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HONEYWELL INTERNATIONAL INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except per share amounts)

In 2005, 2004 and 2003, the diluted earnings per share calculation excludes the effect of stock options when the options' exercise

prices exceed the average market price of the common shares during the period. In 2005, 2004 and 2003, the number of stock options

not included in the computation were 17,793,385, 41,656,606 and 41,908,964, respectively. These stock options were outstanding at

the end of each of the respective years.

Note 9—Accounts, Notes and Other Receivables

December 31,

2005 2004

Trade $4,623 $3,656

Other 573 724

5,196 4,380

Less—Allowance for doubtful accounts (179) (137)

$5,017 $4,243

We sell interests in designated pools of trade accounts receivables to third parties. The sold receivables are over-collateralized by

$178 million at December 31, 2005 and we retain a subordinated interest in the pool of receivables representing that over-

collateralization as well as an undivided interest in the balance of the receivables pools. New receivables are sold under the agreement

as previously sold receivables are collected. Losses are recognized when our interest in the receivables are sold. The retained interests

in the receivables are shown at the amounts expected to be collected by us, and such carrying value approximates the fair value of our

retained interests. We are compensated for our services in the collection and administration of the receivables.

December 31,

2005 2004

Designated pools of trade receivables $1,251 $1,060

Interest sold to third parties (500) (500)

Retained interest $ 751 $ 560

Losses on sales of receivables were $18, $9 and $7 million in 2005, 2004 and 2003, respectively. No credit losses were incurred

during those years.

Note 10—Inventories

December 31,

2005 2004

Raw materials $1,438 $1,153

Work in process 695 779

Finished products 1,427 1,382

3,560 3,314

Less—

Progress payments (14) (24)

Reduction to LIFO cost basis (145) (130)

$3,401 $3,160