2.

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

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

4.

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

5.

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 July 3, 2004, and its consolidated results of operations and cash flows for each of the respective three- and six-month periods ended July 3, 2004 and June 28, 2003. 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 July 3, 2004 and January 3, 2004, other assets includes $21 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 $3 million and $6 million for the three and six months ended July 3, 2004, and $1 million and $4 million for the three and six months ended June 28, 2003, respectively.

Bell Helicopter has a joint venture with The Boeing Company ("Boeing") to provide engineering, development and test services 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.

6.

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

7.

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 which Textron has fully guaranteed.

On May 20, 2004, Textron sold its Energy Manufacturing and Williams Machine and Tool business ("E&W"). 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).

8.

A summary of changes in goodwill is as follows:

All of Textron's acquired intangible assets are subject to amortization and are comprised of the following as of July 3, 2004:

Amortization expense for the three and six months ended July 3, 2004 totaled $1 million and $3 million, respectively, and is expected to be approximately $3 million for the remainder of 2004. Amortization expense for the three and six months ended June 28, 2003 totaled $2 million and $4 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.

9.

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

Comprehensive income is summarized below:

The dilutive effect of convertible preferred shares and stock options was approximately 2,538,000 and 877,000 shares for the three months ended July 3, 2004 and June 28, 2003, respectively, and approximately 2,698,000 and 987,000 shares for the six months ended July 3, 2004 and June 28, 2003, respectively. Income available to common shareholders used to calculate both basic and diluted earnings per share approximated net income for both periods.

10.

The following table illustrates the effect on net income and earnings per share if Textron had applied the fair-value recognition provisions of 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 July 3, 2004 and January 3, 2004 was a receivable of $1 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.

The components of net periodic benefit cost for the three months ended July 3, 2004 and June 28, 2003 are as follows:

11.

The components of net periodic benefit cost for the six months ended July 3, 2004 and June 28, 2003 are as follows:

As discussed in Note 14, in May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 106-2, "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003" (the "Act") for employers that sponsor postretirement healthcare plans that provide prescription drug benefits. The FSP is effective for the third quarter of 2004. The net periodic benefit cost for postretirement benefits other than pensions for the three and six month periods ended July 3, 2004 and June 28, 2003 do not include the effect of any future subsidy under the Act.

12.

Textron recorded $28 million and $85 million in special charges for the three and six months ended July 3, 2004, respectively. Special charges for the three and six months ended June 28, 2003 were $24 million and $52 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 10,000 employees and has closed 105 facilities, including 45 manufacturing plants, primarily in the Industrial and Fastening Systems segments. Textron expects a total reduction of about 10,000 employees, excluding approximately 700 Trim employees and 1,000 OmniQuip employees, representing approximately 18% of its global workforce since the restructuring was first announced.

Textron estimates that approximately $50 million in additional program costs will be incurred primarily in the Fastening Systems and Industrial segments. In total, Textron estimates that the entire program for continuing operations will be approximately $536 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 July 3, 2004. For projects that have been formally approved and initiated as of July 3, 2004, Textron expects to incur approximately $16 million in additional severance costs, $12 million in other associated costs and $5 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 $68 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 July 3, 2004 and anticipates that all actions related to these liabilities will be completed within a twelve-month period. 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.

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, we have established reserves for losses on Textron Manufacturing's balance sheet that are recorded in other current or long-term liabilities. We establish these reserves 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 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 transferred from Textron Manufacturing's other liabilities to its allowance for doubtful accounts to offset the transferred account receivable.

14.

The activity in the reserves recorded by Textron Manufacturing for finance receivables held by Textron Finance with recourse 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 of the current 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 July 3, 2004.

In January 2003, the Financial Accounting Standards Board (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 (SPE) 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 certain variable interest entities that it is not required to consolidate.

Textron entered into an agreement with Agusta Aerospace Corporation ("Agusta") in November 1998 to share certain costs and profits for the joint design, development, manufacture, marketing, sale, customer training and product support of Bell Agusta Aerospace's BA609, the commercial tiltrotor, and the AB139. These programs have been in the development stage, and only certain marketing and administrative costs are charged to the venture. 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 July 3, 2004, this venture had total assets of $6 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 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.

16.

The agreement has been assessed under Financial Accounting Standards Board Interpretation No. 46 ("FIN 46"), and since Bell Helicopter 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. As the joint venture establishes contractual rights rather than a legal entity, no capital contributions have been required and Bell Helicopter is not obligated to any future funding or requirements other than execution of existing contracts.

In May 2004, the FASB issued FSP 106-2, which provides guidance on the accounting effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"), and as requires employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act (the "subsidy"). FSP 106-2 is effective for interim periods beginning after June 15, 2004, and provides a deferral election until such time when the effect of the subsidy on net periodic benefit cost can be fully evaluated. Textron has elected to defer accounting for the Act until the third quarter of 2004 when we anticipate that final guidelines on the eligibility rules for the subsidy will be available. Accordingly, net periodic benefit cost for the periods reported does not reflect any amount associated with the subsidy under the Act. Textron has initiated the process of determining the effect of the Act and the related subsidy on the net periodic benefit cost, and believes that the subsidy will not have a material impact on Textron's financial position or results of operations.

The Statements of Cash Flows for Textron Manufacturing, which include distributions received from Textron Finance but exclude the net income of Textron Finance, are provided on page 17. Textron's Consolidated Statements of Cash Flows are provided on page 4.

17.

18.

Textron reports under the following 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 six-month periods ended July 3, 2004 and June 28, 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 second quarter, the economy continued to improve as most of Textron's end markets showed good growth or signs of solid recovery with volume increases in the Fastening Systems and Industrial segments. At Cessna and Bell, year-to-date orders for Citation business jets and commercial helicopters, respectively, are at least double what they were at this time last year.

Segment profit for the second 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, lower pension income and higher healthcare costs.

Revenues were $2.55 billion in the second quarter of 2004, compared with $2.53 billion in 2003. The increase was largely driven by higher volume of $68 million and favorable foreign exchange of $57 million in the Fastening Systems and Industrial segments, partially offset by lower revenue of $54 million from the V-22 program at Bell and lower Citation business jet volume of $35 million at Cessna.

Revenues were $4.90 billion in the first half of 2004, compared with $4.93 billion in 2003. The decrease was largely driven by lower Citation business jet volume of $243 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 $51 million from the V-22 program at Bell. These decreases were partially offset by favorable foreign exchange of $153 million and increased volume of $137 million in the Fastening Systems and Industrial segments.

Segment profit was $236 million in the second quarter of 2004, compared with $206 million in 2003. The increase of $30 million was largely due to higher profit of $21 million in the Industrial segment, primarily as a result of improved cost performance of $33 million, $15 million in the Bell segment, mainly in its commercial helicopter business, and $13 million in the Finance segment, principally due to a lower loan loss provision. These increases were partially offset by lower profit of $22 million at Cessna largely due to lower business jet volume.

Segment profit was $408 million for the first half of 2004, compared with $380 million in 2003. The increase of $28 million was due to higher profit of $34 million in the Industrial segment, primarily as a result of improved cost performance of $55 million and a lower fair market value adjustment of $9 million for used golf car inventory, partially offset by unfavorable performance of $17 million at a North American Kautex plant. Segment profit also increased $27 million in the Bell segment, primarily in its commercial helicopter business, and $21 million in the Finance segment largely due to a lower loan loss provision. These increases were partially offset by lower profit of $59 million at Cessna largely due to lower business jet volume.

20.

Textron recorded special charges related to restructuring of $28 million and $24 million in the second quarter of 2004 and 2003, respectively. Special charges totaled $85 million and $52 million for the six months ended July 3, 2004 and June 28, 2003, respectively. The $85 million of special charges for the six months ended July 3, 2004 includes $97 million of restructuring costs and a $12 million pre-tax gain on the sale of Collins & Aikman (C&A) common stock for $34 million in cash. Special charges of $52 million for the six months ended June 28, 2003 were for restructuring.

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 10,000 employees and has closed 105 facilities, including 45 manufacturing plants, primarily in the Industrial and Fastening Systems segments. Textron expects a total reduction of about 10,000 employees, excluding approximately 700 Trim employees and 1,000 OmniQuip employees, representing approximately 18% of its global workforce since the restructuring was first announced.

As of July 3, 2004, $486 million of cost has been incurred relating to continuing operations (including $11 million related to Trim), consisting of $244 million in severance costs, $111 million in asset impairment charges, $46 million in contract termination costs and $87 million in other associated costs, net of gains on sales of assets of $2 million. Textron estimates that approximately $50 million in additional program costs will be incurred primarily in the Fastening Systems and Industrial segments. In total, Textron estimates that the entire program for continuing operations will be approximately $536 million (including $11 million related to Trim) and will be substantially complete by the end of 2004.

