter of 2005. Based on forecasted production requirements, the transition to and/or certification of the new supplier is not expected to have a material impact on Textron's results of operations or financial position.

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In January 2003, the FASB issued Interpretation No. 46 ("FIN 46" or the "Interpretation"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." The Interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Entities were previously consolidated by an enterprise that has a controlling financial interest through ownership of a majority voting interest in the entity.

Subsequent to the original issuance of the Interpretation, the effective date for entities created or interests obtained prior to February 1, 2003 was deferred, and in December 2003, the FASB issued a revised version of FIN 46 that provided clarification of the original Interpretation and excluded certain operating entities from its scope. Public companies were required to apply the provisions of this Interpretation specifically to entities commonly referred to as special-purpose entities in financial statement periods ending after December 15, 2003. The effective date for all other types of entities within the scope of the Interpretation is for financial statement periods ending after March 15, 2004.

Textron Manufacturing and Textron Finance adopted the revised FIN 46 in the first quarter of 2004. The adoption did not have a material impact on its results of operations or financial position. In the normal course of business, Textron has entered into various joint venture agreements that qualify as operating businesses. The majority of these ventures meet the criteria for exclusion from the scope of FIN 46. As discussed below, Textron does participate in variable interest entities and other contractual arrangements that it is not required to consolidate.

Textron entered into an agreement with Agusta in November 1998 to share certain costs and profits for the joint design, development, manufacture, marketing, sale, customer training and product support of the commercial tiltrotor (the BA609) and the AB139. As of October 2, 2004, only certain marketing and administrative costs are charged to the venture, while development costs are recorded separately by the partners. Bell's share of the development costs are charged to Textron's earnings as a period expense. This venture is a variable interest entity as it relies on its partners to fund the development and provide services for substantially all of the venture's operations. Since Bell does not absorb more than half of this venture's expected losses or residual returns, it is not the primary beneficiary and cannot consolidate this venture. Bell is not obligated to continue funding this venture other than to execute existing contracts. As of October 2, 2004, this venture had total assets of approximately $5 million and no debt.

Bell Helicopter and Boeing entered into a joint venture agreement in December 1995 to perform the V-22 EMD contract and subsequent new production contracts for the performance of engineering studies, preliminary design, full-scale development and engineering and manufacturing development for the V-22 aircraft. The contractual arrangement created under the joint venture agreement defines the collaboration between the two companies to 

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perform the work under the contracts. The joint venture has no employees and owns no property as all venture functions are performed by either Bell Helicopter or Boeing. The work under the V-22 Contracts is allocated evenly between Bell Helicopter and Boeing.

Profits on cost-plus contracts are allocated equally between Bell Helicopter and Boeing. Profits on fixed price contracts are also shared equally with profits determined based on the estimated profit at the inception of the contract. Bell Helicopter and Boeing are each responsible for their own cost overruns, and are entitled to retain any cost underruns, on fixed-price contracts. Under the joint venture agreement, Bell Helicopter and Boeing are each responsible for 50% of any obligations arising from the performance of the V-22 Contracts. Bell Helicopter does not absorb more than half of this venture's expected losses or residual returns and is not obligated to any future funding or requirements other than execution of existing contracts. Since this joint venture establishes contractual rights rather than ownership rights, and is not a legal entity, FIN 46 is not applicable and the venture is not consolidated by Textron.

The Statements of Cash Flows for Textron Manufacturing are provided on page 16 and includes cash flows from the manufacturing businesses along with distributions received from Textron Finance. Textron's Consolidated Statements of Cash Flows are provided on page 4.

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Textron has five reportable segments: Bell, Cessna, Fastening Systems, Industrial and Finance. Textron evaluates segment operating performance based on segment profit. Segment profit for manufacturing segments does not include interest, certain corporate expenses, special charges and gains and losses from the disposition of significant business units. The measurement for the Finance segment includes interest income, interest expense and distributions on preferred securities of Finance subsidiary trust, and excludes special charges.

A summary of continuing operations by segment for the three- and nine-month periods ended October 2, 2004 and September 27, 2003 is as follows:

Textron Inc. is a multi-industry company that leverages its global network of businesses to provide customers with innovative solutions and services in five business segments: Bell, Cessna, Fastening Systems, Industrial and Finance. Textron is known around the world for its powerful brands spanning the business jet, aerospace and defense, fastening systems, plastic fuel systems and golf car and turf-care markets, among others.

During the third quarter, the economy continued to improve for most of Textron's end markets. Sales volumes in the manufacturing segments increased reflecting signs of solid recovery. Continued strength in orders for Citation business jets has sold out all planned production for 2004 deliveries at Cessna, and commercial helicopter orders at Bell have continued to be strong.

Segment profit for the third quarter of 2004 increased due to cost improvements from enterprise management initiatives, higher pricing and improved credit quality, which more than offset other factors affecting operating results, including increased costs for steel and steel components and lower pension income.

Revenues were $2.6 billion in the third quarter of 2004, compared with $2.2 billion in 2003. The increase was largely driven by higher volume of $216 million in the Cessna, Industrial and Fastening Systems segments, favorable foreign exchange of $50 million in the Fastening Systems and Industrial segments, and $38 million related to the consolidation of CitationShares. Additionally, Bell segment revenues increased $49 million as $66 million of higher commercial revenue was partially offset by $17 million of lower U.S. Government revenue.

Revenues were $7.5 billion in the first nine months of 2004, compared with $7.2 billion in 2003. The increase was largely driven by favorable foreign exchange of $202 million and higher volume of $200 million in the Industrial and Fastening Systems segments, and $46 million of higher pricing in the manufacturing segments (including lower used aircraft overtrade allowances of $10 million at Cessna), partially offset by lower volume of $132 million at Cessna, principally due to production schedule changes in 2003 to reflect lower demand due to soft market conditions at that time, and lower revenue of $18 million in the Finance segment. Bell segment revenues decreased slightly as lower revenue of $47 million from the U.S. Government business was substantially offset by higher sales of $38 million in the commercial business.

Segment profit was $214 million in the third quarter of 2004, compared with $157 million in 2003. The increase of $57 million was largely due to improved cost performance totaling $67 million, primarily at the Cessna and Industrial segments, a $53 million impact due to higher sales volume, over half of which was at Cessna, and $14 million of higher pricing in the manufacturing segments (including lower used aircraft overtrade allowances of $2 million at Cessna). These increases were partially offset by $71 million of inflation, including steel costs of $24 million.

Segment profit was $622 million for the first nine months of 2004, compared with $537 million in 2003. The increase of $85 million was due to improved cost performance totaling $222 million in the manufacturing segments and $46 million of higher pricing (including lower used aircraft overtrade allowances of $10 million at Cessna), partially offset by $166 million of inflation, including steel costs of $44 million.

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Special charges decreased to $18 million in the third quarter of 2004, compared with $42 million in the third quarter of 2003. This decrease was due to a $15 million charge in the third quarter of 2003 to write-off deferred issuance costs related to the redemption of Junior Subordinated Debentures and a $9 million decrease in restructuring costs.

Special charges increased to $103 million for the first nine months of 2004, compared with $94 million in 2003. This increase was primarily due to a $36 million increase in restructuring costs to $115 million for the first nine months of 2004, compared with $79 million in 2003. Restructuring costs increased largely due to a significant contract termination charge in the first quarter of 2004. This increase in restructuring costs was partially offset by a $12 million gain on the sale of Collins & Aikman common stock in 2004 and a $15 million charge in 2003 to write-off deferred issuance costs related to the redemption of Junior Subordinated Debentures.

Restructuring Program
To improve returns at core businesses and to complete the integration of certain acquisitions, Textron approved and committed to a restructuring program in the fourth quarter of 2000 based upon targeted cost reductions. This program was expanded in 2001, and in October 2002, Textron announced a further expansion of the program as part of its strategic effort to improve operating efficiencies, primarily in its industrial businesses. Textron's restructuring program includes corporate and segment direct and indirect workforce reductions, consolidation of facilities primarily in the United States and Europe, rationalization of certain product lines, outsourcing of non-core production activity, the divestiture of non-core businesses, and streamlining of sales and administrative overhead. Under this restructuring program, Textron has reduced its workforce by approximately 11,000 employees from continuing operations and has closed 112 facilities, including 50 manufacturing plants, primarily in the Industrial and Fastening Systems segments. Excluding approximately 700 Trim employees, Textron expects a total reduction of about 11,000 employees from continuing operations, representing approximately 19% of its global workforce since the restructuring was first announced.

As of October 2, 2004, $504 million of cost has been incurred relating to continuing operations (including $11 million related to the divested Automotive Trim business ("Trim")), consisting of $250 million in severance costs, $112 million in asset impairment charges, $51 million in contract termination costs and $95 million in other associated costs, net of gains on sales of assets of $4 million. Textron estimates that approximately $62 million in additional program costs will be incurred primarily in the Fastening Systems and Industrial segments. In total, Textron estimates that the entire program cost for continuing operations will be within the range of $536 million to $561 million (including $11 million related to Trim) and will be substantially complete by the end of 2004.

Corporate expenses and other, net were $30 million in the third quarter of 2004, compared with $19 million in 2003. The increase was primarily due to lower pension income of $3 million, increased spending on certain corporate initiatives of $2 million, a gain on life insurance settlements in 2003 of $2 million, higher directors and officers insurance premiums of $2 million and increased cost associated with implementation of the Sarbanes-Oxley Act of 2002 of $2 million.

Corporate expenses and other, net were $101 million for the first nine months of 2004, compared with $81 million in 2003. The increase was primarily due to lower royalty income of $7 million related to the Trim divestiture, higher directors and officers insurance premiums of $6 million, gains on life insurance settlements in 2003 of $5 million, increased cost associated with implementation of the Sarbanes-Oxley Act of 2002 of $3 million and increased cost related to certain corporate initiatives of $2 million.

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Income from continuing operations was $103 million in the third quarter of 2004 compared with $47 million in 2003. The increase was primarily due to higher segment profit of $57 million, a $15 million charge to write off deferred issuance costs in 2003 and lower restructuring costs of $9 million, partially offset by higher corporate expenses and other, net of $11 million.

Income from continuing operations was $240 million in the first nine months of 2004, compared with $198 million in 2003. The increase was primarily due to the higher segment profit of $85 million, partially offset by increased corporate expenses and other, net of $20 million and higher special charges of $9 million.

The following items are considered by management to affect the comparability of operating results to normal ongoing operations:

A reconciliation of the federal statutory income tax rate to the effective income tax rate is provided below: