UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 2009
		For the fiscal quarter ended June 30, 2009
or
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15515

TEXTRON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		05-6008768 (I.R.S. Employer Identification No.)
Delaware		05-6008768
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
40 Westminster Street, P.O. Box 6687, Providence, RI (Address of principal executive offices)		02940-6687 (Zip code)

401-621-4200 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (~~Registrant’s~~1) has ~~telephone~~filed ~~number,~~all ~~including~~reports ~~area~~required ~~code~~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 þ No o

Indicate by check mark whether the registrant ~~(1)~~ has ~~filed~~submitted ~~all~~electronically ~~reports~~and posted on its corporate Web site, if any, every Interactive Data File required to be ~~filed~~submitted byand ~~Section 13~~posted pursuant orto ~~15(d)~~Rule 405 of ~~the~~Regulation S-T (§232.405 ~~Securities Exchange Act~~ of ~~1934~~this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to ~~file~~submit ~~such reports)~~ and ~~(2) has~~post ~~been subject to~~ such ~~filing requirements for the past~~ ~~90 days~~files). Yes. þo No. o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes. o No. o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ ~~(Do not check if a smaller reporting company)~~ Smaller reporting company o

~~Indicate~~(Do bynot check ~~mark~~if ~~whether the registrant is~~ a ~~shell~~smaller ~~company (as~~reporting ~~defined in Rule 12b-2 of the Exchange Act~~company)~~. Yes. o No. þ~~

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

All of the shares of common stock of the registrant are owned by Textron Inc.

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT

TEXTRON FINANCIAL CORPORATION

TABLE OF CONTENTS

		Page			~~Page~~
PART I. FINANCIAL INFORMATION
	Item 1.			FINANCIAL STATEMENTS
Item 1. FINANCIAL STATEMENTS
				Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 (unaudited)		2
Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)			2
				Consolidated Balance Sheets at March 31, 2009 and January 3, 2009 (unaudited)		3
Consolidated Balance Sheets at June 30, 2009 and January 3, 2009 (unaudited)			3
				Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)		4
Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)			4
				Consolidated Statements of Changes in Equity through March 31, 2009 (unaudited)		5
Consolidated Statements of Changes in Equity through June 30, 2009 (unaudited)			5
Notes to the Consolidated Financial Statements (unaudited)			6	~~Notes to the Consolidated Financial Statements (unaudited)~~		6
	Item 1A.			RISK FACTORS		22
Item 1A. RISK FACTORS			22
	Item 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
	Item 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		36
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			35
	Item 4.			CONTROLS AND PROCEDURES		36
Item 4. CONTROLS AND PROCEDURES			36
PART II. OTHER INFORMATION
	Item 6.			EXHIBITS		37
Item 6. EXHIBITS			36
Ex-12 Computation of Ratio of Earnings to Fixed Charges
Ex-12 - Computation of Ratio of Earnings to Fixed Charges
Ex-31.1 Certification of Chief Executive Officer
Ex-31.1 - Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
Ex-31.2 Certification of Chief Financial Officer
Ex-31.2 - Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Ex-32.1 Certification of Chief Executive Officer
Ex-32.1 - Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Ex-32.2 Certification of Chief Financial Officer
Ex-32.2 - Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

TEXTRON FINANCIAL CORPORATION ~~CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (Unaudited)~~

	2009			2008
	(In millions)
Finance charges	$	115		$	155
Securitization (losses) gains		(7	)		20
Rental revenues on operating leases		8			9
Other income		6			30
Total revenues		122			214
Interest expense		54			86
Depreciation of equipment on operating leases		5			5
Net interest margin		63			123
Provision for losses		76			27
Selling and administrative expenses		53			54
(Loss) income before special charges and income taxes		(66	)		42
Special charges		3			—
(Loss) income before income taxes		(69	)		42
Income tax (benefit) expense		(16	)		11
Net (loss) income	$	(53	)	$	31

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)

Finance charges	$	104		$	127		$	219		$	282
Gains on early extinguishment of debt		37			—			39			—
Rental revenues on operating leases		7			8			15			17
Securitization (losses) gains		(20	)		20			(27	)		40
Portfolio (losses) gains		(50	)		(3	)		(60	)		2
Other income		8			25			22			50

Total revenues		86			177			208			391
Interest expense		41			71			95			157
Depreciation of equipment on operating leases		4			4			9			9

Net interest margin		41			102			104			225
Provision for losses		87			40			163			67
Selling and administrative expenses		53			49			106			103

(Loss) income before special charges, income taxes and noncontrolling interest		(99	)		13			(165	)		55
Special charges		5			—			8			—

(Loss) income before income taxes and noncontrolling interest		(104	)		13			(173	)		55
Income tax (benefit) expense		(39	)		9			(55	)		20

Net (loss) income before noncontrolling interest		(65	)		4			(118	)		35
Noncontrolling interest, net of income taxes		1			—			1			—

Net (loss) income	$	(66	)	$	4		$	(119	)	$	35

See Notes to the Consolidated Financial Statements.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			January 3,
	June 30,			January 3,
	2009			2009
	(In millions)
Assets
ASSETS
Cash and equivalents	$	~~637~~521		$	16
Finance receivables held for investment, net of unearned income:
Installment contracts		2,~~713~~622			2,787
Revolving loans		1,~~277~~200			1,208
Distribution finance receivables		1,183			647
Golf course and resort mortgages		1,133			1,206
Finance leases		579			608
Distribution finance receivables		932			647
Leveraged leases		387			459
Finance leases		560			608
Total finance receivables held for investment		7,272			6,915
Leveraged leases		358			459
Allowance for losses on finance receivables held for investment		(220	)		(191	)
Total finance receivables held for investment		6,805			6,915
Finance receivables held for investment — net		7,052			6,724
Allowance for losses on finance receivables held for investment		(284	)		(191	)
Finance receivables held for sale		887			1,658
Finance receivables held for investment — net		6,521			6,724
Equipment on operating leases — net		239			247
Finance receivables held for sale		613			1,658
Other assets		748			699
Equipment on operating leases — net		235			247
Total assets	$	9,563		$	9,344
Other assets		629			699
Liabilities and equity
Total assets	$	8,519		$	9,344
LIABILITIES AND EQUITY
Liabilities
Accrued interest and other liabilities	$	~~404~~348		$	379
Amounts due to Textron Inc.		3028			161
Deferred income taxes		~~212~~206			337
Debt		7,~~954~~057			7,388
Total liabilities		87,~~600~~639			8,265
Equity
Shareholder’s equity
Capital surplus		1,~~217~~305			1,217
Investment in parent company preferred stock		(25	)		(25	)
Accumulated other comprehensive loss		(5561	)		(55	)
Retained deficit		(~~195~~361	)		(58	)
Total shareholder’s equity		~~942~~858			1,079
Noncontrolling interest		2122			—
Total equity		~~963~~880			1,079
Total liabilities and equity	$	98,~~563~~519		$	9,344

See Notes to the Consolidated Financial Statements.

~~Item~~ TEXTRON FINANCIAL ~~1. Financial Statements (Continued)~~CORPORATION

~~TEXTRON~~CONSOLIDATED ~~FINANCIAL CORPORATION CONSOLIDATED~~ STATEMENTS OF CASH FLOWS ~~THREE MONTHS ENDED MARCH 31, 2009 AND 2008~~ ~~(Unaudited)~~