Income from continuing operations was $100 million in the second quarter of 2004 compared with $85 million in 2003. The increase was primarily due to higher segment profit and a $7 million pre-tax gain on the sale of Textron's interest in two Brazilian-based joint ventures in the Industrial segment to its joint venture partner.

Income from continuing operations was $137 million in the first half of 2004, compared with $151 million in 2003, primarily due to the increase in restructuring charges. Textron also recorded a $12 million pre-tax gain on the sale of its remaining shares of C&A common stock in the first quarter of 2004 and a $7 million pre-tax gain on the sale of its interest in two Brazilian-based joint ventures in the Industrial segment in the second quarter of 2004 compared with a pre-tax gain of $15 million on the sale of its remaining interest in an Italian automotive joint venture to C&A in the first quarter of 2003.

21.

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:

Other, net includes the impact of Textron's sale of its interest in two Brazilian-based joint ventures in the Industrial segment during the second quarter of 2004 and the sale of its interest in an Italian automotive joint venture in the first quarter of 2003.

The full year 2004 effective tax rate is now expected to be approximately 33%.

Discontinued operations in the second quarter and first half of 2003 resulted in a net loss of $22 million, primarily due to a pre-tax asset impairment charge of $30 million at OmniQuip.

We experienced improvements in manufacturing volume in certain non-aircraft businesses and stronger commercial aircraft orders in the first half of 2004, reflecting good growth or signs of solid recovery in most of our end markets. At Cessna, the estimated sale of jets in 2004 has been increased to about 180 jets from the previous estimate of between 170 to 175 jets. Total 2004 revenues for Textron are now expected to increase more than 4% compared to 2003. Continued improvement is expected in overall segment profit and margins as a result of the impact from the higher volumes and the benefits of restructuring and other cost reduction initiatives.

On June 30, 2004, Textron acquired an additional 25% interest in CitationShares, its joint venture with TAG Aviation USA ("TAG"), for cash and the assumption of debt guarantees previously provided by TAG. As a result of this 

22.

The Bell segment's revenues decreased $29 million in the second quarter of 2004 compared to 2003 due to lower revenue of $31 million in the U.S. Government business partially offset by higher sales volume of $2 million in the commercial business. U.S. Government revenues decreased due to lower revenue of $54 million on the V-22 program, partially offset by higher revenue of $14 million on the H-1 upgrade program and higher sales of $12 million for air-launched weapons. The lower V-22 revenue was primarily due to the decreasing development effort of $38 million and $20 million of lower effort on production lots three through six as these contracts near completion. Revenue for the development contracts and production lots through lot six is recognized as costs are incurred. For production lots that began in 2003 and all subsequent production lots, the policy is to recognize revenue on an as-delivered basis. This transition has resulted in lower overall V-22 production revenue as no units from these lots were delivered in the period. Commercial revenues increased modestly as higher foreign military sales of $44 million were largely offset by lower sales of $42 million of other commercial helicopters, primarily due to the allocation of seven model 412s to meet the foreign military deliveries. Additionally, $7 million of lower Huey II kit sales were offset by higher volume in the aircraft engine business.

The Bell segment's revenues decreased $58 million in the first half of 2004 compared to 2003 due to lower revenue of $30 million in the U.S. Government business and lower commercial sales of $28 million. U.S. Government sales decreased primarily due to lower revenue of $51 million on the V-22 program and an $8 million reduction in revenue recorded in the first quarter of 2004 as a result of a proposed settlement between Bell and the U.S. Government to resolve a potential claim. (See Note 12 to the financial statement for details regarding the proposed settlement.) These decreases were partially offset by $18 million of higher military spares volume to support the war in Iraq and higher H-1 revenue of $6 million. Commercial revenues decreased primarily due to lower helicopter sales to commercial customers of $60 million and lower Huey II kit sales of $6 million, partially offset by higher foreign military sales of $22 million and higher revenue of $13 million in the aircraft engine business.

Segment profit in the second quarter of 2004 was $15 million greater than in 2003 due to higher profit of $11 million in the commercial business and higher profit of $4 million in the U.S. Government business. Higher profit in the commercial business was primarily due to the $15 million impact of the higher foreign military sales volume and the favorable resolution of a $6 million warranty issue, partially offset by the $9 million impact of lower sales volume of other commercial helicopters. U.S. Government profit increased primarily due to the $3 million impact of higher volume and a favorable mix on air-launched weapons.

Segment profit in the first half of 2004 was $27 million greater than in 2003 primarily due to higher profit of $22 million in the commercial business and $5 million in the U.S. Government business. Commercial profit increased primarily due to the $16 million impact of the higher foreign military sales, the favorable resolution of a $6 million warranty issue and the $5 million favorable impact of a nonrecurring 2003 charge related to a recall, inspection and customer care program at the aircraft engine business. Profit in the U.S. Government business increased $7 million primarily due to the $7 million impact of higher volume and a favorable mix on air-launched weapons and $4 million of higher spares profit, partially offset by $8 million accrued in the first quarter for a proposed settlement between Bell and the U.S. Government to resolve a potential claim.

23.

Backlog at Bell Helicopter of $2.5 billion was up $1.1 billion from the first quarter of 2004. The increase was primarily due to signed contracts for production lots seven and eight for the V-22 program.

The Cessna segment revenues decreased $75 million in the second quarter of 2004 compared to 2003, primarily due to lower used aircraft volume of $48 million, lower Citation business jet volume of $35 million, and lower single engine aircraft sales of $20 million. The lower business jet revenue was principally due to the actions taken during 2003 to adjust production schedules to decreased demand, while delayed certification of the Garmin 1000 avionics contributed to the lower sales of single engine aircraft. Jet sales declined to 36 jets in the second quarter of 2004 from 57 jets in the second quarter of 2003. Since the business jet production cycle averages 9 to 12 months, the reduced production schedule in 2003 continued to impact jet sales through the second quarter of 2004. The lower jet volume was partially offset by $11 million of higher pricing.

The Cessna segment revenues decreased $245 million in the first half of 2004 compared to 2003, primarily due to lower Citation business jet volume of $243 million, principally due to the actions taken during 2003 to adjust production schedules to decreased demand. Jet sales declined to 70 jets in the first half of 2004 from 107 jets in the first half of 2003. In addition, lower single engine aircraft sales of $22 million and lower used aircraft sales of $20 million, were partially offset by higher pricing of $16 million and an $8 million benefit from lower used aircraft overtrade allowances.

Segment profit decreased $22 million in the second quarter of 2004 compared to 2003 largely due to reduced margin of $23 million from lower volume and $18 million from inflation. These decreases were partially offset by higher pricing of $11 million, lower used aircraft valuation adjustments of $6 million, improved cost performance of $5 million and a $4 million benefit due to prior year provisions for residual value guarantees. The decrease in used aircraft valuation adjustments was primarily due to the stabilization of market values for used jets in 2004, in comparison to 2003 when market values were declining.

Segment profit decreased $59 million in the first half of 2004 compared to 2003, largely due to reduced margin of $81 million from lower volume and $31 million from inflation. These decreases were partially offset by improved cost performance of $24 million, $16 million of higher pricing, a $13 million benefit related to prior year provisions for residual value guarantees, lower used aircraft valuation adjustments of $8 million and a $7 million benefit from lower used aircraft overtrade allowances. The benefit from lower used aircraft overtrade allowances and valuation adjustments were primarily due to fewer trade-ins and the stabilization of market values for used jets in 2004, in comparison to 2003 when market values were declining.

Backlog from unaffiliated customers of $4.8 billion was up from $4.3 billion in the first quarter of 2004. A significant portion of Cessna's backlog represents orders from a major fractional shares aircraft operator.

24.

The Fastening Systems segment's revenues increased $47 million in the second quarter of 2004 compared to 2003, primarily due to higher volume of $23 million, largely due to improvements in several of its end markets and a favorable foreign exchange impact of $25 million.

The Fastening Systems segment's revenues increased $115 million in the first half of 2004 compared to 2003, primarily due to higher volume of $66 million, largely due to improvements in several of its end markets and a favorable foreign exchange impact of $57 million.

During the first half of 2004, an increase in the global demand for steel resulted in significantly higher prices for materials used in the manufacturing process at Fastening Systems, which is a major supplier of steel fasteners. As a result, Fastening Systems took action to raise prices and impose surcharges on its steel products to mitigate the impact of higher raw material costs.

Segment profit increased $3 million in the second quarter of 2004 compared to 2003 due to $12 million of improved cost performance, the impact of the higher sales volume of $4 million and favorable foreign exchange of $2 million. These increases were partially offset by inflation of $16 million. The impact of higher steel prices was $9 million ($4 million, net of price increases and surcharges to our customers) in the second quarter of 2004.

Segment profit increased $5 million in the first half of 2004 compared to 2003 due to $20 million of improved cost performance, the impact of the higher sales volume of $11 million and favorable foreign exchange of $5 million. These increases were partially offset by inflation of $29 million and lower pricing of $3 million. The impact of higher steel prices was $13 million ($7 million, net of price increases and surcharges to our customers) in the first half of 2004.

The Industrial segment's revenues increased $79 million in the second quarter of 2004 compared to 2003, primarily due to higher sales volume of $45 million, a favorable foreign exchange impact of $32 million and higher pricing of $7 million. The higher sales volume primarily reflects increases at Kautex, largely due to new product launches and growth in its international markets, and to a lesser degree increases at E-Z-GO and Greenlee in North America.

The Industrial segment's revenues increased $171 million in the first half of 2004 compared to 2003, primarily due to a favorable foreign exchange impact of $96 million, higher sales volume of $72 million and higher pricing of $8 million. The higher sales volume primarily reflects increases at Kautex, largely due to new product launches and growth in its international markets, and to a lesser degree increases at E-Z-GO and Greenlee in North America.

Segment profit increased $21 million in the second quarter of 2004 compared to 2003 primarily due to $27 million of improved cost performance, the $7 million impact of higher volume, higher pricing of $7 million, lower fair market value adjustments of $5 million for used golf cars and improved credit performance of $2 million. These increases were partially offset by inflation of $15 million, lower profit of $7 million at a North American Kautex plant due to increased cost from manufacturing inefficiencies, and higher warranty costs of $4 million at Kautex.

Segment profit increased $34 million in the first half of 2004 compared to 2003 primarily due to $55 million of improved cost performance, the $9 million impact of higher volume, higher pricing of $9 million, lower fair market value adjustments of $9 million for used golf cars and improved credit performance of $4 million. These increases were 

25.

partially offset by inflation of $25 million, lower profit of $17 million at a North American Kautex plant due to increased cost from manufacturing inefficiencies, and higher warranty costs of $7 million at Kautex.

Finance Revenues

The Finance segment's revenues decreased $5 million in the second quarter of 2004 compared to 2003. The decrease was primarily due to lower finance charges and discounts of $19 million from lower average finance receivables of $712 million reflecting the continued liquidation of non-core assets. The decrease was partially offset by higher other income of $13 million primarily due to higher securitization and syndication gains of $8 million.

The Finance segment's revenues decreased $11 million in the first half of 2004 compared to 2003. The decrease was primarily due to lower finance charges and discounts of $29 million from lower average finance receivables of $602 million as a result of continued liquidation of non-core assets. The decrease was partially offset by higher other income of $18 million primarily due to higher securitization and syndication gains of $17 million.

Segment profit increased $13 million in the second quarter of 2004 compared to 2003 primarily due to a lower provision for loan losses of $12 million reflecting an improvement in portfolio performance, and improved net interest margin of $5 million, partially offset by higher operating expenses of $5 million principally due to higher legal and collections expense.

Segment profit increased $21 million in the first half of 2004 compared to 2003 primarily due to a lower provision for loan losses of $16 million reflecting an improvement in portfolio performance, and improved net interest margin of $4 million.

The Finance segment's nonperforming assets include nonaccrual accounts that are not guaranteed by Textron Manufacturing, for which interest has been suspended, and repossessed assets. Nonperforming assets decreased to $148 million in the second quarter of 2004, compared to $162 million at January 3, 2004, representing 2.5% and 2.8% of finance assets, respectively. The allowance for losses on receivables as a percentage of nonaccrual finance receivables was 78.5% at the end of the second quarter of 2004 compared to 78.4% at the end of 2003. Net charge-offs decreased $6 million primarily due to a $16 million decrease in other non-core portfolios and a $3 million decrease at aircraft finance, reflecting an improvement in general economic conditions and aircraft values, partially offset by a $13 million increase in the resort finance business primarily related to two accounts for which reserves had been previously established.

Special charges were $85 million and $52 million in the first half of 2004 and 2003, respectively, and are summarized below by segment: