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I have a similar problem with TAC bombers. Playing as Germany I rushed the 1938 TAC development in 1937. After taking over Austria I got a TAC bomber production line from them - a model 1 TAC with Escort. I am not able to upgrade them to model 2 or model 3 during production.

BTW - Is it WAD to have the retooling time apply only once if your upgrading a production line twice ?
In my opinion there should be a second retooling time added but with about 50% reduction.