	2009			2008
	(In millions)
Cash flows from operating activities:
Net (loss) income	$	(53	)	$	31
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred income tax provision		(121	)		2
Increase (decrease) in income taxes payable		92			(9	)
Provision for losses		76			27
Depreciation		7			7
Collections in excess of non-cash gains/impairments on securitizations and syndications		6			(7	)
Restructuring charges		3			—
Amortization		1			3
Decrease in accrued interest and other liabilities		(6	)		(3	)
Other — net		13			1
Net cash provided by operating activities		18			52
Cash flows from investing activities:
Finance receivables originated or purchased		(1,325	)		(3,033	)
Finance receivables repaid		1,513			2,092
Proceeds from disposition of other assets, including repossessed assets and properties and operating leases		72			10
Proceeds from receivable sales, including securitizations		59			459
Other investments		11			2
Purchase of assets for operating leases		(3	)		(7	)
Net cash provided (used) by investing activities		327			(477	)
Cash flows from financing activities:
Proceeds from line of credit		1,740			—
Net (decrease) increase in commercial paper		(735	)		612
Principal payments on long-term debt		(221	)		(471	)
Proceeds from issuance of long-term debt		—			424
Principal payments on secured debt		(193	)		—
Proceeds from issuance of secured debt		16			—
Principal payments on nonrecourse debt		(129	)		(42	)
Net (decrease) increase in other short-term debt		(8	)		31
Net decrease in intercompany loan due to Textron Inc.		(133	)		—
Proceeds from sale of noncontrolling interest		21			—
Capital contributions from Textron Inc.		2			2
Dividends paid to Textron Inc.		(86	)		(144	)
Net cash provided by financing activities		274			412
Effect of exchange rate changes on cash		2			—
Net increase (decrease) in cash and equivalents		621			(13	)
Cash and equivalents at beginning of year		16			60
Cash and equivalents at end of period	$	637		$	47

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(Unaudited)


	2009			2008
	(In millions)

Cash flows from operating activities:
Net (loss) income	$	(119	)	$	35
Net income attributable to noncontrolling interest		1			—

Net (loss) income before noncontrolling interest		(118	)		35
Adjustments to reconcile net (loss) income before noncontrolling interest to net cash provided by operating activities:
Provision for losses		163			67
Deferred income tax provision		(123	)		(41	)
Increase in income taxes payable		73			6
Portfolio losses		60			3
Gains on early extinguishment of debt		(39	)		—
Impairments/gains in excess of collections on securitizations and syndications		21			(9	)
Depreciation and amortization		19			19
Decrease in accrued interest and other liabilities		(18	)		(14	)
Other — net		34			17

Net cash provided by operating activities		72			83
Cash flows from investing activities:
Finance receivables originated or purchased		(2,234	)		(6,338	)
Finance receivables repaid		2,905			5,690
Proceeds from receivable sales, including securitizations		184			617
Proceeds from disposition of other assets, including repossessed assets and properties and operating leases		134			16
Other investments		60			(105	)
Purchase of assets for operating leases		(6	)		(14	)

Net cash provided (used) by investing activities		1,043			(134	)
Cash flows from financing activities:
Proceeds from line of credit		1,740			—
Proceeds from issuance of long-term debt		—			822
Principal payments on long-term debt		(877	)		(833	)
Net decrease in commercial paper		(743	)		(103	)
Net (decrease) increase in other short-term debt		(16	)		55
Proceeds from issuance of secured debt		16			300
Principal payments on secured debt		(384	)		—
Principal payments on nonrecourse debt		(144	)		(53	)
Net decrease in intercompany loan due to Textron Inc.		(133	)		—
Proceeds from sale of noncontrolling interest		21			—
Capital contributions from Textron Inc.		93			5
Dividends paid to Textron Inc.		(189	)		(147	)

Net cash (used) provided by financing activities		(616	)		46
Effect of exchange rate changes on cash		6			1

Net increase (decrease) in cash and equivalents		505			(4	)
Cash and equivalents at beginning of year		16			60

Cash and equivalents at end of period	$	521		$	56

See Notes to the Consolidated Financial Statements.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

