UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended ~~April~~July 1, 2006
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-5480

_______________

TEXTRON INC.

(Exact name of registrant as specified in its charter)

_______________

Delaware

(State or other jurisdiction of

incorporation or organization)

05-0315468

(I.R.S. Employer Identification No.)

40 Westminster Street, Providence, RI 02903

401-421-2800

(Address and telephone number of principal executive offices)

_______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No

üNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X üAccelerated filer ___ Non-accelerated filer ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
. Yes __ No X

Common stock outstanding at ~~April~~July 22, 2006 - ~~130,096,275~~126,260,189 shares

PART I. FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

TEXTRON INC.

Consolidated Statements of Operations (unaudited)

(Dollars in millions, except per share amounts)

Three Months Ended

April 1,
2006
April 2,
2005

Revenues
Manufacturing revenues
$
2,450
$
2,129

Finance revenues
182

141

     Total revenues
2,632

2,270

Costs, expenses and other
Cost of sales
1,955

1,667

Selling and administrative
361

340

Interest expense, net
94

68

Provision for losses on finance receivables
9

12

Special charges
-

54

     Total costs, expenses and other
2,419

2,141

Income from continuing operations before income taxes
213

129

Income taxes
(55)

(45)

Income from continuing operations
158

84

Income from discontinued operations, net of income taxes
10

42

Net income
$
168
$
126

Per common share:
     Basic:
          Income from continuing operations
$
1.21
$
0.62

          Income from discontinued operations, net of income taxes
0.08

0.31

     Net income
$
1.29
$
0.93

     Diluted:
          Income from continuing operations
$
1.19
$
0.61

          Income from discontinued operations, net of income taxes
0.07

0.30

     Net income
$
1.26
$
0.91

Average shares outstanding (in thousands):
     Basic
130,093
135,127

     Diluted
132,856
138,283

Dividends per share:
     $2.08 Preferred stock, Series A
$
.52
$
.52

     $1.40 Preferred stock, Series B
$
.35
$
.35

     Common stock
$
.3875
$
.35


	Three Months Ended						Six Months Ended
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Revenues
Manufacturing revenues	$	2,628		$	2,520		$	5,078		$	4,649
Finance revenues		192			147			374			288
Total revenues		2,820			2,667			5,452			4,937
Costs, expenses and other
Cost of sales		2,081			2,029			4,036			3,695
Selling and administrative		376			336			737			677
Interest expense, net		109			72			203			140
Provision for losses on finance receivables		(1	)		1			8			13
Special charges		-			41			-			95
Total costs, expenses and other		2,565			2,479			4,984			4,620
Income from continuing operations before income taxes		255			188			468			317
Income taxes		(78	)		(70	)		(133	)		(115	)
Income from continuing operations		177			118			335			202
(Loss) income from discontinued operations, net of income taxes		(108	)		5			(98	)		47
Net income	$	69		$	123		$	237		$	249
Per common share:
Basic:
Income from continuing operations	$	1.38		$	0.88		$	2.59		$	1.50
(Loss) income from discontinued operations, net of income taxes		(0.84	)		0.04			(0.76	)		0.35
Net income	$	0.54		$	0.92		$	1.83		$	1.85
Diluted:
Income from continuing operations	$	1.34		$	0.86		$	2.53		$	1.47
(Loss) income from discontinued operations, net of income taxes		(0.81	)		0.03			(0.74	)		0.33
Net income	$	0.53		$	0.89		$	1.79		$	1.80
Average shares outstanding (in thousands):
Basic		128,453			134,603			129,185			134,866
Diluted		131,294			137,582			132,002			137,948
Dividends per share:
$2.08 Preferred stock, Series A	$	0.52		$	0.52		$	1.04		$	1.04
$1.40 Preferred stock, Series B	$	0.35		$	0.35		$	0.70		$	0.70
Common stock	$	0.3875		$	0.35		$	0.775		$	0.70

See Notes to the Consolidated Financial Statements.

Item 1.FINANCIAL STATEMENTS (Continued)

TEXTRON INC.

Consolidated Balance Sheets (unaudited)

(Dollars in millions)

April 1,
2006

December 31,
2005

Assets
Textron Manufacturing
Cash and cash equivalents
$
535

$
786

Accounts receivable, less allowance for doubtful accounts of $41 and $38
1,006

891

Inventories
1,925

1,712

Other current assets
444

464

Assets of discontinued operations
1,163

1,122

          Total current assets
5,073

4,975

Property, plant and equipment, less accumulated
     depreciation and amortization of $2,032 and $1,999

1,577

1,574

Goodwill
980

979

Other intangible assets, net
31

32

Other assets
1,517

1,498

          Total Textron Manufacturing assets
9,178

9,058

Textron Finance
Cash
10

10

Finance receivables, less allowance for losses of $100 and $96
7,105

6,667

Goodwill
169

169

Other assets
588

595

          Total Textron Finance assets
7,872

7,441

          Total assets
$
17,050

$
16,499

Liabilities and Shareholders' Equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt
$
202

$
275

Accounts payable
854

677

Accrued liabilities
1,599

1,749

Liabilities of discontinued operations
495

446

          Total current liabilities
3,150

3,147

Accrued postretirement benefits other than pensions
517

515

Other liabilities
1,543

1,511

Long-term debt
1,663

1,659

          Total Textron Manufacturing liabilities
6,873

6,832

Textron Finance
Other liabilities
548

510

Deferred income taxes
460

461

Debt
5,842

5,420

          Total Textron Finance liabilities
6,850

6,391

          Total liabilities
13,723

13,223

Shareholders' equity
Capital stock:
     Preferred stock
10

10

     Common stock
26

26

Capital surplus
1,677

1,533

Retained earnings
5,924

5,808

Accumulated other comprehensive loss
(77)

(78)

7,560

7,299

Less cost of treasury shares
4,233

4,023

Total shareholders' equity
3,327

3,276

Total liabilities and shareholders' equity $
17,050
$
16,499

Common shares outstanding (in thousands)
129,892

130,185


	July 1, 2006			December 31, 2005
Assets
Textron Manufacturing
Cash and cash equivalents	$	302		$	786
Accounts receivable, less allowance for doubtful accounts of $39 and $38		1,024			891
Inventories		2,072			1,712
Other current assets		451			464
Assets of discontinued operations		1,007			1,122
Total current assets		4,856			4,975
Property, plant and equipment, less accumulated depreciation and amortization of $2,096 and $1,999		1,597			1,574
Goodwill		991			979
Other intangible assets, net		30			32
Other assets		1,555			1,498
Total Textron Manufacturing assets		9,029			9,058
Textron Finance
Cash		23			10
Finance receivables, less allowance for losses of $92 and $96		7,540			6,667
Goodwill		169			169
Other assets		589			595
Total Textron Finance assets		8,321			7,441
Total assets	$	17,350		$	16,499
Liabilities and Shareholders' Equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt	$	164		$	275
Accounts payable		943			677
Accrued liabilities		1,692			1,749
Liabilities of discontinued operations		492			446
Total current liabilities		3,291			3,147
Accrued postretirement benefits other than pensions		517			515
Other liabilities		1,566		��	1,511
Long-term debt		1,694			1,659
Total Textron Manufacturing liabilities		7,068			6,832
Textron Finance
Other liabilities		537			510
Deferred income taxes		465			461
Debt		6,258			5,420
Total Textron Finance liabilities		7,260			6,391
Total liabilities		14,328			13,223
Shareholders' equity
Capital stock:
Preferred stock		10			10
Common stock		26			26
Capital surplus		1,730			1,533
Retained earnings		5,944			5,808
Accumulated other comprehensive loss		(69	)		(78	)
		7,641			7,299
Less cost of treasury shares		4,619			4,023
Total shareholders' equity		3,022			3,276
Total liabilities and shareholders' equity	$	17,350		$	16,499
Common shares outstanding (in thousands)		126,249			130,185

See Notes to the Consolidated Financial Statements.

Item 1.FINANCIAL STATEMENTS (Continued)

TEXTRON INC.

Consolidated Statements of Cash Flows (unaudited)

For the ~~Three~~Six Months Ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005,

respectively

(~~Dollars in~~In millions)

Consolidated

2006
2005
Revised-
See Note 1
Cash flows from operating activities:
Net income
     $      168
     $      126
Income from discontinued operations
          (10)
          (42)
Income from continuing operations
          158
          84
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
          Earnings of Textron Finance, net of distributions
          -
          -
          Depreciation
          62
          67
          Amortization
          4
          4
          Provision for losses on finance receivables
          9
          12
          Special charges
          -
          54
          Collections in excess of non-cash gains on securitizations
          3
          2
          Deferred income taxes
          (5)
          (1)
          Changes in assets and liabilities:
               Accounts receivable, net
          (104)
          (106)
               Inventories
          (233)
          (91)
               Other assets
          15
          69
               Accounts payable
          177
          191
               Accrued liabilities
          41
          (169)
               Captive finance receivables, net
          (73)
          (52)
               Other operating activities, net
          23
          15
     Net cash provided by operating activities of continuing operations
          77
          79
     Net cash used in operating activities of discontinued operations
          (8)
          (39)
     Net cash provided by operating activities
          69
          40
Cash flows from investing activities:
Finance receivables:
     Originated or purchased
          (2,472)
          (2,278)
     Repaid
          2,046
          1,902
     Proceeds on receivables sales and securitization sales
          -
          32
Capital expenditures
          (60)
          (58)
Proceeds on sale of property, plant and equipment
          2
          -
Other investing activities, net
          26
          6
     Net cash used in investing activities of continuing operations
          (458)
          (396)
     Net cash (used in) provided by investing activities of discontinued operations
          (20)
          9
     Net cash used in investing activities
          (478)
          (387)
Cash flows from financing activities:
(Decrease) increase in short-term debt
          (131)
          287
Proceeds from issuance of long-term debt
          556
          799
Principal payments and retirements of long-term debt
          (52)
          (737)
Proceeds from employee stock ownership plans
          107
          47
Purchases of Textron common stock
          (226)
          (117)
Dividends paid
          (97)
          (95)
Dividends paid to Textron Manufacturing
          -
          -
     Net cash provided by (used in) financing activities of continuing operations
          157
          184
     Net cash used in financing activities of discontinued operations
          (1)
          (1)
     Net cash provided by (used in) financing activities
          156
          183
Effect of exchange rate changes on cash and cash equivalents
          2
          (9)
Net decrease in cash and cash equivalents
          (251)
          (173)
Cash and cash equivalents at beginning of year
          796
          697
Cash and cash equivalents at end of quarter
     $     545
     $     524
Supplemental schedule of non-cash investing and financing activities from continuing operations:
Capital expenditures financed through capital leases
     $        5
     $        1

	Consolidated
	2006			2005 Revised- See Note 1
Cash flows from operating activities:
Net income	$	237		$	249
Loss (income) from discontinued operations		98			(47	)
Income from continuing operations		335			202
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Earnings of Textron Finance, net of distributions		-			-
Depreciation		130			137
Amortization		8			9
Provision for losses on finance receivables		8			13
Special charges		-			95
Share-based compensation		17			14
Collections in excess of non-cash gains on securitizations		4			-
Deferred income taxes		2			5
Changes in assets and liabilities:
Accounts receivable, net		(109	)		(101	)
Inventories		(398	)		(108	)
Other assets		25			66
Accounts payable		257			265
Accrued liabilities		58			(92	)
Captive finance receivables, net		(205	)		(46	)
Other operating activities, net		28			18
Net cash provided by operating activities of continuing operations		160			477
Net cash provided by (used in) operating activities of discontinued operations		65			(6	)
Net cash provided by operating activities		225			471
Cash flows from investing activities:
Finance receivables:
Originated or purchased		(5,475	)		(4,809	)
Repaid		4,658			4,386
Proceeds on receivables sales and securitization sales		50			181
Capital expenditures		(134	)		(131	)
Net cash used in acquisitions		-			(23	)
Proceeds on sale of property, plant and equipment		3			-
Other investing activities, net		38			18
Net cash used in investing activities of continuing operations		(860	)		(378	)
Net cash (used in) provided by investing activities of discontinued operations		(21	)		2
Net cash used in investing activities		(881	)		(376	)
Cash flows from financing activities:
Increase (decrease) in short-term debt		389			(391	)
Proceeds from issuance of long-term debt		1,034			1,551
Principal payments and retirements of long-term debt		(655	)		(995	)
Proceeds from employee stock ownership plans		143			68
Purchases of Textron common stock		(598	)		(244	)
Dividends paid		(147	)		(142	)
Dividends paid to Textron Manufacturing		-			-
Capital contributions paid to Textron Finance		-			-
Excess tax benefits related to stock option exercises		18			9
Net cash provided by (used in) financing activities of continuing operations		184			(144	)
Net cash used in financing activities of discontinued operations		(6	)		(4	)
Net cash provided by (used in) financing activities		178			(148	)
Effect of exchange rate changes on cash and cash equivalents		7			(23	)
Net decrease in cash and cash equivalents		(471	)		(76	)
Cash and cash equivalents at beginning of year		796			697
Cash and cash equivalents at end of quarter	$	325		$	621
Supplemental schedule of non-cash investing and financing activities from continuing operations:
Capital expenditures financed through capital leases	$	5		$	2

See Notes to the Consolidated Financial Statements.

Item 1. 1.FINANCIAL STATEMENTS (Continued)

TEXTRON INC.

Consolidated Statements of Cash Flows (unaudited) (continued)

For the ~~Three~~Six Months Ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005, respectively

(~~Dollars in~~In millions)

Textron Manufacturing*
Textron Finance*

2006
2005
Revised-
See Note 1
2006
2005
Revised-
See Note 1
Cash flows from operating activities:
Net income
     $     168
     $     126
     $      31
     $       22
Income from discontinued operations
          (10)
          (42)
          -
          -
Income from continuing operations
          158
          84
          31
          22
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
          Earnings of Textron Finance, net of distributions
          31
          75
          -
          -
          Depreciation
          55
          59
          7
          8
          Amortization
          1
          2
          3
          2
          Provision for losses on finance receivables
          -
          -
          9
          12
          Special charges
          -
          54
          -
          -
          Collections in excess of non-cash gains on securitizations
          -
          -
          3
          2
          Deferred income taxes
          (4)
          1
          (1)
          (2)
          Changes in assets and liabilities:
               Accounts receivable, net
          (104)
          (106)
          -
          -
               Inventories
          (214)
          (78)
          -
          -
               Other assets
          14
          56
          (2)
          6
               Accounts payable
          177
          182
          -
          9
               Accrued liabilities
          (9)
          (185)
          50
          16
               Captive finance receivables, net
          -
          -
          -
          -
               Other operating activities, net
          23
          15
          -
          -
     Net cash provided by operating activities of continuing operations
          128
          159
          100
          75
     Net cash used in operating activities of discontinued operations
          (8)
          (39)
          -
          -
     Net cash provided by operating activities
          120
          120
          100
          75
Cash flows from investing activities:
Finance receivables:
     Originated or purchased
          -
          -
          (2,700)
          (2,456)
     Repaid
          -
          -
          2,201
          2,028
     Proceeds on receivables sales and securitization sales
          -
          -
          -
          32
Capital expenditures
          (57)
          (55)
          (3)
          (3)
Proceeds on sale of property, plant and equipment
          2
          2
          -
          -
Other investing activities, net
          (4)
          2
          14
          (4)
     Net cash used in investing activities of continuing operations
          (59)
          (51)
          (488)
          (403)
     Net cash (used in) provided by investing activities of discontinued operations
          (20)
          9
          -
          -
     Net cash used in investing activities
          (79)
          (42)
          (488)
          (403)
Cash flows from financing activities:
(Decrease) increase in short-term debt
          (75)
          (1)
          (56)
          288
Proceeds from issuance of long-term debt
          -
          401
          556
          398
Principal payments and retirements of long-term debt
          (2)
          (413)
          (50)
          (324)
Proceeds from employee stock ownership plans
          107
          47
          -
          -
Purchases of Textron common stock
          (226)
          (117)
          -
          -
Dividends paid
          (97)
          (95)
          -
          -
Dividends paid to Textron Manufacturing
          -
          -
          (62)
          (97)
     Net cash provided by (used in) financing activities of continuing operations
          (293)
          (178)
          388
          265
     Net cash used in financing activities of discontinued operations
          (1)
          (1)
          -
          -
     Net cash provided by (used in) financing activities
         (294)
         (179)
          388
          265
Effect of exchange rate changes on cash and cash equivalents
          2
          (9)
          -
          -
Net decrease in cash and cash equivalents
         (251)
         (110)
          -
          (63)
Cash and cash equivalents at beginning of year
          786
          570
          10
          127
Cash and cash equivalents at end of quarter
     $     535
     $     460
     $       10
     $     64
Supplemental schedule of non-cash investing and financing activities from continuing operations:
Capital expenditures financed through capital leases
     $        5
     $        1
     $     -
     $       -

	Textron Manufacturing*						Textron Finance*
	2006			2005 Revised- See Note 1			2006			2005 Revised- See Note 1
Cash flows from operating activities:
Net income	$	237		$	249		$	67		$	51
Loss (income) from discontinued operations		98			(47	)		-			-
Income from continuing operations		335			202			67			51
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Earnings of Textron Finance, net of distributions		13			46			-			-
Depreciation		116			120			14			17
Amortization		3			4			5			5
Provision for losses on finance receivables		-			-			8			13
Special charges		-			95			-			-
Share-based compensation		17			14			-			-
Collections in excess of non-cash gains on securitizations		-			-			4			-
Deferred income taxes		(3	)		-			5			5
Changes in assets and liabilities:
Accounts receivable, net		(109	)		(101	)		-			-
Inventories		(356	)		(102	)		-			-
Other assets		18			39			1			15
Accounts payable		257			265			-			-
Accrued liabilities		7			(132	)		51			40
Captive finance receivables, net		-			-			-			-
Other operating activities, net		28			18			-			-
Net cash provided by operating activities of continuing operations		326			468			155			146
Net cash provided by (used in) operating activities of discontinued operations		69			(6	)		(4	)		-
Net cash provided by operating activities		395			462			151			146
Cash flows from investing activities:
Finance receivables:
Originated or purchased		-			-			(5,996	)		(5,208	)
Repaid		-			-			4,974			4,687
Proceeds on receivables sales and securitization sales		-			-			50			233
Capital expenditures		(129	)		(127	)		(5	)		(4	)
Net cash used in acquisitions		-			(23	)		-			-
Proceeds on sale of property, plant and equipment		3			10			-			-
Other investing activities, net		(4	)		(1	)		6			15
Net cash used in investing activities of continuing operations		(130	)		(141	)		(971	)		(277	)
Net cash (used in) provided by investing activities of discontinued operations		(21	)		2			-			-
Net cash used in investing activities		(151	)		(139	)		(971	)		(277	)
Cash flows from financing activities:
(Decrease) increase in short-term debt		(123	)		2			512			(393	)
Proceeds from issuance of long-term debt		-			401			1,034			1,150
Principal payments and retirements of long-term debt		(3	)		(416	)		(652	)		(579	)
Proceeds from employee stock ownership plans		143			68			-			-
Purchases of Textron common stock		(598	)		(244	)		-			-
Dividends paid		(147	)		(142	)		-			-
Dividends paid to Textron Manufacturing		-			-			(80	)		(97	)
Capital contributions paid to Textron Finance		(18	)		-			18			-
Excess tax benefits related to stock option exercises		18			9			-			-
Net cash (used in) provided by financing activities of continuing operations		(728	)		(322	)		832			81
Net cash used in financing activities of discontinued operations		(6	)		(4	)		-			-
Net cash (used in) provided by financing activities		(734	)		(326	)		832			81
Effect of exchange rate changes on cash and cash equivalents		6			(23	)		1			-
Net (decrease) increase in cash and cash equivalents		(484	)		(26	)		13			(50	)
Cash and cash equivalents at beginning of year		786			570			10			127
Cash and cash equivalents at end of quarter	$	302		$	544		$	23		$	77
Supplemental schedule of non-cash investing and financing activities from continuing operations:
Capital expenditures financed through capital leases	$	5		$	2		$	-		$	-

*Textron is segregated into two borrowing groups, Textron Manufacturing and Textron Finance, as described in Note 1 to the Consolidated Financial Statements. Textron Manufacturing's cash flows exclude the pre-tax income from Textron Finance in excess of dividends paid to Textron Manufacturing. All significant transactions between Textron Manufacturing and Textron Finance have been eliminated from the Consolidated column provided on page 4.

See Notes to the Consolidated Financial Statements.

Item 1.FINANCIAL STATEMENTS (Continued)

TEXTRON INC.

Notes to the Consolidated Financial Statements (unaudited)

Note 1: Basis of Presentation

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 December 31, 2005. The consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of Textron's consolidated financial position at ~~April~~July 1, 2006, and its consolidated results of operations and cash flows for each of the interim ~~period~~periods presented. The results of operations for the interim ~~period is~~periods are not necessarily indicative of the results to be expected for the full year.

Textron's financings are conducted through two borrowing groups: Textron Manufacturing and Textron Finance. This framework is designed to enhance Textron's borrowing power by separating the Finance segment. Textron Manufacturing consists of Textron Inc., the parent company, consolidated with the entities that operate in the Bell, Cessna and Industrial business segments. Textron Manufacturing's cash flows include dividends received from Textron Finance but exclude its pre-tax income. Textron Finance consists of Textron's wholly owned commercial finance subsidiary, Textron Financial Corporation, consolidated with its subsidiaries, which are the entities through which Textron operates its Finance segment. Textron Finance obtains financing for its operations by borrowing from its own group of external creditors. All significant intercompany transactions are eliminated from the ~~Consolidated Financial Statements,~~consolidated financial statements, including retail and wholesale financing activities for inventory sold by Textron Manufacturing that is financed by Textron Finance.

For the year ended December 31, 2005, and in 2006, Textron has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount. Prior 2005 interim periods have been revised to conform to this presentation.

Note 2: ~~Inventories~~

(In millions)

April 1,
2006

December 31,
2005

Finished goods
$
596

$
527

Work in process
1,544

1,410

Raw materials
281

267

2,421

2,204

Less progress/milestone payments
496

492

$
1,925

$
1,712

Discontinued Operations

Textron's consolidated financial statements and related footnote disclosures reflect the Fastening Systems business and the previously sold businesses of InteSys and OmniQuip as discontinued operations, net of applicable income taxes, for all periods presented.

Operating results, primarily related to Fastening Systems, of the discontinued businesses are as follows:


	Three Months Ended									Six Months Ended
(In millions)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Revenues	$	464		$	521		$	925		$	1,044
(Loss) income from discontinued operations		(122	)		12			(98	)		3
Income tax benefit		14			-			-			4
Operating (loss) income from discontinued operations, net of income taxes		(108	)		12			(98	)		7
(Loss) gain on disposal, net of income taxes		-			(7	)		-			40
(Loss) income from discontinued operations, net of income taxes	$	(108	)	$	5		$	(98	)	$	47

Item 1.FINANCIAL STATEMENTS (Continued)

In May 2006, as a result of offers received from potential purchasers and the additional obligations estimated to require settlement as part of a sale, Textron determined that the net assets of the Fastening Systems business exceeded the fair value less cost to sell. Consequently, Textron recorded a $120 million after-tax impairment charge in the second quarter of 2006.

On May 31, 2006, Textron entered into a purchase agreement to sell substantially all of Textron's Fastening Systems business to TFS Acquisition Corporation, an investment vehicle formed for the acquisition by Platinum Equity, a private equity investment firm. The purchase price will consist of a cash amount of $630 million, subject to adjustment based on changes in the net asset value, net debt and cash of the Fastening Systems business, and the assumption of certain liabilities. The estimated purchase price approximates fair value of the business, less cost to sell. The transaction is expected to close in the third quarter of 2006.

In the first half of 2005, a gain of $40 million was recognized on the sale of InteSys, a business previously reported in the Industrial segment.

The assets and liabilities of the Fastening Systems business are as follows:
(In millions)	July 1, 2006		December 31, 2005
Receivables	$	357	$	299
Inventories		182		190
Property, plant and equipment, net		285		346
Other		183		287
Total assets	$	1,007	$	1,122
Accounts payable and accrued liabilities	$	297	$	265
Other		195		181
Total liabilities	$	492	$	446

Note 3: Inventories


(In millions)	July 1, 2006		December 31, 2005
Finished goods	$	699	$	527
Work in process		1,574		1,410
Raw materials		340		267
		2,613		2,204
Less progress/milestones payments		541		492
	$	2,072	$	1,712

Item 1.FINANCIAL STATEMENTS (Continued)

Note 4: Comprehensive Income and Accumulated Other Comprehensive Loss

Comprehensive income is summarized below:

Three Months Ended

(In millions)

April 1,
2006

April 2,
2005

Net income

     $     168

     $     126

Other comprehensive income (loss)
          1

          (38)

Comprehensive income (see below)
     $     169

     $       88


	Three Months Ended					Six Months Ended
(In millions)	July 1, 2006		July 2, 2005			July 1, 2006		July 2, 2005
Net income	$	69	$	123		$	237	$	249
Other comprehensive income (loss)		8		(38	)		9		(76	)
Comprehensive income	$	77	$	85		$	246	$	173

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

Three Months Ended

(In millions)
April 1,
2006

April 2,
2005

Beginning of period
     $     (78)

     $     (97)

Currency translation adjustment
          (3)

          (38)

Net deferred gain (loss) on hedge contracts
          2

          (1)

Net deferred gain on interest-only securities
          2

          1

Other comprehensive income (loss)
          1

          (38)

End of period
     $     (77)

     $   (135)


	Six Months Ended
(In millions)	July 1, 2006			July 2, 2005
Beginning of period	$	(78	)	$	(97	)
Currency translation adjustment		(3	)		(73	)
Net deferred gain (loss) on hedge contracts		14			(6	)
Net deferred (loss) gain on interest-only securities		(2	)		3
Other comprehensive income (loss)		9			(76	)
End of period	$	(69	)	$	(173	)

Other comprehensive ~~loss~~income (loss) includes a net income tax expense of $8 million and a net income tax benefit of $1$2 million for the ~~three~~six months ended ~~April~~July 1, ~~2006. There was no net income tax impact included in other comprehensive loss for the three months ended April~~2006 and July 2, ~~2005.~~

2005, respectively.

Note 4:5: Earnings per Share

The dilutive effect of stock options, restricted stock and convertible preferred shares was approximately ~~2,763,000~~2,841,000 and ~~3,156,000~~2,979,000 shares for the three months ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005, respectively, and approximately 2,817,000 and 3,082,000 shares for the six months ended July 1, 2006 and July 2, 2005, respectively. Income available to common shareholders that was used to calculate both basic and diluted earnings per share approximated net income for both periods.

Note ~~5: Share-based~~6: Share-Based Compensation

The compensation expense that has been recorded in net income for Textron's share-based compensation plans is as follows:


	Three Months Ended						Six Months Ended
(In millions)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Compensation expense, net of hedge income or expense	$	18		$	16		$	40		$	29
Income tax benefit		(5	)		(7	)		(18	)		(11	)
Net compensation cost	$	13		$	9		$	22		$	18

Three Months Ended
(In millions)
April 1,
2006
April 2,
2005
Compensation expense, net of hedge income or expense
     $     22
     $     13
Income tax benefit
          (13)
          (4)
Net compensation cost
     $     9
     $     9

Included in the table above are net compensation costs recorded in discontinued operations of approximately $1 million ~~in each of 2006 and 2005.~~

~~Item 1.~~ ~~FINANCIAL STATEMENTS (Continued)~~

~~Stock Options~~

The stock option compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. The weighted-average fair value of options granted per share was $25 and $20 in the first quarter of 2006 and 2005, respectively. The fair values of options granted are estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on implied volatilities from traded options on Textron common stock, historical volatilities and other factors. Textron uses historical data to estimate option exercise behavior, adjusted to reflect anticipated increases in expected life.

~~The weighted-average assumptions used in Textron's Black-Scholes option-pricing model~~ for ~~awards issued during the respective periods are as follows:~~

Three Months Ended

April 1,
2006
April 2,
2005
Dividend yield
2%
2%
Expected volatility
25%
25%
Risk-free interest rate
4%
4%
Expected lives (In years)
6.0
6.0

~~The following table summarizes information related to stock option activity for the respective periods:~~

Three Months Ended

(In millions)
April 1,
2006
April 2,
2005
Intrinsic value of options exercised
     $       71
     $     25
Cash received from option exercises
     $     107
     $     47
Actual tax benefit realized for tax deductions
     from option exercises

     $       22

     $       8

~~Stock option activity under the 1999 Long-Term Incentive Plan during~~ the three months ended ~~April 1, 2006 is as follows:~~

Number of
Options
(In thousands)

Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
(In years)

Aggregate
Intrinsic
Value
(In millions)
Outstanding at beginning of year
8,146

     $     56.23

Granted
991

          87.95

Exercised
(2,104)

          52.57

Canceled, expired or forfeited
(122)

          55.41

Outstanding at end of quarter
6,911

     $     61.90
     6.58
     $     218
Exercisable at end of quarter
4,768

     $     54.59
     5.41
     $     185

~~Item 1.~~ ~~FINANCIAL STATEMENTS (Continued)~~

~~Restricted Stock~~

The fair value of restricted stock is based on the trading price of Textron common stock on the date of grant, less required adjustments to reflect the fair value of the award as dividends are not paid or accrued until the restricted stock vests. The weighted-average grant-date fair value of restricted stock granted in the three months ended AprilJuly 1, 2006 and ~~April~~July 2, 2005, ~~was approximately $82~~respectively, and ~~$71 per share, respectively.~~

~~Restricted stock activity under~~$2 million for the ~~Plan during the three~~six months ended ~~April~~July 1, 2006 ~~is as follows:~~

(Shares in thousands)

Number of
Shares

Weighted-Average Grant-Date Fair Value
Outstanding at beginning of year, nonvested
          1,156

     $     55.99
Granted
          325

          82.18
Vested
          (6)

          49.91
Forfeited
          (42)

          52.60
Outstanding at end of quarter, nonvested
          1,433

     $     62.06

and July 2, 2005, respectively. There were no significant issuances of stock options in the second quarter of 2006 or 2005.

Item 1.FINANCIAL STATEMENTS (Continued)

Note 6:7: Pension Benefits and Postretirement Benefits Other Than Pensions

The components of net periodic benefit cost for the three months ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005 are as follows:

(In millions)

Pension Benefits

Postretirement Benefits
Other Than Pensions

2006
2005

2006
2005

Service cost
     $     35
     $     33

     $       2
     $       2

Interest cost
          69
          67

          10
          9

Expected return on plan assets
          (96)
          (97)

          -
          -

Amortization of prior service cost
          5
          4

          (1)
          (1)

Amortization of net loss
          12
          9

          6
          4

Net periodic benefit cost

     $     25

     $     16

     $     17

     $     14


(In millions)	Pension Benefits						Postretirement Benefits Other Than Pensions
	2006			2005			2006			2005
Service cost	$	36		$	30		$	3		$	2
Interest cost		69			72			10			8
Expected return on plan assets		(96	)		(97	)		-			-
Amortization of prior service cost		4			7			(2	)		(1	)
Amortization of net loss		12			7			5			2
Net periodic benefit cost	$	25		$	19		$	16		$	11

The components of net periodic benefit cost for the six months ended July 1, 2006 and July 2, 2005 are as follows:


(In millions)	Pension Benefits						Postretirement Benefits Other Than Pensions
	2006			2005			2006			2005
Service cost	$	71		$	63		$	5		$	4
Interest cost		138			139			20			17
Expected return on plan assets		(192	)		(194	)		-			-
Amortization of prior service cost		9			11			(3	)		(2	)
Amortization of net loss		24			16			11			6
Net periodic benefit cost	$	50		$	35		$	33		$	25

Note 7:8: Special Charges

Special charges for the ~~first~~second quarter of 2005 include a ~~$52~~$39 million impairment charge related to preferred shares in Collins & Aikman Products Co. ("C&A Products") and $2 million in restructuring costs ~~related to~~in connection with Textron's company-wide restructuring program that was completed ~~as of~~at the end of 2005. ~~There were no special~~Special charges for the first ~~quarter~~six months of ~~2006.~~

~~Textron continues to make payments against the restructuring reserves previously established. During the first quarter of 2006, $1~~2005 include $91 million of ~~severance payments were made leaving $2~~impairment charges related to preferred shares in C&A Products and $4 million ofin restructuring costs in connection with the company-wide restructuring program.

Textron's remaining reserves ~~for severance~~under the company-wide restructuring program total $31 million as of ~~April~~July 1, 2006. ~~An additional $34~~This balance includes a $29 million ~~of reserves for contract terminations also remain at April 1, 2006.~~

~~10.~~

~~Item 1. FINANCIAL STATEMENTS (Continued)~~

liability associated with exiting certain leased facilities in the Industrial segment and will be paid out over the remaining lease term.

Note 8:9: Commitments and Contingencies

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. As a government contractor, Textron is subject to audits, reviews and investigations to determine whether its operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could also 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 U.S. Federal Aviation Administration ("FAA"), recalled approximately 950 turbocharged airplane engines and mandated the inspection of another 736 engines to replace potentially faulty crankshafts manufactured by a former 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 has been completed. Textron has continued to monitor the performance of the crankshafts previously supplied by the former supplier to ensure their continued suitability for their intended use and to ensure that the existing reserves are adequate to cover the costs directly related to potential crankshaft issues that may not specifically be a part of the prior recall program. In 2005, Lycoming issued a service bulletin covering certain non-turbocharged aircraft engines, amended later in 2005 to include additional engines, to replace crankshafts manufactured by the former supplier with new FAA-certified crankshafts. Including the amendment, the service bulletin covers approximately 1,425 crankshafts and requires the affected crankshafts to be replaced within the earlier of the next 50 hours of operation or six months. An additional $8 million was accrued in 2005 to increase existing reserves.

During the fourth quarter of 2005, Lycoming developed a plan to institute a retirement program for approximately 5,100 crankshafts, representing the remaining crankshafts manufactured by the former supplier using the same forging technique as the crankshafts covered by prior service bulletins. A service bulletin was issued in the first quarter of 2006 implementing this plan, which requires the retirement of an affected crankshaft at the next crankshaft access or scheduled overhaul, whichever occurs first, but not to exceed three calendar years from the issuance of the service bulletin. There have been no accidents involving these crankshafts, and they have not been the subject of a recall. An additional reserve of $10 million was recorded in the fourth quarter of 2005 to cover the expected cost of this planned retirement program. As of April 1, 2006, reserves to cover costs directly related to crankshafts provided by the former supplier totaled $21 million.

In connection with the 2002 recall ~~the~~of certain Lycoming turbocharged airplane engines, a former third-party supplier filed a lawsuit against Lycoming claiming that the former supplier had been wrongly blamed for aircraft engine failures

10.

Item 1.FINANCIAL STATEMENTS (Continued)

resulting from its crankshaft forging process and that Lycoming's design was the cause of the engine failures. In February 2005, a jury returned a verdict against Lycoming for $86 million in punitive damages, $2.7 million in expert fees and $1.7 million in increased insurance costs. The jury also found that the former supplier's claim that it had incurred $5.3 million in attorneys' fees was reasonable. Judgment was entered on the verdict on March 29, 2005, awarding the former supplier $9.7 million in alleged compensatory damages and attorneys' fees and $86 million in alleged punitive damages. While the ultimate outcome of the litigation cannot be assured, management strongly disagrees with the verdict and believes that it is probable that ~~the verdict~~it will be reversed through the appellate process.

~~11.~~

~~Item 1. FINANCIAL STATEMENTS (Continued)~~

In 2005, Lycoming issued a service bulletin covering certain non-turbocharged aircraft engines to replace potentially faulty crankshafts manufactured by the former supplier with new crankshafts certified by the U.S. Federal Aviation Administration ("FAA"). This bulletin was amended later in 2005 to include additional engines. Including the amendment, the service bulletin covers approximately 1,425 crankshafts and requires that the affected crankshafts be replaced within the earlier of the next 50 hours of operation or six months. On April 27, 2006, the FAA issued an Airworthiness Directive requiring compliance within six months of that date. As of July 1, 2006, reserves to cover costs directly related to crankshafts provided by the former supplier, excluding the retirement program described below, totaled $9 million.

During the fourth quarter of 2005, Lycoming developed a plan to institute a retirement program for approximately 5,100 crankshafts, representing the remaining crankshafts manufactured by the former supplier using the same forging technique as the crankshafts covered by prior service bulletins. A service bulletin was issued in the first quarter of 2006 implementing this plan, which requires the retirement of an affected crankshaft at the next crankshaft access or scheduled overhaul, whichever occurs first, but not to exceed three calendar years from the issuance of the service bulletin. These crankshafts have not been the subject of a recall. As of July 1, 2006, reserves for this program totaled $10 million.

Note 9:10: Arrangements with Off-Balance Sheet Risk

Bell Helicopter and AgustaWestland North America Inc. ("AWNA") formed the AgustaWestlandBell LLC ("AWB LLC") in January 2004 for the joint design, development, manufacture, sale, customer training and product support of the US101 helicopter, ~~recently~~subsequently designated the VH-71 helicopter, and certain variations and derivatives thereof, to be offered and sold to departments or agencies of the U.S. Government.

In March 2005, AWB LLC received a $1.2 billion cost reimbursement-type subcontract from Lockheed Martin for the System Development and Demonstration phase of the U.S. Marine Corps Marine 1 Helicopter Squadron (VH-71) Program. On March 11, 2005, Bell Helicopter guaranteed to Lockheed Martin the due and prompt performance by AWB LLC of all its obligations under this subcontract, provided that Bell Helicopter's liability under the guaranty shall not exceed 49% of AWB LLC's aggregate liability to Lockheed Martin under the subcontract. AgustaWestland N.V., AWNA's parent company, has guaranteed the remaining 51% to Lockheed Martin. Bell Helicopter and AgustaWestland N.V. have entered into cross-indemnification agreements in which each party indemnifies the other related to any payments required under these agreements that result from the indemnifying party's workshare under any subcontracts received.

For 2006, AWB LLC's maximum obligation is 40% of the total contract value, which equates to $464 million based on the current contract value of $1.2 billion and thereafter increases to 50%, or $580 million. Accordingly, the maximum amount of Bell Helicopter's liability under the guarantee will be $227 million in 2006 and $284 million thereafter through completion.

In connection with the disposition of Trim, certain operating leases were transferred and assigned to Collins & Aikman Corporation ("C&A"). Textron has guaranteed C&A's payments under these operating leases and an environmental matter up to an aggregate remaining amount of approximately ~~$24~~$18 million. Textron would be required to make payments under the guarantees upon default by C&A. The original purchase and sale agreement provided an indemnification agreement with C&A for Textron's guarantees of the leases and the environmental matter. In May 2005, C&A and substantially all of its subsidiaries filed for Chapter 11 bankruptcy protection, and in July 2005, C&A's European subsidiaries filed a group-wide administration order in the United Kingdom. These filings effectively reduced Textron's ability to seek recourse from C&A under the indemnity provisions of the purchase and sale agreement, should a default occur. Textron has not received any significant default notices related to these leases, and management believes C&A will continue to make payments. AsIn July 2006, as part of C&A's announced plan to sell its European operations, Textron ~~has~~ reached ~~a tentative~~an agreement ~~to settle~~and settled its guarantee related to C&A's lease of certain European facilities. To the extent possible, Textron will seek reimbursement from C&A for ~~any~~ amounts it is required to pay

11.

Item 1.FINANCIAL STATEMENTS (Continued)

for these matters. Management will continue to monitor C&A's performance and Textron's reserves related to these matters. Textron's reserves ~~totaled $9~~of $12 million at ~~April~~July 1, 2006 are based on management's best estimate of Textron's exposure under these guarantees.

As disclosed under the caption "Guarantees" in Note 18 to the Consolidated Financial Statements in Textron's 2005 Annual Report on Form 10-K, Textron has issued or is party to certain other guarantees. As of ~~April~~July 1, 2006, there ~~has~~have been no material ~~change~~changes to these other guarantees.

Note 11:Recently Announced Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 155 "Accounting for Certain Hybrid Financial Instruments - An amendment of FASB Statements No. 133 and 140". This Statement requires evaluation of all interests in securitized financial assets to determine whether they represent either freestanding derivatives or contain embedded derivatives. These interests were previously exempted from such evaluation in SFAS No. 133. SFAS No. 155 permits any hybrid instrument, such as an interest in securitized financial assets containing an embedded derivative, to be accounted for at fair value as opposed to bifurcating and accounting for the embedded derivative separate from the host instrument. This Statement also amends SFAS No. 140 by eliminating restrictions on a qualifying special purpose entity's ability to hold passive derivative financial instruments pertaining to beneficial interests that are, or contain, a derivative financial instrument. Textron will adopt this Statement in the first quarter of 2007, and does not expect the adoption to have a material impact on Textron's financial position or results of operations.

In March 2006, the FASB also issued SFAS No. 156 "Accounting for Servicing of Financial Assets - An amendment of FASB Statement No. 140". This Statement requires all separately recognized servicing assets and liabilities to be initially measured at fair value and permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to, and over, the estimated net servicing income or loss and assess the rights for impairment or the need for an increased obligation. The option to subsequently measure servicing rights at fair value will allow entities which utilize derivative instruments to hedge their servicing rights to account for such hedging relationships at fair value and avoid the complications of hedge accounting under SFAS No. 133. Textron does not utilize derivative instruments to hedge its servicing rights as of July 1, 2006. Textron will adopt this Statement in the first quarter of 2007, and will utilize the amortization method to subsequently measure its servicing rights. The adoption of this Statement is not expected to have a material impact on Textron's financial position or results of operations.

In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109" ("FIN 48"). This Interpretation provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Textron will adopt this Interpretation in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings. Textron is currently assessing the impact of this Interpretation on Textron's financial position and results of operations.

In July 2006, the FASB issued Staff Position No. 13-2 "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction". This Staff Position amends SFAS No. 13 "Accounting for Leases" and requires a recalculation of returns on leveraged leases if there is a change or projected change in the timing of cash flows related to income taxes generated by the leveraged lease. In accordance with this guidance, the difference between the revised calculation of earnings since lease inception and the actual amount of cumulative earnings recognized is recorded in income from continuing operations. Textron is required to adopt this guidance in the first quarter of 2007. Upon adoption, any change in the projected cash flows will be reported as an adjustment to retained earnings. The Internal Revenue Service has challenged both the ability to accelerate the timing of tax deductions and the amounts of those deductions related to certain leveraged lease transactions with an initial investment of approximately $167 million within the Finance segment. Textron is currently assessing the impact of this Staff Position on Textron's financial position and results of operations.

12.

Item 1.FINANCIAL STATEMENTS (Continued)

Note ~~10:~~ 12:Segment Information

Textron reports under the following segments: Bell, Cessna, Industrial and Finance. Textron evaluates segment performance based on segment profit. Segment profit for the Manufacturing segments excludes interest expense, certain corporate expenses, special charges, and gains and losses from the disposition of significant business units. The measurement for the Finance segment includes both interest income and expense, and excludes special charges. Provisions for losses on finance receivables involving the sale or lease of Textron products are recorded by the selling manufacturing division when Textron Finance has recourse to Textron Manufacturing.

A summary of continuing operations by segment ~~for the three-month periods ended April 1, 2006 and April 2, 2005~~ is ~~as follows:~~

Three Months Ended

(In millions)
April 1,
2006

April 2,
2005

REVENUES
MANUFACTURING:
     Bell $
783

$
616

     Cessna
869

713

     Industrial
798

800

2,450

2,129

FINANCE
182

141

Total revenues $
2,632

$
2,270

SEGMENT OPERATING PROFIT
MANUFACTURING:
     Bell $
69

$
75

     Cessna
117

87

     Industrial
49

55

235

217

FINANCE
49

33

Segment profit
284

250

Special charges
$
-

(54)

Segment operating income
284

196

Corporate expenses and other, net
(49)

(43)

Interest expense, net
(22)

(24)

Income from continuing operations before income taxes
$
213

$
129

~~Note 11: Subsequent Events~~

In December 2005, Textron's Board of Directors authorized the divestiture of the Textron Fastening Systems business. With this approval, Textron committed to actively market the segment and expected to complete the sale within 12 months. Beginning in the fourth quarter of 2005, the Fastening Systems segment was reported as a discontinued operation.

In the first quarter of 2006, Textron's management commenced its marketing efforts including establishing the proposed deal structure and identifying potential buyers. Formal negotiations have been commenced with a number of potential purchasers and specific terms and conditions have been discussed including the impact on the sales price of depreciation, currency exchange fluctuation, the assumption of liabilities, as well as the transfer of pension related obligations and assets.

provided below:


	Three Months Ended						Six Months Ended
(In millions)	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
REVENUES
MANUFACTURING:
Bell	$	805		$	786		$	1,588		$	1,402
Cessna		1,005			910			1,874			1,623
Industrial		818			824			1,616			1,624
		2,628			2,520			5,078			4,649
FINANCE		192			147			374			288
Total revenues	$	2,820		$	2,667		$	5,452		$	4,937
SEGMENT OPERATING PROFIT
MANUFACTURING:
Bell	$	65		$	83		$	134		$	158
Cessna		153			121			270			208
Industrial		54			58			103			113
		272			262			507			479
FINANCE		56			44			105			77
Segment profit		328			306			612			556
Special charges		-			(41	)		-			(95	)
Segment operating income		328			265			612			461
Corporate expenses and other, net		(48	)		(55	)		(97	)		(98	)
Interest expense, net		(25	)		(22	)		(47	)		(46	)
Income from continuing operations before income taxes	$	255		$	188		$	468		$	317

13.

~~Item 1.~~ ~~FINANCIAL STATEMENTS (Continued)~~

On May 4, 2006, as a result of the offers received from potential purchasers of substantially all of the business of the segment, and the additional obligations that Textron now estimates will need to be settled as part of the sale, Textron determined that the net assets of discontinued operations related to the Textron Fastening Systems business may exceed the fair value less costs to sell. Consequently, Textron determined that it will incur a non-cash impairment charge in the second quarter of 2006 in the range of $75 million to $150 million.

~~14.~~

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

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

We had a strong start to the year as we were able to deliver organic growth (sales from existing business, excluding the effects of foreign exchange and mergers and acquisition activity) of 18%, which is the result of our

Our commitment to bring new products and services to our customers ~~and strong end markets. Backlog in the aircraft businesses grew~~positioned Textron to ~~nearly $10 billion~~deliver organic growth of approximately 12% in the first half of 2006. Organic growth includes sales from existing businesses and excludes the effects of foreign exchange fluctuations, acquisitions and divestitures. In our combined aircraft businesses, we continue to experience growth in our backlog which rose to $10 billion by the end of the second quarter. ~~Industrial~~Our industrial business volume also increased as a result of improvements in end ~~markets. Additionally, the~~markets, and our Finance segment has continued to grow organically. The Finance segment's portfolio quality statistics have improved since year-end and average finance receivables ~~increased.~~

were approximately $1.0 billion higher than the corresponding period in 2005.

During the first ~~quarter~~half of 2006, increased pricing, the benefit of higher manufacturing sales volume and increased ~~pricing~~profit in the Finance business, more than offset inflation, higher pension costs and the impact of increased costs on Lot 1 of the H-1 Low Rate Initial Production contract ~~at Bell. At~~("H-1 LRIP").

On May 31, 2006, Textron entered into a purchase agreement to sell substantially all of its Fastening Systems ~~production~~business, which was classified as a discontinued operation in the fourth quarter of ~~armored vehicles is on track~~2005, to ~~reach our production goal~~a private equity investment firm. In connection with this pending sale, we recorded an after-tax impairment charge of ~~approximately 450 units this year.~~

$120 million in the second quarter of 2006.

Consolidated Results of Operations

Revenues

Revenues increased ~~$362~~$153 million in the ~~first~~second quarter of 2006, compared to 2005, primarily due to higher ~~volume~~pricing of ~~$315~~$66 million ~~across all~~in the manufacturing segments, ~~especially in the aircraft businesses~~increased manufacturing volume of $47 million and higher ~~pricing of $52 million. Higher~~ Finance revenues ~~also contributed $41 million to the increase.~~of $45 million. These increases were partially offset by ~~unfavorable foreign exchange of $28 million and~~ the 2005 divestiture of non-core product lines in the Industrial segment of ~~$28~~$15 million.

Revenues increased $515 million in the first half of 2006, compared to 2005, primarily due to higher volume of $362 million across all the manufacturing segments, especially in the aircraft businesses, higher pricing of $118 million in the manufacturing segments and higher Finance revenues of $86 million. These increases were partially offset by the 2005 divestiture of non-core product lines in the Industrial segment of $43 million and unfavorable foreign exchange of $29 million.

Segment Profit

Segment profit increased ~~$34 million.~~$22 million in the second quarter of 2006, compared to 2005. Major drivers included ~~a $67~~$66 million from higher pricing in the manufacturing segments, $17 million in cost improvements, higher profit in the Finance segment of $12 million and the increased contribution of $5 million from higher manufacturing ~~sales~~ volume, partially offset by inflation of $82 million.

Segment profit increased $56 million in the first half of 2006, compared to 2005. Major drivers included $118 million from higher pricing in the manufacturing ~~pricing~~segments, the increased contribution of ~~$52~~$72 million from higher manufacturing volume and higher profit in the Finance segment of ~~$16~~$28 million, partially offset by inflation of ~~$62 million, an unfavorable mix of $16 million and the impact of the H-1 program of $13~~$144 million.

~~Special Charges~~

Special charges for the first quarter of 2005 included a $52 million impairment charge of preferred shares in Collins & Aikman Products Co. and $2 million in restructuring costs related to Textron's company-wide restructuring program that was completed as of the end of 2005. There were no special charges for the first quarter of 2006.

~~15.~~

14.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

Special Charges

Special charges for the second quarter of 2005 include a $39 million impairment charge related to preferred shares in Collins & Aikman Products Co. ("C&A Products") and $2 million in restructuring costs in connection with Textron's company-wide restructuring program that was completed at the end of 2005. Special charges for the first six months of 2005 include $91 million of impairment charges related to preferred shares in C&A Products and $4 million in restructuring costs in connection with the company-wide restructuring program.

Income Taxes

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

Q1 2006
Q1 2005
Federal statutory income tax rate
35.0%
35.0%
Increase (decrease) in taxes resulting from:
     State income taxes
1.6
1.4
     C&A impairment valuation allowance
-
6.9
     Foreign tax rate differential
(3.1)
(4.3)
     Favorable tax settlements
(5.6)
-
     ESOP dividends
(0.7)
(0.9)
     Export sales benefit
(1.1)
(1.0)
     Other, net
(0.3)
(2.2)
Effective income tax rate
25.8%
34.9%

~~The effective tax rate for the first quarter of 2006 was lower primarily due to a $12 million benefit as a result of a favorable tax settlement of a prior year tax dispute.~~

	Three Months Ended						Six Months Ended
	July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Federal statutory income tax rate		35.0	%		35.0	%		35.0	%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		1.6			(0.7	)		1.6			0.2
Foreign tax rate differential		(3.7	)		(4.0	)		(3.7	)		(4.0	)
Favorable tax settlements		-			-			(2.6	)		-
C&A impairment valuation allowance		-			9.0			-			8.5
ESOP dividends		(0.7	)		(0.8	)		(0.7	)		(0.8	)
Export sales benefit		(1.1	)		(0.9	)		(1.1	)		(0.9	)
Special foreign dividend		-			1.0			-			0.6
Other, net		(0.5	)		(1.4	)		(0.1	)		(2.3	)
Effective income tax rate		30.6	%		37.2	%		28.4	%		36.3	%

The effective tax rate for the full year is expected to be approximately 29% to 30%.

Discontinued Operations

Discontinued operations ~~include~~are primarily comprised of the ~~Textron~~ Fastening Systems business which was classified as held for sale in the ~~first quarter of 2006 and 2005, and the InteSys business in the first~~fourth quarter of 2005. ~~In the first quarter of~~On May 31, 2006, Textron entered into a purchase agreement to sell substantially all of the Fastening ~~Systems' net income increased $15 million, compared~~Systems business to ~~2005, primarily due~~a private equity investment firm, which is discussed in more detail in Note 2 to the $10 million after-tax impact of suspending depreciation and amortization of assets held for sale and an after-tax foreign exchange translation gain of $5 million. In the first quarter of 2005, Textron recordedconsolidated financial statements. Discontinued operations also includes an after-tax gain of approximately ~~$47~~$40 million associated with the sale of the InteSys business in the first half of 2005, and activity related to certain retained assets and liabilities of the OmniQuip business.

Revenues for the Fastening Systems business for the second quarter of 2006 decreased $57 million from the corresponding period in 2005, primarily due to the $54 million impact of divestitures. For the first half of 2006, revenues decreased $117 million from the corresponding period, primarily due to the $87 million impact of divestitures and a $25 million unfavorable foreign exchange rate impact.

Operating (loss) income from discontinued operations, net of income taxes, decreased $120 million and $105 million for the three and six months ended July 1, 2006, respectively, primarily due to the $120 million after-tax impairment charge recorded in the second quarter of 2006 in connection with the Fastening Systems business. This charge was partially offset by the $19 million and $38 million impact of suspending depreciation and amortization on the assets held for sale in the Fastening Systems business for the three and six months ended July 1, 2006, respectively.

15.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Outlook

We expect continued ~~revenue~~year-over-year growth ~~for the balance of 2006~~in revenues and ~~overall~~ segment profit ~~for the year is expected~~in 2006 compared to ~~increase over 2005 as we continue to implement our transformation strategy.~~2005. At Cessna, we anticipate another strong year of business jet deliveries in 2006 resulting in increases in total revenues and ~~profits. At the Industrial segment, our outlook on profit margins has improved with higher margins expected in 2006 compared with 2005, while revenues remain essentially flat.~~profit. At Bell, we expect revenues for the full year to increase over 2005, ~~while~~as armored security vehicle ("ASV") deliveries remain on track to meet our commitments. Bell's profit ~~margins are~~margin is expected to decrease primarily due to certain nonrecurring items that benefited the 2005 ~~results as well as~~results. In the Industrial segment, we continue to expect higher ~~estimated costs on Lot 1 of the H-1 Low Rate Initial Production contract ("H-1 LRIP").~~margins in 2006 compared to 2005, while revenues are expected to remain essentially flat. Finance segment revenues and profits are expected to increase with continued growth in ~~the managed Finance receivable portfolio~~finance receivables and relative stability in credit quality.

Segment Analysis
Bell
	Three Months Ended				Six Months Ended
(In millions)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
Revenues	$	805	$	786	$	1,588	$	1,402
Segment profit		65		83		134		158

Bell Revenues

U.S. Government Business

U.S. Government revenues decreased $13 million in the second quarter of 2006, compared to 2005, primarily due to lower volume of $152 million from the V-22 program, partially offset by increased ASV deliveries of $65 million, higher spares and service revenue of $35 million and additional revenue from the Armed Reconnaissance Helicopter ("ARH") program of $31 million.

U.S. Government revenues increased $164 million in the first half of 2006, compared to 2005, primarily due to increased ASV deliveries of $118 million, higher revenue of $58 million from the ARH program and higher spares and service revenue of $39 million, partially offset by lower revenue of $66 million from the V-22 program.

Commercial Business

Commercial revenues increased $32 million in the second quarter of 2006, compared to 2005, primarily due to higher civil aircraft sales of $40 million and higher spares and service sales of $27 million, partially offset by lower international military revenue of $13 million and a decrease in used aircraft sales of $11 million.

Commercial revenues increased $22 million in the first half of 2006, compared to 2005, primarily due to higher civil aircraft sales of $107 million and higher spares and service volume of $31 million, partially offset by lower international military sales of $86 million and lower Huey II kit sales of $11 million.

16.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

(Continued)

Segment Analysis
Bell

Three Months Ended

(In millions)
April 1, 2006
April 2, 2005

Revenue
     $     783
     $     616

Segment profit
          69
          75

Bell ~~Revenues~~

Segment Profit

U.S. Government Business

Profit in the U.S. Government ~~revenues increased $177~~business decreased $5 million in the ~~first~~second quarter of 2006, compared to 2005, ~~primarily due to~~as higher ~~volume~~profit of ~~$86~~$11 million ~~from~~on the ~~V-22~~ASV program, ~~increased deliveries of armored security vehicles ("ASV") worth $53 million and $28 million in revenue for the Armed Reconnaissance Helicopter ("ARH") program.~~

~~Commercial Business~~

~~Commercial revenues decreased $10 million in the first quarter of 2006, compared to 2005, primarily due to lower international military sales of $73 million, partially~~was more than offset by ~~higher other commercial aircraft volume~~the $13 million impact of ~~$67 million.~~

~~Bell Segment Profit~~

~~U.S. Government Business~~

lower V-22 deliveries and a $6 million charge on the ARH program for unreimbursed launch-related costs.

Profit in the U.S. Government business increased ~~$10~~$5 million in the first ~~quarter~~half of 2006, compared to 2005. The increase was primarily due to higher profit ~~on the V-22 program resulting~~of $18 million from the ~~$6 million impact of higher~~ASV program, principally due to volume, ~~and $6 million of favorable performance, and the $5 million impact of higher ASV volume. These increases were~~ partially offset by the $13 million ~~to reflect the~~ impact of estimated incremental costs recorded in the first quarter of 2006 for resources added to the H-1 LRIP contract to meet customer schedule requirements.

While the ~~related~~estimated incremental costs for the H-1 LRIP will be expended over the next several quarters, the ~~full~~ impact was recorded in the first quarter of 2006 as the ~~H-1 LRIP~~ contract is in a loss position. ~~Operational Evaluation of the H-1 aircraft is scheduled to begin in early~~In May ~~and~~2006, a Defense Acquisition Board meeting ~~is scheduled at the end of May~~was held to assess overall performance of the H-1 program. AsSubsequent to this meeting, the Department of Defense has authorized Bell to proceed with ~~any government contract, the U. S. Government can terminate or modify the contract for its convenience, however management believes that Bell will meet the contract and customer requirements.~~

~~The ARH contract did not have a significant profit impact in~~Lot III production.

During the first quarter ~~and is not expected to significantly affect profit during the System Development and Demonstration phase.~~

~~17.~~

~~Item 2.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

~~During the first quarter,~~of 2006, the U.S. Government completed a review of Bell Helicopter's earned value management system. This review identified deficiencies in certain areas. As a result, Bell Helicopter is not allowed to claim it has a compliant earned value management system in proposals, and it also is subject to increased withholding on progress payments. In the second quarter of 2006, Bell and the U.S. Government reached an agreement on a corrective action plan to address all the deficiencies identified in this review. Textron does not expect this ~~issue~~matter to have a material financial impact on Textron's financial position or results of ~~operations, and is working with the U.S. Government to develop a corrective action plan that will address all the deficiencies identified in this review.~~

operations.

Commercial Business

Commercial profit decreased ~~$16~~$13 million in the first quarter of 2006, compared to 2005, primarily due to the $29 million impact of lower international military sales volume and higher net research and development expense of $5 million, partially offset by the $23 million impact from higher volume in other commercial aircraft and mix.

~~Bell Helicopter Backlog~~

~~Bell Helicopter's backlog was $3.0 billion at the end of the first quarter of 2006, compared to $2.8 billion as of year-end 2005.~~

Cessna

Three Months Ended

(In millions)
April 1, 2006
April 2, 2005

Revenue
     $     869
     $     713

Segment profit
          117
          87

~~Cessna Revenues~~

~~Cessna revenue increased $156 million in the first~~second quarter of 2006, compared to 2005, primarily due to higher net engineering expense of $19 million, principally due to lower co-development income from risk-sharing partners, costs related to production ramp-up activities of approximately $12 million and increased commissions and other sales activities of $5 million. These decreases were partially offset by the $11 million contribution from higher sales of civil aircraft, primarily due to volume, higher spares and service sales of $5 million and a $5 million favorable impact of a warranty provision recorded at Lycoming in the second quarter of 2005.

Commercial profit decreased $29 million in the first half of 2006, compared to 2005, primarily due to the $27 million impact of lower international military sales, higher net engineering expense of $24 million, principally due to lower co-development income from risk-sharing partners, and costs related to production ramp-up activities of approximately $16 million. These decreases were partially offset by the $34 million impact from higher sales of civil aircraft and the $5 million favorable impact of the Lycoming warranty provision recorded in 2005.

17.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Bell Helicopter Backlog

Bell Helicopter's backlog was $3.3 billion at the end of the first half of 2006, compared to $2.8 billion at year-end 2005.

Cessna
	Three Months Ended				Six Months Ended
(In millions)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
Revenues	$	1,005	$	910	$	1,874	$	1,623
Segment profit		153		121		270		208

Cessna Revenues

Cessna revenues increased $95 million in the second quarter of 2006, compared to 2005, largely due to favorable pricing of $50 million and higher volume of $45 million, primarily related to Citation business ~~jet and used aircraft~~jets.

Cessna revenues increased $251 million in the first half of 2006, compared to 2005, largely due to higher volume of ~~$85~~$167 million, ~~and $22 million, respectively,~~primarily related to Citation business jets, and favorable pricing of ~~$35~~$84 million.

Cessna Segment Profit

Segment profit increased ~~$30~~$32 million in the ~~first~~second quarter of 2006, compared to 2005, primarily due to higher pricing of ~~$35~~$50 million and impact of higher volume of ~~$26~~$6 million. These increases were partially offset by inflation of ~~$23 million and capabilities investment of $8 million, including higher start-up costs for new models, increased infrastructure costs and Lean initiatives.~~$35 million. During the ~~first~~second quarter, Cessna recorded a benefit of $9$10 million reflecting favorable warranty performance compared to a benefit of $8 million recorded in 2005.

Segment profit increased $62 million in the first half of 2006, compared to 2005, primarily due to higher pricing of $84 million and the impact of higher volume of $32 million, partially offset by inflation of $58 million. During the first half, Cessna recorded a benefit of $19 million reflecting favorable warranty performance compared to a benefit of $16 million recorded in 2005.

Cessna Backlog

Cessna's backlog was ~~$6.9~~$6.8 billion at the end of the first ~~quarter~~half of 2006, compared to $6.3 billion asat year-end 2005.

Industrial
	Three Months Ended				Six Months Ended
(In millions)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
Revenues	$	818	$	824	$	1,616	$	1,624
Segment profit		54		58		103		113

Industrial Revenues

The Industrial segment's revenues decreased $6 million in the second quarter of ~~year-end 2005.~~

Industrial

Three Months Ended

(In millions)
April 1, 2006
April 2, 2005

Revenue
     $     798
     $     800

Segment profit
          49
          55

2006, compared to 2005, primarily due to the divestiture of non-core product lines of $15 million, partially offset by higher pricing of $10 million.

18.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

(Continued)

~~Industrial Revenues~~

The Industrial segment's revenues decreased $2$8 million in the first ~~quarter~~half of 2006, compared to 2005, primarily due to the ~~unfavorable foreign exchange impact of $28 million and the~~ divestiture of non-core product lines of ~~$28~~$43 million and the unfavorable foreign exchange impact of $29 million, partially offset by higher volume of $48 million and higher pricing of $6$16 million.

Industrial Segment Profit

Segment profit decreased $6$4 million in the ~~first~~second quarter of 2006, compared to 2005, mainly due to ~~$ 22~~$27 million of inflation and the $3 million impact of the divestiture of non-core product lines, partially offset by ~~the impact~~improved cost performance of ~~higher volume of $16~~$18 million and higher pricing of $10 million.

Segment profit decreased $10 million in the first half of 2006, compared to 2005, mainly due to $49 million of inflation, the $6 million impact of the divestiture of non-core product lines and the $4 million unfavorable impact of foreign exchange, partially offset by $21 million of improved cost performance, the $17 million impact of higher volume and higher pricing of $16 million.

Finance

Three Months Ended

(In millions)
April 1, 2006
April 2, 2005

Revenue
     $     182
     $     141

Segment profit
          49
          33

Finance
	Three Months Ended				Six Months Ended
(In millions)	July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
Revenues	$	192	$	147	$	374	$	288
Segment profit		56		44		105		77

Finance Revenues

The Finance segment's revenues increased ~~$41~~$45 million in the second quarter of 2006, compared with 2005. The increase was primarily due to a higher interest rate environment, which accounted for $26 million of the increase, and $20 million related to $1.0 billion in higher average finance receivables. The increase in average finance receivables was due to core portfolio growth, partially offset by a $102 million reduction in the liquidating portfolios.

The Finance segment's revenues increased $86 million in the first ~~quarter~~half of 2006, compared with 2005. The increase was due to a higher interest rate environment, which accounted for ~~$24~~$50 million of the increase, and ~~$17~~$37 million related to ~~$948 million~~$1.0 billion in higher average finance receivables. The increase in average finance receivables was ~~related~~due to core portfolio growth, partially offset by a ~~$98~~$100 million reduction in the liquidating portfolios.

Finance Segment Profit

Segment profit increased ~~$16~~$12 million in the ~~first~~second quarter of 2006, compared with 2005, primarily due to a ~~$13~~$12 million increase in net interest margin, primarily attributable to the growth in core receivables.

Segment profit increased $28 million in the first half of 2006, compared with 2005, primarily due to a $25 million increase in net interest margin, primarily attributable to the growth in core receivables, and a $3$5 million decrease in the provision for loan losses ~~as a result of sustained improvements~~reflecting improvement in portfolio quality. Operating expenses were unchanged, reflecting an improvement in operating expenses as a percentage of average managed and serviced receivables to 1.91% from 2.03% in the corresponding period of 2005. This improvement in operating performance reflects continued process improvement initiatives, which have enabled us to leverage our infrastructure while we grow our Finance receivable portfolio.

19.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Finance Portfolio Quality

The following table presents information about the credit quality of the Finance segment's portfolio:

April 1,
December 31,
(In millions, except for ratios)
2006
2005

Nonperforming assets as a percentage of finance assets
          1.55%
          1.53%
Allowance for losses on finance receivables as a percentage of finance      receivables

          1.39%

          1.43%
Allowance for losses on finance receivables as a percentage of nonaccrual      finance receivables

          102.1%

          108.6%
60+ days contractual delinquency as a percentage of finance receivables
          0.67%
          0.79%

~~19.~~

~~Item 2.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~


	July 1,			December 31,
	2006			2005

Nonperforming assets as a percentage of finance assets		1.38	%		1.53	%
Allowance for losses on finance receivables as a percentage of finance receivables		1.21	%		1.43	%
Allowance for losses on finance receivables as a percentage of nonaccrual finance receivables		103.9	%		108.6	%
60+ days contractual delinquency as a percentage of finance receivables		0.65	%		0.79	%

Textron Finance's nonperforming assets include nonaccrual accounts that are not guaranteed by Textron Manufacturing, for which interest has been suspended, and repossessed assets. Nonperforming assets by business are as follows:

April 1,
December 31,
(In millions)
2006
2005
Resort finance
     $     28
     $     31
Asset-based lending
          23
          6
Golf finance
          13
          13
Aircraft finance
          11
          14
Distribution finance
          2
          2
Other
          43
          45
Total nonperforming assets
     $     120
     $     111


	July 1,		December 31,
(In millions)	2006		2005
Asset-based lending	$	25	$	6
Resort finance		24		31
Golf finance		15		13
Aircraft finance		12		14
Distribution finance		3		2
Liquidating portfolios		33		45
Total nonperforming assets	$	112	$	111

We believe that nonperforming assets generally will ~~generally~~ be in the range of 1% to 4% of finance assets depending on economic conditions. Nonperforming ~~asset levels~~assets remained relatively unchanged from the end of 2005 with improvements in ~~most of~~resort finance and the ~~businesses, with the exception of Asset-based~~liquidating portfolios, offset by an increase in asset-based lending. The increase in ~~this business is primarily attributable to~~asset-based lending was the result of two loans, which we do not believe represents a trend.

~~Share-Based Compensation~~

During the first quarter of 2005, Textron elected to adopt the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payments" ("SFAS No. 123-R"), using the modified prospective method. The adoption of SFAS No. 123-R resulted in recognition of stock option expense for continuing operations of approximately $4 million and $3 million for the three months ended April 1, 2006 and April 2, 2005, respectively.

Textron granted approximately 991,000 and 1,201,000 options in the first quarter of 2006 and 2005, respectively, at weighted average grant date fair values per option of $25 and $20. The valuation of stock options requires numerous assumptions. Textron determines the fair value of each option as of the date of the grant using the Black-Scholes option-pricing model. This model requires inputs for the expected volatility of Textron's common stock price, expected life of the option, and expected dividend yield, among others. In addition, we estimate the number of options expected to eventually vest. Expected volatility estimates are based on implied volatilities from traded options on Textron common stock, historical volatilities and other factors. Textron uses historical data to estimate option exercise behavior, adjusted to reflect anticipated increases in expected life.

Liquidity and Capital Resources

Textron's financings are conducted through two borrowing groups: Textron Manufacturing and Textron Finance. This framework is designed to enhance Textron's borrowing power by separating the Finance segment. To support creditors in evaluating the separate borrowing groups, Textron presents separate balance sheets and statements of cash ~~flow~~flows for each borrowing group. Textron Manufacturing consists of Textron Inc., the parent company, consolidated with the entities that operate in the Bell, Cessna and Industrial business segments, whose financial results are a reflection of the ability to manage and finance the development, production and delivery of tangible goods and services. Textron Finance consists of Textron's wholly owned commercial finance subsidiary, Textron Financial Corporation, consolidated with its subsidiaries. The financial results of Textron Finance are a reflection of its ability to provide financial services in a competitive marketplace, at appropriate pricing, while managing the associated financial risks. The fundamental differences between each borrowing group's activities result in different measures used by investors, rating agencies and analysts.

20.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

(Continued)

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 cash flows related to these captive financing activities are reflected as operating activities (by Textron Manufacturing) and as investing activities (by Textron Finance) based on each group's operations. These captive financing transactions have been eliminated and cash from customers or from securitizations is recognized in operating activities within the Consolidated Statement of Cash Flows when received.

Textron Manufacturing's debt (net of cash)-to-capital ratio as of ~~April~~July 1, 2006 was ~~29%~~34%, compared with 26% at December 31, 2005. The higher ratio in 2006 is primarily due to the decrease in cash largely attributed to $598 million in share repurchases in the first half of 2006. Textron Manufacturing's gross debt-to-capital ratio as of ~~April~~July 1, 2006 was ~~36%~~38%, compared with 37% at December 31, 2005. Textron Manufacturing has established a gross debt-to-capital ratio target in the mid-thirties.

For liquidity purposes, Textron Manufacturing and Textron Finance have a policy of maintaining sufficient unused lines of credit to support their outstanding commercial paper. Textron Manufacturing has a primary revolving credit facility of $1.3 billion that ~~was set to expire~~expires in ~~2010. In April 2006, the facility was amended to extend the expiration date to~~ 2011. Textron Finance is permitted to borrow under this facility. Textron Finance also has bank lines of credit ~~of $1.5~~totaling $1.8 billion ~~of which $500 million was set to~~that expire in ~~July 2006 and $1.0 billion in 2010. In April 2006, these facilities were combined into a single facility expiring in 2011, and the amount of available credit was increased to $1.75 billion.~~2011. None of these lines of credit were drawn at ~~April~~July 1, 2006 or at December 31, 2005. At ~~April~~July 1, 2006, the lines of credit not reserved as support for outstanding commercial paper or letters of credit were $1.2 billion for Textron Manufacturing and ~~$354~~$31 million for Textron Finance, compared with $1.2 billion and $300 million, respectively, at December 31, 2005.

At ~~April~~July 1, 2006, Textron Finance had ~~$2.2~~$2.9 billion in debt and ~~$453~~$424 million in other liabilities that are due within the next twelve months.

Operating Cash Flows of Continuing Operations
Three Months Ended
(In millions)
April 1, 2006
April 2, 2005
Consolidated
     $     77
     $     79
Textron Manufacturing
     $     128
     $     159
Textron Finance
     $     100
     $     75

~~In the first quarter of 2006,~~

Operating Cash Flows of Continuing Operations	Six Months Ended
(In millions)	July 1, 2006		July 2, 2005
Consolidated	$	160	$	477
Textron Manufacturing	$	326	$	468
Textron Finance	$	155	$	146

The consolidated operating cash flows of continuing operations ~~on a consolidated basis were consistent with~~decreased $317 million in the first ~~quarter~~half of 2006 compared to the corresponding period in 2005. ~~These consolidated~~The increase of $133 million in income from continuing operations was more than offset by a $290 million increase in cash ~~flows exclude~~used for inventories, primarily in our aircraft businesses related to higher demand from our military and commercial customers, and a $159 million use of cash due to a net increase in captive finance receivables related to Textron Manufacturing products, principally due to higher finance receivables originations. The net captive financing activity (cash outflows from finance receivable originations, net of cash ~~inflows~~flows from repayments, sales and securitizations) between Textron Manufacturing and Textron ~~Finance. Textron Manufacturing's~~Finance is excluded from the consolidated cash flows included $73 million in the first quarter of 2006, compared to $52 million in the first quarter of 2005, of cash received as a result of Textron Finance financing sales of Textron Manufacturing products. The decrease in Textron Manufacturing's cash flows was attributed largely to a decrease in dividends from Textron Finance that was only partially offset by an increase in income from operations.

flows.

Dividends received by Textron Manufacturing from Textron Finance have been eliminated from the consolidated operating cash flows, and net captive financing activities have been reclassified from investing cash flows, as discussed below.

Investing Cash Flows of Continuing Operations
Three Months Ended
(In millions)
April 1, 2006
April 2, 2005
Consolidated
     $     (458)
     $     (396)
Textron Manufacturing
     $       (59)
     $       (51)
Textron Finance
     $     (488)
     $     (403)

21.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

(Continued)

Investing Cash Flows of Continuing Operations

	Six Months Ended
(In millions)	July 1, 2006			July 2, 2005
Consolidated	$	(860	)	$	(378	)
Textron Manufacturing	$	(130	)	$	(141	)
Textron Finance	$	(971	)	$	(277	)

The consolidated cash flows used for investing activities increased largely due to higher finance receivable originations and purchases, net of cash collections from repayments, sales and securitizations at Textron Finance.

~~The~~ These consolidated ~~investing~~ cash flows include the reclassification of net captive financing activities to operating cash flows of ~~$73~~$205 million in the first ~~quarter~~half of 2006 and ~~$52~~$46 million in the first ~~quarter~~half of 2005.

Financing Cash Flows of Continuing Operations
Three Months Ended
(In millions)
April 1, 2006
April 2, 2005
Consolidated
     $      157
     $       184
Textron Manufacturing
     $     (293)
     $     (178)
Textron Finance
     $       388
     $       265

Financing Cash Flows of Continuing Operations	Six Months Ended
(In millions)	July 1, 2006			July 2, 2005
Consolidated	$	184		$	(144	)
Textron Manufacturing	$	(728	)	$	(322	)
Textron Finance	$	832		$	81

The consolidated cash flows ~~provided by~~from financing activities reflect the financing cash flows of Textron Manufacturing and Textron Finance after the elimination of the dividends paid by Textron Finance to Textron Manufacturing. For Textron Manufacturing, the decrease in ~~2006 decreased~~financing cash flows is primarily due to $354 million in additional purchases of Textron common stock and $125 million in net paydowns of its short-term debt, partially offset by ~~an increase~~$75 million in higher proceeds from employee stock ownership plans. ~~In 2005, long-term debt issuances were primarily utilized to retire maturing long-term debt. In 2006 long-term debt issuances at~~For Textron Finance, ~~were used~~the increase in cash flows was primarily attributable to a net increase in debt outstanding to fund ~~receivable~~asset growth.

Principal Payments on Long-Term Debt

In the first ~~quarter~~half of 2006 and 2005, Textron Manufacturing made principal payments of $2$3 million and ~~$413~~$416 million, respectively. The principal payments in the first half of 2005 reflect the maturity of EUR 300 million in debt that was refinanced with EUR 300 million 3.875% notes that mature in March 2013. In the first ~~quarter~~half of 2006 and 2005, Textron Finance made principal payments of ~~$50~~$652 million and ~~$324~~$579 million, respectively.

Stock Repurchases and Proceeds from Stock Option Exercises

In the first ~~quarter~~half of 2006 and 2005, Textron repurchased ~~2,576,572~~6,979,672 and ~~1,671,428~~3,171,428 shares of common stock, respectively, under its Board authorized share repurchase programs for an aggregate cost of ~~$219~~$610 million and ~~$124~~$239 million, respectively. Proceeds from the exercise of stock options increased ~~$60~~$75 million to ~~$107~~$143 million in the first ~~quarter~~half of 2006 as more options were exercised.

Dividends

On January 26, 2006, the Board of Directors authorized a $0.15 per share increase in Textron's annualized common stock dividend to $1.55 per share and, accordingly, approved a quarterly dividend per common share of $0.3875 ~~for holders~~in the first and second quarters of ~~record at~~2006 compared with $0.35 in the ~~close~~first and second quarters of ~~business on March 10, 2006.~~2005. Dividend payments to shareholders totaled ~~$97~~$147 million and $142 million in the first ~~quarter~~half of 2006 and ~~$95 million in the first quarter of 2005.~~

Discontinued Operations Cash Flows
Three Months Ended
(In millions)
April 1, 2006
April 2, 2005
Operating activities
     $       (8)
     $     (39)
Investing activities
     $     (20)
     $         9
Financing activities
     $       (1)
     $     (1)

2005, respectively.

22.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Discontinued Operations Cash Flows

	Six Months Ended
(In millions)	July 1, 2006			July 2, 2005
Operating activities	$	65		$	(6	)
Investing activities	$	(21	)	$	2
Financing activities	$	(6	)	$	(4	)

Cash flows from discontinued operations include Textron Manufacturing's Fastening Systems, ~~Omniquip,~~OmniQuip and InteSys ~~businesses.~~businesses, and Textron Finance's small business finance operation. The change in operating cash flow is primarily ~~attributable~~attributed to ~~Textron~~a decrease in working capital in the Fastening ~~Systems. In~~Systems business. Investing cash flows principally includes capital expenditures for the Fastening Systems business, which were offset in the first ~~quarter~~half of 2005 ~~investing cash flows include~~upon the receipt of $15 million related to the sale of the remainder of the InteSys operations.

~~22.~~

~~Item 2.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

Capital Resources

Under a shelf registration statement filed with the Securities and Exchange Commission, Textron Finance may issue public debt securities in one or more offerings up to a total maximum offering of $4$4.0 billion. Under this registration statement, Textron Finance issued ~~$470 million of~~ term debt of $925 million and CAD 87100 million ~~of term debt~~ during the first ~~quarter~~half of 2006. The proceeds of these issuances were used to fund receivable growth and repay short-term debt. At ~~April~~July 1, 2006, Textron Finance had ~~$1.2 billion~~$757 million available under this registration statement. Under a shelf registration statement filed with the Securities and Exchange Commission, Textron Manufacturing may issue public debt securities in one or more offerings up to a total maximum offering of $2.0 billion. At ~~April~~July 1, 2006, Textron Manufacturing had $1.6 billion available under this registration statement.

Off-Balance Sheet Arrangements

Textron Manufacturing enters into a forward contract in Textron common stock on an annual basis. The contract is intended to hedge the cash volatility of stock-based incentive compensation indexed to Textron common stock. The forward contract requires an annual cash settlement between the counter parties based upon a number of shares multiplied by the difference between the strike price and the prevailing Textron common stock price. A cash payment of approximately $12 million was received in January 2006 upon the settlement of the contract held at year-end. As of ~~April~~July 1, 2006, the contract was for approximately ~~1.6~~1.5 million shares with a strike price of $77.62. The market price of Textron's common stock ~~was $93.39~~closed at ~~April 1,~~$92.18 on June 30, 2006, resulting in a receivable of ~~$25~~$22 million.

Textron Finance sells finance receivables utilizing both securitizations and whole-loan sales. As a result of these transactions, finance receivables are removed from the balance sheet and the proceeds received are used to reduce the recorded debt levels. Despite the reduction in the recorded balance sheet position, Textron Finance generally retains a subordinated interest in the finance receivables sold through securitizations, which may affect operating results through periodic fair value adjustments. Textron Finance utilizes these off-balance sheet financing arrangements (primarily asset-backed securitizations) to further diversify funding alternatives. These arrangements are an important source of funding that provided net proceeds ~~from continuing operations~~ of ~~$26~~$50 million inand $227 million during the first ~~quarter~~half of ~~2005.~~2006 and 2005, respectively. Textron Finance ~~did not increase its utilization of~~has used the proceeds from these arrangements into fund the ~~first quarter~~origination of ~~2006.~~

new finance receivables.

23.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Guarantees

~~23.~~

~~Item 2.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)~~

For 2006, AWB LLC's maximum obligation is 40% of the total contract value, which equates to $464 million based on the current contract value of $1.2 billion, and thereafter increases to 50%, or $580 million. Accordingly, the maximum amount of Bell Helicopter's liability under the guarantee will be $227 million in 2006 and $284 million thereafter through completion.

Recently Announced Accounting Pronouncements

In ~~the first quarter of~~February 2006, the Financial Accounting Standards Board ("FASB") issued ~~SFAS~~Statement of Financial Accounting Standard ("SFAS") No. 155 "Accounting for Certain Hybrid Financial ~~Instruments-An~~Instruments - An amendment of FASB Statements No. 133 and 140" ~~("SFAS 155")~~. ~~SFAS 155~~This Statement requires evaluation of all interests in securitized financial assets to determine whether they represent either freestanding derivatives or contain embedded derivatives. These interests were previously exempted from such evaluation in ~~Statement~~SFAS No. 133. ~~The statement~~SFAS No. 155 permits any hybrid instrument, such as an interest in securitized financial assets containing an embedded derivative, to be accounted for at fair value as opposed to bifurcating and accounting for the embedded derivative ~~separately~~separate from the host instrument. ~~The statement~~This Statement also amends ~~Statement~~SFAS No. 140 by eliminating restrictions on a qualifying special purpose entity's ability to hold passive derivative financial instruments pertaining to beneficial interests that are, or contain, a derivative financial instrument. Textron will adopt ~~SFAS 155 effective January 1, 2007. At April 1,~~this Statement in the first quarter of 2007, and does not expect the adoption to have a material impact on Textron's financial position or results of operations.

24.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In March 2006, ~~Textron has not completed its evaluation of~~ the ~~impact of this statement on its interests in securitized financial assets.~~

~~The~~ FASB also issued SFAS No. 156 "Accounting for Servicing of Financial Assets an- An amendment of FASB Statement No. 140" ~~("SFAS 156") in the first quarter of 2006. SFAS 156~~. This Statement requires all separately recognized servicing assets and liabilities to be initially measured at fair value and permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to, and over, the estimated net servicing income or loss and assess the rights for impairment or the need for an increased obligation. The option to subsequently measure servicing rights at fair value will allow entities which utilize derivative instruments to hedge their servicing rights to account for such hedging relationships at fair value and avoid the complications of hedge accounting under ~~Statement~~SFAS No. 133. Textron does not utilize derivative instruments to hedge its servicing rights as of ~~April~~July 1, 2006. Textron will adopt ~~SFAS 156 effective January 1,~~this Statement in the first quarter of 2007, and will ~~likely~~ utilize the amortization method to subsequently measure its servicing rights. The adoption of this ~~statement~~Statement is not expected to have a material impact on Textron's financial position or results of ~~operations~~operations.

In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - An interpretation of FASB Statement No. 109" ("FIN 48"). This Interpretation provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Textron will adopt this Interpretation in the first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings. Textron is currently assessing the ~~consolidated balance sheets do not contain~~impact of this Interpretation on Textron's financial position and results of operations.

In July 2006, the FASB issued Staff Position No. 13-2 "Accounting for a ~~significant balance~~Change or Projected Change in the Timing of ~~servicing assets at April 1, 2006.~~

Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction". This Staff Position amends SFAS No. 13 "Accounting for Leases" and requires a recalculation of returns on leveraged leases if there is a change or projected change in the timing of cash flows related to income taxes generated by the leveraged lease. In accordance with this guidance, the difference between the revised calculation of earnings since lease inception and the actual amount of cumulative earnings recognized is recorded in income from continuing operations. Textron is required to adopt this guidance in the first quarter of 2007. Upon adoption, any change in the projected cash flows will be reported as an adjustment to retained earnings. The Internal Revenue Service has challenged both the ability to accelerate the timing of tax deductions and the amounts of those deductions related to certain leveraged lease transactions with an initial investment of approximately $167 million within the Finance segment. Textron is currently assessing the impact of this Staff Position on Textron's financial position and results of operations.

Foreign Exchange Risks

Textron's financial results are affected by changes in foreign currency exchange rates and economic conditions in the foreign markets in which products are manufactured and/or sold. For the first ~~quarter~~half of 2006, the impact of foreign exchange rate changes from the first ~~quarter~~half of 2005 decreased revenues by approximately ~~$28~~$29 million ~~(1.2%~~(1%) and ~~decreased~~had essentially no impact on segment ~~profit by approximately $2 million (0.9%).~~

~~24.~~

profit.

25.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ~~(continued)~~

(Continued)

Forward-Looking Information

Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by Textron from time to time are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements, including the following: (a) changes in worldwide economic and political conditions that impact interest and foreign exchange rates; (b) the interruption of production at Textron facilities or Textron's customers or suppliers; (c) Textron's ability to perform as anticipated and to control costs under contracts with the U.S. Government; (d) the U.S. Government's ability to unilaterally modify or terminate its contracts with Textron for the Government's convenience or for Textron's failure to perform, to change applicable procurement and accounting policies, and, under certain circumstances, to suspend or debar Textron as a contractor eligible to receive future contract awards; (e) changes in national or international funding priorities and government policies on the export and import of military and commercial products; (f) the adequacy of cost estimates for various customer care programs, including servicing warranties; (g) the ability to control costs and successful implementation of various cost reduction programs; (h) the timing of certifications of new aircraft products; (i) the occurrence of slowdowns or downturns in customer markets in which Textron products are sold or supplied or where Textron Financial offers financing; (j) changes in aircraft delivery schedules or cancellation of orders; (k) the impact of changes in tax legislation; (l) the extent to which Textron is able to pass raw material price increases through to customers or offset such price increases by reducing other costs; (m) Textron's ability to offset, through cost reductions, pricing pressure brought by original equipment manufacturer customers; (n) Textron's ability to realize full value of receivables and investments in securities; (o) the availability and cost of insurance; (p) increases in pension expenses related to lower than expected asset performance or changes in discount rates; (q) Textron Financial's ability to maintain portfolio credit quality; (r) Textron Financial's access to debt financing at competitive rates; (s) uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; (t) performance of acquisitions; (u) the efficacy of research and development investments to develop new products; (v) bankruptcy or other financial problems at major suppliers or customers that could cause disruptions in Textron's supply chain or difficulty in collecting amounts owed by such customers; and (w) Textron's ability to execute planned dispositions.
~~25.~~

26.

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	There has been no significant change in Textron's exposure to market risk during the first ~~quarter~~half of 2006. For discussion of Textron's exposure to market risk, refer to Item ~~7A,~~7A. Quantitative and Qualitative Disclosures About Market Risk contained in Textron's 2005 Annual Report on Form 10-K.
Item 4.	CONTROLS AND PROCEDURES
	We have carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive Officer (the "CEO") and our Executive Vice President and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Act")) as of the end of the fiscal quarter covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
	There were no changes in Textron's internal control over financial reporting during the fiscal quarter ended ~~April~~July 1, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~26.~~

27.

PART II. OTHER INFORMATION

Item 1.1A.

RISK FACTORS

~~LEGAL PROCEEDINGS~~

As previously reported in Textron's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, two identical lawsuits, purporting to be class actions on behalf of Textron benefit plans and participants and beneficiaries of those plans during 2000 and 2001, were filed in 2002 in the United States District Court in Rhode Island against Textron, the Textron Savings Plan and the Plan's trustee. A consolidated amended complaint alleges breach of certain fiduciary duties under ERISA, based on the amount of Plan assets invested in Textron stock during 2000 and 2001. The complaint seeks equitable relief and compensatory damages on behalf of various Textron benefit plans and the participants and beneficiaries of those plans during 2000 and 2001 to compensate for alleged losses relating to Textron stock held as an asset of those plans. Textron's Motion to Dismiss the consolidated amended complaint was granted on June 24, 2003. On May 7, 2004, the United States Court of Appeals for the First Circuit affirmed dismissal of all claims against the Plan's trustee and against the Plan itself, and also affirmed dismissal of certain other claims against Textron. However, the Court of Appeals ruled that plaintiffs should be permitted to attempt to develop their breach of fiduciary duty claims, and remanded those claims to the District Court. On March 1, 2006, the District Court entered summary judgment for Textron. The plaintiff has subsequently filed a notice of appeal to the United States Court of Appeal for the First Circuit. Textron believes this lawsuit is without merit and will defend the appeal vigorously.

~~Item 1A.~~

~~RISK FACTORS~~

Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe are currently the most significant, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially.

We may be unable to effectively mitigate pricing pressures.

In some markets, particularly where we deliver component products and services to original equipment manufacturers, we face ongoing customer demands for price reductions, which are sometimes contractually obligated. In some cases, we are able to offset these reductions through technological advances or by lowering our cost base through improved operating and supply chain efficiencies. However, if we are unable to effectively mitigate future pricing pressures, our financial results of operations could be adversely affected.

Delays in aircraft delivery schedules or cancellation of orders may adversely affect our financial results.

Aircraft customers, including sellers of fractional share interests, may respond to weak economic conditions by delaying delivery of orders or canceling orders. Weakness in the economy may also result in fewer hours flown on existing aircraft and, consequently, lower demand for spare parts and maintenance. Weak economic conditions may also cause reduced demand for used business ~~jets.~~jets or helicopters. We may accept used aircraft on trade-in that would be subject to fluctuations in the fair market value of the aircraft while in inventory. Reduced demand for new and used ~~business jets,~~aircraft, spare parts and maintenance can have an adverse effect on our financial results of operations.

~~27.~~

~~PART II. OTHER INFORMATION~~ ~~(continued)~~

Developing new products and technologies entails significant risks and uncertainties.

Delays or cost overruns in the development and acceptance of new products, or certification of new aircraft products and other products, could affect our financial results of operations. These delays could be caused by unanticipated technological hurdles, production changes to meet customer demands, coordination with joint venture partners or failure on the part of our suppliers to deliver components as agreed. We also could be adversely affected if the general efficacy of our research and development investments to develop products is less than expected.

28.

PART II. OTHER INFORMATION (continued)

We have customer concentration with the U.S. Government.

During 2005, we derived approximately 18% of our ~~revenue~~revenues from sales to a variety of U.S. Government entities. Our ability to compete successfully for and retain this business is highly dependent on technical excellence, management proficiency, strategic alliances, cost-effective performance and the ability to recruit and retain key personnel. U.S. Government programs are subject to uncertain future funding levels, which can result in the extension or termination of programs. Our business is also highly sensitive to changes in national and international priorities and U.S. Government budgets.

U.S. Government contracts may be terminated at any time and may contain other unfavorable provisions.

The U.S. Government typically can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders.

If any of our contracts are terminated by the U.S. Government, our backlog would be reduced, in accordance with contract terms, by the expected value of the remaining ~~terms of~~work under such contracts, and our financial condition and results of operations could be adversely affected. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our products and services as a subcontractor.

In addition to ~~unfavorable~~these termination provisions, our U.S. Government contracts contain provisions that allow the U.S. Government to unilaterally suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations, reduce the value of existing contracts, issue modifications to a contract, and control and potentially prohibit the export of our products, services and associated materials.

~~28.~~

~~PART II. OTHER INFORMATION~~ ~~(continued)~~

Cost overruns on U.S. Government contracts could subject us to losses or adversely affect our future business.

Contract and program accounting require judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Assumptions have to be made regarding the length of time to complete the contract because costs include expected increases in wages and prices for materials. Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates and are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award fees are also used in estimating sales and profit rates based on actual and anticipated awards.

Because of the significance of the estimates described above, it is likely that different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future financial results of operations.

29.

PART II. OTHER INFORMATION (continued)

Under fixed-price contracts, we receive a fixed price irrespective of the actual costs we incur, and consequently, any costs in excess of the fixed price are absorbed by us. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses. Under cost reimbursement contracts, which are subject to a contract-ceiling amount, we are reimbursed for allowable costs and paid a fee, which may be fixed or performance based. However, if our costs exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all such costs. Under each type of contract, if we are unable to control costs we incur in performing under the contract, our financial condition and results of operations could be adversely affected. Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards.

We may make acquisitions that increase the risks of our business.

We may enter into acquisitions in the future in an effort to enhance shareholder value. Acquisitions involve a certain amount of risks and uncertainties that could result in our not achieving expected benefits. Such risks include difficulties in integrating newly acquired businesses and operations in an efficient and cost-effective manner; challenges in achieving expected strategic objectives, cost savings and other benefits; the risk that the acquired businesses' markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets; the risk that we pay a purchase price that exceeds what the future results of operations would have merited; the potential loss of key employees of the acquired businesses; and the risk of diverting the attention of senior management from our existing operations.

Our operations could be adversely affected by interruptions of production that are beyond our control.

Our business and financial results may be affected by certain events that we cannot anticipate or that are beyond our control, such as natural disasters and national emergencies, that could curtail production at our facilities and cause delayed deliveries and cancelled orders. In addition, we purchase components and raw materials and information technology and other services from numerous suppliers, and even if our facilities are not directly affected by such events, we could be affected by interruptions at such suppliers. Such suppliers may be less likely than our own facilities to be able to quickly recover from such events, and may be subject to additional risks such as financial problems that limit their ability to conduct their operations.

~~29.~~

~~PART II. OTHER INFORMATION~~ ~~(continued)~~

Our business could be adversely affected by strikes or work stoppages and other labor issues.

Approximately 18,500 of our employees are unionized, which represented approximately 40% of our employees at December 31, 2005, including employees of the discontinued business of Textron Fastening Systems. As a result, we may experience work stoppages, which could negatively impact our ability to manufacture our products on a timely basis, resulting in strain on our relationships with our customers and a loss of revenues. In addition, the presence of unions may limit our flexibility in responding to competitive pressures in the marketplace, which could have an adverse effect on our financial results of operations.

In addition to our workforce, the workforces of many of our customers and suppliers are represented by labor unions. Work stoppages or strikes at the plants of our key customers could result in delayed or cancelled orders for our products. Work stoppages and strikes at the plants of our key suppliers could disrupt our manufacturing processes. Any of these results could adversely affect our financial results of operations.

30.

PART II. OTHER INFORMATION (continued)

Our Textron Finance borrowing group's business is dependent on its continuing access to the capital markets.

Our financings are conducted through two borrowing groups, Textron Finance and Textron Manufacturing. Textron Finance consists of Textron Financial Corporation and its subsidiaries, which are the entities through which we operate in the Finance segment. Textron Finance relies on its access to the capital markets to fund asset growth, fund operations and meet debt obligations and other commitments. Textron Finance raises funds through commercial paper borrowings, issuances of medium-term notes and other term debt securities, and syndication and securitization of receivables. Additional liquidity is provided to Textron Finance through bank lines of credit. Much of the capital markets funding is made possible by the maintenance of credit ratings that are acceptable to investors. If the credit ratings of Textron Finance were to be lowered, it might face higher borrowing costs, a disruption of its access to the capital markets or both. Textron Finance could also lose access to financing for other reasons, such as a general disruption of the capital markets. Any disruption of Textron Finance's access to the capital markets could adversely affect its business and our profitability.

If Textron Finance is unable to maintain portfolio credit quality, our financial performance could be adversely affected.

A key determinant of financial performance at Textron Finance will be its ability to maintain the quality of loans, leases and other credit products in its finance asset portfolios. Portfolio quality may adversely be affected by several factors, including finance receivable underwriting procedures, collateral quality, geographic or industry concentrations, or general economic downturns. Any inability by Textron Finance to successfully collect its finance receivable portfolio and to resolve problem accounts may adversely affect our cash flow, profitability, and financial condition.

~~30.~~

~~PART II. OTHER INFORMATION~~ ~~(continued)~~

We are subject to legal proceedings and other claims.

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to private sector transactions; government contracts; production partners; product liability; employment; and environmental contamination. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations. However, litigation is inherently unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in any particular period.

31.

PART II. OTHER INFORMATION (continued)

The levels of our reserves are subject to many uncertainties and may not be adequate to cover writedowns or losses.

In addition to reserves at Textron Finance, we establish reserves in our manufacturing segments to cover uncollectible accounts receivable, excess or obsolete inventory, fair market value writedowns on used aircraft and golf cars, recall campaigns, warranty costs and litigation. These reserves are subject to adjustment from time to time depending on actual experience and are subject to many uncertainties, including bankruptcy or other financial problems at key customers.

In the case of litigation matters for which reserves have not been established because the loss is not deemed probable, it is reasonably possible such matters could be decided against us and could require us to pay damages or make other expenditures in amounts that are not presently estimable.

The effect on our financial results of many of these factors depends in some cases on our ability to obtain insurance covering potential losses at reasonable rates.

Currency, raw material price and interest rate fluctuations may adversely affect our results.

We are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, raw material prices and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program. In some cases, we purchase derivatives or enter into contracts to insulate our financial results of operations from these fluctuations. Nevertheless, changes in currency exchange rates, raw material prices and interest rates can have substantial adverse effects on our financial results of operations.

The increasing costs of certain employee and retiree benefits could adversely affect our results.

Our earnings and cash flow may be impacted by the amount of income or expense we expend or record for employee benefit plans. This is particularly true for our pension plans, which are dependent on actual plan asset returns and factors used to determine the value and current costs of plan benefit obligations.

In addition, medical costs are rising at a rate faster than the general inflation rate. Continued medical cost inflation in excess of the general inflation rate increases the risk that we will not be able to mitigate the rising costs of medical benefits. Increases to the costs of pension and medical benefits could have an adverse effect on our financial results of operations.

~~31.~~

~~PART II. OTHER INFORMATION~~ ~~(continued)~~

Unanticipated changes in Textron's tax rates or exposure to additional income tax liabilities could affect our profitability.

We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of income among these different jurisdictions. Our effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or in tax laws, which could affect our profitability. In particular, the carrying value of deferred tax assets is dependent on our ability to generate future taxable income. In addition, the amount of income taxes we pay is subject to audits in various jurisdictions, and a material assessment by a tax authority could affect our profitability.

32.

PART II. OTHER INFORMATION (continued)

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER REPURCHASES OF EQUITY SECURITIES

Total
Number of
Shares Purchased

Average Price
Paid per
Share
(Excluding
Commissions)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan

Maximum
Number of Shares
that May Yet Be
Purchased
Under the Plan
Month 1 (January 1, 2006 -
     February 4, 2006)

     961,972

$77.53

     961,972**

12,000,000***
Month 2 (February 5, 2006 -
     March 4, 2006)

     689,600

$87.01

     689,600

11,310,400
Month 3 (March 5, 2006 -
     April 1, 2006)

     927,271*

$91.44

     925,000*

10,385,400
     Total
     2,578,843

$85.06
     2,576,572

*      On March 7, 2006, Textron received 2,271 shares as payment for the exercise price of employee stock options, which are not included in publicly
        ~~announced repurchase plans.~~
**    961,972 shares were purchased in January 2006, fully exhausting the October 21, 2004 plan authorizing repurchase of up to 12 million shares of common
        ~~stock.~~

~~***~~

	Total Number of Shares Purchased		Average Price Paid per Share (Excluding Commissions)		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
Month 1 (April 2, 2006 - May 6, 2006)		1,167,300	$	91.22		1,167,300		9,218,100
Month 2 (May 7, 2006 - June 3, 2006)		577,900	$	92.14		577,900		8,640,200
Month 3 (June 4, 2006 - July 1, 2006)		2,657,900	$	86.95		2,657,900		5,982,300
Total		4,403,100	$	88.76		4,403,100

On January 26, 2006, Textron's Board approved a new share repurchase plan under which Textron is authorized to repurchase up to 12 million shares
of common stock. The new plan has no expiration date.

~~Item 5.~~

33.

~~OTHER INFORMATION~~

(a) Because this Quarterly Report on Form 10-Q is being filed within four business days from the date of the reportable events, we have elected to make the following disclosures in this Quarterly Report on Form 10-Q instead of in a Current Report on Form 8-K under Item 1.01 Entry into a Material Definitive Agreement and Item 2.06 Material Impairments.

~~Entry into a Material Definitive Agreement~~

On May 4, 2006, Textron and Mary L. Howell, John D. Butler and Terrence O'Donnell entered into Amended and Restated Employment Agreements, amending the Employment Agreements dated July 23, 1998, July 23, 1998 and March 10, 2000, respectively. The intent of these Amended and Restated Employment Agreements, which was mutually agreed upon by the executives and the Board of Directors, was to eliminate the inclusion of any performance share units granted after 2005 from the calculation of the executives' benefits under the Supplemental Retirement Plan for Textron Key Executives (the "SERP").

~~32.~~

PART II. OTHER INFORMATION (continued)

In consideration of this elimination of performance share units granted after 2005 from the calculation of SERP benefits, the Amended and Restated Employment Agreements for Ms. Howell and Mr. Butler each provide that, in the event of the executive's death, disability, termination without "cause" or resignation for "good reason," the executive will become fully vested in the maximum annual benefit payable under the SERP (i.e., 50% of highest consecutive five-year compensation reduced by benefits payable under other plans). Except in the case of death or a termination following a change of control, the SERP benefits so calculated, to the extent they exceed the benefits calculated without regard to such accelerated vesting provision, will not be payable until two and one-half years following termination.

In the case of Mr. O'Donnell, in consideration for the elimination of performance share units granted after 2005 from the calculation of SERP benefits, Textron has agreed to credit Mr. O'Donnell's account under the Deferred Income Plan for Textron Key Executives with an additional $157,465 as of January 1, 2006, and as of each anniversary of such date ending with January 1, 2009. Such amounts will be credited only if Mr. O'Donnell remains employed on the relevant dates, or if his employment is terminated without cause or he resigns for good reason, in which case the discounted present value of any installment not yet credited to Mr. O'Donnell's account will be accelerated and paid to Mr. O'Donnell in cash.

The Amended and Restated Employment Agreements also clarify certain language to reflect historic interpretations of the provisions so to avoid any future ambiguity, supply a previously absent definition of compensation for purposes of post-termination deemed years of service under Textron's pension plans and add a provision to make adjustments necessary to bring the Amended and Restated Employment Agreements in compliance with the new requirements with regard to deferred compensation under Section 409A of the Internal Revenue Code.

Also on May 4, 2006, Textron entered into a Second Amendment to the Employment Agreement with Lewis B. Campbell entered into as of July 23, 1998 (as amended by the First Amendment dated as of May 6, 2005). This Amendment implements clarifying changes substantially identical to those referred to above in the description of the Amended and Restated Employment Agreements with Ms. Howell and Messrs. Butler and O'Donnell.

Copies of the Amended and Restated Employment Agreements with Ms. Howell and Messrs. Butler and O'Donnell are attached hereto as Exhibits 10.1, 10.2 and 10.3, respectively. A copy of the Campbell Second Amendment is attached hereto as Exhibit 10.4.

~~Material Impairments~~

In the first quarter of 2006, Textron's management commenced its marketing efforts including establishing the proposed deal structure and identifying potential buyers. Formal negotiations commenced with a number of potential purchasers and specific terms and conditions have been discussed including the impact on the sales price of depreciation, currency exchange fluctuation, the assumption of liabilities, as well as the transfer of pension related obligations and assets.

~~33.~~

Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	At Textron's annual meeting of shareholders held on April 26, 2006, the following items were voted upon:
	1.	The following persons were elected to serve as directors in Class I for three year terms expiring in 2009 and received the votes listed.
		Name			For				Withheld
		Lewis B. Campbell			105,530,562				9,021,676
		Lawrence K. Fish			105,684,866				8,867,372
		Joe T. Ford			106,005,095				8,547,143
		The following directors have terms of office which continued after the meeting: H. Jesse Arnelle, Kathleen M. Bader, R. Kerry Clark, Ivor J. Evans, Paul E. Gagne, Dain M. Hancock, Lord Powell of Bayswater KCMG, Thomas B. Wheeler.
	2.	The appointment of Ernst & Young LLP as Textron's independent auditors for 2006 was ratified by the following vote:
		For		Against			Abstain	Broker Non-Votes
		112,420,675		1,287,883			843,680	0
	3.	A shareholder proposal relating to a report related to the use of depleted uranium was rejected by the following vote:
		For	Against			Abstain		Broker Non-Votes
		8,494,771	83,105,917			9,089,415		13,862,135
	4.	A shareholder proposal relating to Director majority voting was approved by the following vote:
		For	Against			Abstain		Broker Non-Votes
		59,479,821	39,697,539			1,700,689		13,674,189

34.

PART II. OTHER INFORMATION (continued)

Item 6.	EXHIBITS ~~EXHIBITS~~
	~~10.1~~ 2.1	~~Amended~~ Purchase Agreement by and ~~Restated Employment Agreement~~ between Textron Inc. and ~~Mary L. Howell dated May 4, 2006.~~
	~~10.2~~	~~Amended and Restated Employment Agreement between Textron and John D. Butler dated May 4, 2006.~~
	~~10.3~~	~~Amended and Restated Employment Agreement between Textron and Terrence O'Donnell dated May 4, 2006.~~
	~~10.4~~	~~Second Amendment dated May 4, 2006, to the Employment Agreement with Lewis B. Campbell entered into as of July 23, 1998 (as amended by the First Amendment~~TFS Acquisition Corporation dated as of May ~~6, 2005).~~ 31, 2006 NOTE: The Table of Contents of the Purchase Agreement listed as Exhibit 2.1 contains a list briefly identifying the contents of all omitted schedules and exhibits. Textron will supplementally furnish a copy of any omitted schedule or exhibit to the Commission upon request.
	12.1	Computation of ratio of income to fixed charges of Textron Manufacturing
	12.2	Computation of ratio of income to fixed charges of Textron Inc. including all majority-owned subsidiaries
	31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
	31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
	32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
	32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

~~34.~~

35.

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TEXTRON INC.
Date:	~~May 5,~~August 7, 2006	/s/R. L. Yates
		R. L. Yates Senior Vice President and Corporate Controller (principal accounting officer)

~~35.~~

36.

LIST OF EXHIBITS

The following exhibits are filed as part of this report on Form 10-Q:

Name of Exhibit

~~10.1~~ 2.1	~~Amended~~ Purchase Agreement by and ~~Restated Employment Agreement~~ between Textron Inc. and ~~Mary L. Howell dated May 4, 2006.~~
~~10.2~~	~~Amended and Restated Employment Agreement between Textron and John D. Butler dated May 4, 2006.~~
~~10.3~~	~~Amended and Restated Employment Agreement between Textron and Terrence O'Donnell dated May 4, 2006.~~
~~10.4~~	~~Second Amendment dated May 4, 2006, to the Employment Agreement with Lewis B. Campbell entered into as of July 23, 1998 (as amended by the First Amendment~~TFS Acquisition Corporation dated as of May ~~6, 2005).~~ 31, 2006
12.1	Computation of ratio of income to fixed charges of Textron Manufacturing
12.2	Computation of ratio of income to fixed charges of Textron Inc. including all majority-owned subsidiaries
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1	Certification of Chief Executive Officer Pursuant to ~~Rule~~ 18 U.S.C. Section 1350
32.2	Certification of Chief Financial Officer Pursuant to ~~Rule~~ 18 U.S.C. Section 1350

	Three Months Ended
	April 1, 2006			April 2, 2005
Revenues
Manufacturing revenues	$		2,450	$	2,129
Finance revenues			182		141
Total revenues			2,632		2,270
Costs, expenses and other
Cost of sales			1,955		1,667
Selling and administrative			361		340
Interest expense, net			94		68
Provision for losses on finance receivables			9		12
Special charges			-		54
Total costs, expenses and other			2,419		2,141
Income from continuing operations before income taxes			213		129
Income taxes			(55)		(45)
Income from continuing operations			158		84
Income from discontinued operations, net of income taxes			10		42
Net income	$		168	$	126
Per common share:
Basic:
Income from continuing operations	$		1.21	$	0.62
Income from discontinued operations, net of income taxes			0.08		0.31
Net income	$		1.29	$	0.93
Diluted:
Income from continuing operations	$		1.19	$	0.61
Income from discontinued operations, net of income taxes			0.07		0.30
Net income	$		1.26	$	0.91
Average shares outstanding (in thousands):
Basic	130,093			135,127
Diluted	132,856			138,283
Dividends per share:
$2.08 Preferred stock, Series A	$	.52		$	.52
$1.40 Preferred stock, Series B	$	.35		$	.35
Common stock	$	.3875		$	.35

	April 1, 2006		December 31, 2005
Assets
Textron Manufacturing
Cash and cash equivalents	$	535	$	786
Accounts receivable, less allowance for doubtful accounts of $41 and $38		1,006		891
Inventories		1,925		1,712
Other current assets		444		464
Assets of discontinued operations		1,163		1,122
Total current assets		5,073		4,975
Property, plant and equipment, less accumulated depreciation and amortization of $2,032 and $1,999		1,577		1,574
Goodwill		980		979
Other intangible assets, net		31		32
Other assets		1,517		1,498
Total Textron Manufacturing assets		9,178		9,058
Textron Finance
Cash		10		10
Finance receivables, less allowance for losses of $100 and $96		7,105		6,667
Goodwill		169		169
Other assets		588		595
Total Textron Finance assets		7,872		7,441
Total assets	$	17,050	$	16,499
Liabilities and Shareholders' Equity
Liabilities
Textron Manufacturing
Current portion of long-term debt and short-term debt	$	202	$	275
Accounts payable		854		677
Accrued liabilities		1,599		1,749
Liabilities of discontinued operations		495		446
Total current liabilities		3,150		3,147
Accrued postretirement benefits other than pensions		517		515
Other liabilities		1,543		1,511
Long-term debt		1,663		1,659
Total Textron Manufacturing liabilities		6,873		6,832
Textron Finance
Other liabilities		548		510
Deferred income taxes		460		461
Debt		5,842		5,420
Total Textron Finance liabilities		6,850		6,391
Total liabilities		13,723		13,223
Shareholders' equity
Capital stock:
Preferred stock		10		10
Common stock		26		26
Capital surplus		1,677		1,533
Retained earnings		5,924		5,808
Accumulated other comprehensive loss		(77)		(78)
		7,560		7,299
Less cost of treasury shares		4,233		4,023
Total shareholders' equity		3,327		3,276
Total liabilities and shareholders' equity	$	17,050	$	16,499
Common shares outstanding (in thousands)		129,892		130,185

	Three Months Ended
(In millions)	April 1, 2006	April 2, 2005
Net income	$ 168	$ 126
Other comprehensive income (loss)	1	(38)
Comprehensive income (see below)	$ 169	$ 88


	Number of Options (In thousands)	Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Life (In years)	Aggregate Intrinsic Value (In millions)
Outstanding at beginning of year	8,146	$ 56.23
Granted	991	87.95
Exercised	(2,104)	52.57
Canceled, expired or forfeited	(122)	55.41
Outstanding at end of quarter	6,911	$ 61.90	6.58	$ 218
Exercisable at end of quarter	4,768	$ 54.59	5.41	$ 185


(Shares in thousands)	Number of Shares	Weighted-Average Grant-Date Fair Value
Outstanding at beginning of year, nonvested	1,156	$ 55.99
Granted	325	82.18
Vested	(6)	49.91
Forfeited	(42)	52.60
Outstanding at end of quarter, nonvested	1,433	$ 62.06

	Q1 2006	Q1 2005
Federal statutory income tax rate	35.0%	35.0%
Increase (decrease) in taxes resulting from:
State income taxes	1.6	1.4
C&A impairment valuation allowance	-	6.9
Foreign tax rate differential	(3.1)	(4.3)
Favorable tax settlements	(5.6)	-
ESOP dividends	(0.7)	(0.9)
Export sales benefit	(1.1)	(1.0)
Other, net	(0.3)	(2.2)
Effective income tax rate	25.8%	34.9%


	April 1,	December 31,
(In millions, except for ratios)	2006	2005

Nonperforming assets as a percentage of finance assets	1.55%	1.53%
Allowance for losses on finance receivables as a percentage of finance receivables	1.39%	1.43%
Allowance for losses on finance receivables as a percentage of nonaccrual finance receivables	102.1%	108.6%
60+ days contractual delinquency as a percentage of finance receivables	0.67%	0.79%

Discontinued Operations Cash Flows	Three Months Ended
(In millions)	April 1, 2006	April 2, 2005
Operating activities	$ (8)	$ (39)
Investing activities	$ (20)	$ 9
Financing activities	$ (1)	$ (1)