				Investment			Accumulated
				in Parent			~~Accumulated~~Other						Total
				Company			~~Other~~Comprehensive			Retained			Share-
	Capital			Preferred			~~Comprehensive~~Income			Earnings			holder’s			Noncontrolling		Total
	Surplus			Stock			~~Income~~ (Loss)			(Deficit)			Equity			Interest		Equity
Balance December 29, 2007	$	592		$	(25	)	$	26		$	545		$	1,138		$	—	$	1,138
Comprehensive loss:
Net loss		—			—			—			(461	)		(461	)		—		(461	)
Other comprehensive loss:
Foreign currency translation, net of income taxes		—			—			(79	)		—			(79	)		—		(79	)
Change in unrealized net losses on hedge contracts, net of income taxes		—			—			(1	)		—			(1	)		—		(1	)
Change in unrealized net gains on interest-only securities, net of income taxes		—			—			(1	)		—			(1	)		—		(1	)
Other comprehensive loss		—			—			(81	)		—			(81	)		—		(81	)
Comprehensive loss		—			—			—			—			(542	)		—		(542	)
Capital contributions from Textron Inc.		634			—			—			—			634			—		634
Dividends to Textron Inc.		(9	)		—			—			(142	)		(151	)		—		(151	)
Balance January 3, 2009		1,217			(25	)		(55	)		(58	)		1,079			—		1,079
Comprehensive loss:
Net loss		—			—			—			(53	)		(53	)		—		(53	)
Net (loss) income		—			—			—			(119	)		(119	)		1		(118	)
Other comprehensive loss:
Foreign currency translation, net of income taxes		—			—			2			—			2			—		2
Change in unrealized net losses on retained interests, net of income tax benefit		—			—			(9	)		—			(9	)		—		(9	)
Change in unrealized net losses on interest-only securities, net of income tax benefit		—			—			(2	)		—			(2	)		—		(2	)
Foreign currency translation, net of income taxes		—			—			3			—			3			—		3
Other comprehensive loss		—			—			—(6	)		—			—(6	)		—		—(6	)
Comprehensive loss		—			—			—			—			(53125	)		—		(53125	)
Capital contributions from Textron Inc.		293			—			—			—			293			—		293
Dividends to Textron Inc.		(25	)		—			—			(84184	)		(86189	)		—		(86189	)
Sale of noncontrolling interest		—			—			—			—			—			21		21
Balance March 31, 2009	$	1,217		$	(25	)	$	(55	)	$	(195	)	$	942		$	21	$	963
Balance June 30, 2009	$	1,305		$	(25	)	$	(61	)	$	(361	)	$	858		$	22	$	880

See Notes to the Consolidated Financial Statements.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1.	Basis of Presentation

The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Textron Financial Corporation’s Annual Report on Form 10-K for the year ended January 3, 2009. The accompanying Consolidated Financial Statements include the accounts of Textron Financial Corporation (“Textron Financial” or the “Company”) and its subsidiaries. All significant intercompany transactions are eliminated. In the first quarter of 2009, we sold a 51% residual interest in the Aviation Finance securitization trust to Textron Inc., which is reflected as a Noncontrolling interest on our Consolidated Balance Sheets. The Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of Textron Financial’s consolidated financial position at ~~March~~June 3130, 2009, and its consolidated results of operations and cash flows for each of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. We have evaluated subsequent events up to the time of our filing with the Securities and Exchange Commission on July 31, 2009, which is the date that these financial statements were issued.

During the second quarter of 2009, the Company made a change to consolidate the management of the portion of the Golf Finance segment that finances customer purchases of E-Z-GO golf cars and Jacobsen turf-care equipment with the Aviation Finance segment. This decision is consistent with the previously announced plan to exit all of the commercial finance business, other than that portion of the business supporting the financing of customer purchases of products which Textron manufactures and will facilitate the management of operations and evaluation of the Company’s performance in line with this strategic decision. As a result, the Company’s segment reporting has been adjusted to form a new Captive Finance segment and the remainder of the Golf Finance segment, which historically made mortgage loans for the acquisition and refinancing of golf courses, has been renamed the Golf Mortgage Finance segment. All comparative segment information for prior periods has been recast to reflect this change.


Note 2.	Recent Accounting Pronouncements

In ~~March~~June 2009, the Financial Accounting Standards Board (“FASB”) issued ~~FASB~~Statement ~~Staff~~of ~~Position~~Financial Accounting Standards (“~~FSP~~SFAS”) No. ~~115-2~~166 “Accounting for ~~and FAS~~Transfers of Financial Assets ~~124-2 “Recognition~~— ~~and~~an ~~Presentation~~amendment of ~~Other-Than-Temporary~~FASB ~~Impairments~~Statement No. 140”. ~~The~~This ~~FSP~~standard ~~amends~~eliminates the ~~other-than-temporary~~ ~~impairment~~concept ~~criteria~~of ~~associated~~a ~~with~~qualifying ~~marketable~~special ~~debt~~purpose ~~securities~~entity (“QSPE”) and ~~beneficial~~its ~~interests~~exclusion infrom ~~securitized~~consolidation ~~financial~~by ~~assets. It~~the ~~requires~~primary ~~that~~beneficiary anin ~~entity~~that ~~evaluate~~variable ~~for~~interest ~~and record an~~entity ~~other-than-temporary~~(“VIE”) ~~impairment~~or ~~when~~the ittransferor ~~concludes~~of ~~that~~financial itassets ~~does not intend~~ to ~~sell an impaired security and does not believe it likely that it will be required to sell~~ the ~~security before~~ ~~recovery~~VIE. ofThe ~~the~~new ~~amortized~~accounting ~~cost~~guidance ~~basis,~~also ~~regardless~~requires ofthat ~~the~~former ~~entity~~QSPE’s ~~positive~~be ~~intent~~reevaluated ~~and~~for ~~ability~~consolidation. toThis ~~hold~~standard ~~the asset to~~is ~~maturity.~~effective ~~Once~~beginning anin ~~entity~~the ~~has~~first ~~determined~~quarter ~~that~~of ~~an other-than-temporary~~2010 ~~impairment~~and ~~has occurred, it is required to~~early ~~record~~application ~~the~~is ~~credit~~prohibited. ~~loss~~The ~~component~~adoption of ~~the~~this ~~difference~~standard ~~between the~~may ~~security’s~~result ~~amortized~~in ~~cost~~the ~~basis~~consolidation ~~and~~of ~~the~~our ~~estimated~~off-balance ~~fair~~sheet ~~value~~securitization ~~in earnings~~trusts, ~~whereas~~which ~~the~~hold ~~remaining~~our ~~difference~~securitized ~~is to be~~finance ~~recognized~~receivables asand adebt. ~~component~~As ofour ~~Other~~off-balance ~~comprehensive~~sheet ~~income and~~securitization ~~amortized~~trusts ~~over~~are ~~the~~winding ~~remaining~~down ~~life~~in ofconnection ~~the~~with ~~security.~~our ~~The~~liquidation ~~FSP is~~plan, ~~effective~~we ~~for~~are ~~interim~~currently ~~and~~assessing ~~annual~~the ~~reporting~~impact ~~periods~~the ~~ending~~adoption ~~after~~of this ~~June 15,~~standard ~~2009~~may ~~and~~have ~~the~~our ~~Company~~on isfinancial ~~currently~~position, ~~evaluating~~results ~~the~~of ~~potential~~operations ~~effect~~and ~~adoption~~liquidity ~~may~~when ~~have~~we onare ~~its~~required ~~Statement~~to ofadopt ~~Position~~it next ~~and Results of Operations~~year.

InAlso ~~March~~in June 2009, the FASB issued ~~FSP~~ SFAS No. ~~157-4~~167 “~~Determining~~Amendments ~~Fair~~to ~~Value~~FASB ~~When~~Interpretation ~~the Volume and Level of~~No. 46(R)”. ~~Activity~~This ~~for~~standard changes the ~~Asset~~approach orto ~~Liability~~determining ~~Have~~the ~~Significant Decreased~~primary ~~and~~beneficiary ~~Identifying~~of ~~Transactions~~a ~~That~~VIE ~~Are~~and ~~Not Orderly”. The FSP~~ requires ~~entities~~companies to ~~evaluate~~more ~~the significance and relevance of~~frequently ~~market~~assess ~~factors~~whether ~~for~~they ~~Level 2~~must ~~fair~~consolidate ~~value~~VIEs. ~~inputs~~This tostandard ~~determine~~is ~~if,~~effective ~~due~~in ~~to reduced volume and market activity,~~ the ~~factors~~first ~~are still~~quarter ~~relevant and substantive measures~~ of ~~fair~~2010 ~~value. The FSP is effective for interim~~ and ~~annual~~early ~~reporting~~application ~~periods ending~~is ~~after~~prohibited. ~~June 15,~~The ~~2009~~adoption ~~and~~of ~~the~~this ~~Company~~standard ~~does~~is not ~~believe~~expected ~~the~~to ~~adoption will~~ have aany ~~material~~significant ~~effect~~impact on ~~its~~our ~~Statement~~financial ~~of Position~~position or ~~Results~~ results of ~~Operations~~operations.


Note 3.	Portfolio (Losses) Gains and Other income

Portfolio (losses) gains include impairment charges related to repossessed assets and properties, operating assets received in satisfaction of troubled finance receivables, investments and (losses) gains incurred on the sale or early termination of finance assets.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Note~~ Other 3.income ~~Other~~is ~~Income~~summarized below:

	Three Months Ended					Six Months Ended
	March 31,			March 31,
	June 30,			June 30,		June 30,			June 30,
	2009			2008		2009			2008
	(In millions)
Servicing income	$	107		$	1011	$	17		$	21
Investment income		42			46		6			10
Late charges		1			1		2			2
Syndication income		—			2
Prepayment income		—			1		(1	)		2
Prepayment gains		(1	)		1
Syndication income		—			—		—			2
Portfolio (losses) gains		(10	)		5
Other		(2	)		6		(2	)		13
Other		2			7
Total other income	$	8		$	25	$	22		$	50
Total other income	$	6		$	30

The Other component of Other income includes commitment fees, residual gains, insurance fees and other miscellaneous fees, which are primarily recognized as income when received.


Note 4.	Special Charges

In the fourth quarter of 2008 we announced a restructuring program resulting in a total charge of $27 million which included $11 million of non-cash asset impairments, $1 million of contract termination costs and $15 million of estimated employee severance costs. In addition, during the first ~~quarter~~six months of 2009, the Company ~~incurred~~ incurred employee severance and pension curtailment costs and contract termination costs of $27 million and $1 million, respectively. As of ~~March~~June 3130, 2009, since inception of the program the Company has paid severance related benefits and contract termination costs of $811 million and $1 million, respectively, which were charged against the restructuring reserve. The detail of the reserve account is presented below:

	Severance			~~Contract~~
	and Pension
	Curtailment			Contract
	Costs			Terminations			Total
	(In millions)
Balance at January 3, 2009	$	11		$	1		$	12
Additions		27			1			38
Cash Paid		(47	)		—(1	)		(48	)
Balance at March 31, 2009	$	9		$	2		$	11
Balance at June 30, 2009	$	11		$	1		$	12


Note 5.	Managed and Serviced Finance Receivables

Textron Financial manages and services finance receivables for a variety of investors, participants and third-party portfolio owners. Managed and serviced finance receivables are summarized as follows:


	June 30,			January 3,
	2009			2009
	(In millions)

Total managed and serviced finance receivables	$	9,836		$	12,173
Nonrecourse participations		(793	)		(820	)
Third-party portfolio servicing		(430	)		(532	)

Total managed finance receivables		8,613			10,821
Securitized finance receivables		(1,195	)		(2,248	)

Finance receivables		7,418			8,573
Finance receivables held for sale		(613	)		(1,658	)

Finance receivables held for investment	$	6,805		$	6,915

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Note 5. Managed and Serviced Finance Receivables

	March 31,			January 3,
	2009			2009
	(In millions)
Total managed and serviced finance receivables	$	11,201		$	12,173
Nonrecourse participations		(813	)		(820	)
Third-party portfolio servicing		(493	)		(532	)
Total managed finance receivables		9,895			10,821
Securitized finance receivables		(1,736	)		(2,248	)
Finance receivables		8,159			8,573
Finance receivables held for sale		(887	)		(1,658	)
Finance receivables held for investment	$	7,272		$	6,915

Third-party portfolio servicing largely relates to finance receivable portfolios of resort developers and loan portfolio servicing for third-party financial institutions.

Nonrecourse participations consist of undivided interests in loans originated by Textron Financial, primarily in Resort Finance, Golf Mortgage Finance and Asset-Based Lending, which are sold to independent investors.

Finance receivables held for investment atinclude ~~both March 31,~~approximately ~~2009~~$0.6 billion and ~~January 3, 2009 include approximately~~ $1.1 billion of finance receivables that have been legally sold to special purpose entities (“SPE’s”) and are consolidated subsidiaries of Textron Financial as of June 30, 2009 and January 3, 2009, respectively. The assets of the SPE’s are pledged as collateral for $~~675~~484 million and $853 million of debt as of ~~March~~ June 3130, 2009 and January 3, 2009, respectively, which have been reflected as securitized on-balance sheet debt. Finance receivables held for investment also include approximately $4918 million and $102 million of finance receivables that were unfunded at ~~March~~June 3130, 2009 and January 3, 2009, respectively, primarily as a result of holdback arrangements and payables to manufacturers for inventory financed by dealers. The corresponding liability is included in Accrued interest and other liabilities on Textron Financial’s Consolidated Balance Sheets.


Note 6.	Finance Receivables Held for Investment

Portfolio Maturities

Portfolio maturities of finance receivables held for investment outstanding at June 30, 2009 were as follows:


	Less Than			1-2		2-3			3-4			4-5			More Than
	1 Year			Years		Years			Years			Years			5 Years		Total
	(In millions)

Installment contracts	$	411		$	327	$	363		$	363		$	329		$	829	$	2,622
Revolving loans		264			405		376			196			4			22		1,267
Golf course and resort mortgages		132			268		221			175			108			242		1,146
Distribution finance receivables		680			174		52			49			38			3		996
Finance leases		141			128		112			55			14			110		560
Leveraged leases		(3	)		—		(3	)		(10	)		(2	)		376		358

Total finance receivables held for investment	$	1,625		$	1,302	$	1,121		$	828		$	491		$	1,582	$	6,949

Finance receivables often are repaid or refinanced prior to maturity, and in some instances payment may be delayed or extended beyond the scheduled maturity. Accordingly, the above tabulations should not be regarded as a forecast of future cash collections. Finance receivable receipts related to distribution finance receivables and revolving loans are based on historical cash flow experience. Finance receivable receipts related to leases and term loans are based on contractual cash flows.

In connection with our fourth quarter 2008 plan to exit portions of the commercial finance business, we classified certain finance receivables as held for sale. Following an effort to market the portfolios held for sale and the progress made in liquidating our portfolios, we believe that we will be able to maximize the economic value of a portion of the finance receivables held for sale through orderly liquidation rather than selling the portfolios. Accordingly, since we now intend to hold a portion of these finance receivables for the foreseeable future, we have reclassified $654 million and $65 million, net of valuation allowances, from the held for sale classification to held for investment during the first and second quarter of 2009, respectively. The remaining balance of these reclassified finance receivables was $697 million, net of a $144 million valuation allowance at June 30, 2009. The valuation allowance is excluded from the portfolio maturities table above.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Note 6. Finance Receivables Held for Investment~~ Loan Impairment

Textron Financial periodically evaluates finance receivables, ~~Portfolio~~excluding homogeneous loan portfolios and finance leases, for ~~Maturities~~impairment. A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. In addition, the Company identifies loans that are considered impaired due to the significant modification of the original loan terms to reflect deferred principal payments generally at market interest rates, but which continue to accrue finance charges since full collection of principal and interest is not doubtful. Finance receivables classified as held for sale of $613 million and $1.7 billion at June 30, 2009 and January 3, 2009 are reflected at fair value, and are excluded from the loan impairment disclosures below.

Portfolio maturities of finance receivables held for investment outstanding at March 31, 2009, were as follows:


	June 30,		January 3,
	2009		2009
	(In millions)

Impaired nonaccrual finance receivables	$	629	$	234
Impaired accrual finance receivables		96		19

Total impaired finance receivables	$	725	$	253

Impaired nonaccrual finance receivables with identified reserve requirements	$	585	$	182
Allowance for losses on impaired nonaccrual finance receivables	$	134	$	43

	Less Than		1-2		2-3		3-4			4-5			More Than
	1 Year		Years		Years		Years			Years			5 Years		Total
	(In millions)
Installment contracts	$	410	$	337	$	346	$	359		$	338		$	923	$	2,713
Revolving loans		345		466		347		189			4			26		1,377
Distribution finance receivables		783		266		70		51			70			—		1,240
Golf course and resort mortgages		103		218		274		178			105			255		1,133
Finance leases		146		133		113		60			17			110		579
Leveraged leases		15		1		8		(9	)		(6	)		378		387
Total finance receivables held for investment	$	1,802	$	1,421	$	1,158	$	828		$	528		$	1,692	$	7,429

Nonaccrual finance receivables include impaired nonaccrual finance receivables and accounts in homogeneous portfolios that are contractually delinquent by more than three months. The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers within Resort Finance segment and to a significant increase in delinquent accounts, combined with weakening aircraft values in the Captive Finance segment.


	June 30,		January 3,
	2009		2009
	(In millions)

Impaired nonaccrual finance receivables	$	629	$	234
Nonaccrual homogeneous finance receivables		54		43

Total nonaccrual finance receivables	$	683	$	277

InThe ~~connection~~average ~~with~~recorded ~~our~~investment ~~fourth~~in ~~quarter~~impaired ~~2008~~nonaccrual ~~plan to exit portions of the commercial~~ finance ~~business, we classified certain~~ ~~finance~~ receivables asduring ~~held~~the ~~for~~first ~~sale.~~six ~~Following~~months anof ~~effort~~2009 towas ~~market~~$417 million ~~the~~compared ~~portfolios~~to ~~held~~$108 million ~~for sale~~ in the ~~first quarter of 2009~~ ~~and~~corresponding ~~the~~period ~~progress made~~ in ~~liquidating~~2008. ~~our~~The ~~portfolios,~~average werecorded ~~decided that~~investment ~~we will be able to maximize the economic value of a portion~~in ofimpaired ~~the~~accrual finance receivables ~~held~~amounted ~~for sale through orderly liquidation rather than selling the portfolios. Accordingly, since we now intend~~ to ~~hold a portion of these finance~~ ~~receivables for the foreseeable future, we have reclassified~~ $~~654~~62 million, net of a $157 million valuation allowance, from the held for sale classification to held for investment. This valuation allowance is excluded from the portfolio maturities table above. There was no significant change in the ~~fair~~first ~~value~~six months of ~~these~~2009 ~~reclassified~~compared ~~finance~~to ~~receivables or the remaining~~ $~~887~~28 million ofin ~~finance receivables~~the ~~that~~corresponding ~~continue~~period toin ~~be classified as held for sale at March 31, 2009~~2008.

Nonaccrual finance receivables resulted in Textron Financial’s finance charges being reduced by $20 million and $6 million in the first six months of 2009 and 2008, respectively. No finance charges were recognized using the cash basis method.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Leveraged Leases~~ Note 7. Other Assets

The table below provides a summary of the Company’s net investment in leveraged leases:


	June 30,		January 3,
	2009		2009
	(In millions)

Operating assets received in satisfaction of troubled finance receivables	$	192	$	84
Retained interests in securitizations		119		200
Investments in other marketable securities		80		95
Derivative financial instruments		77		133
Repossessed assets and properties		75		70
Other long-term investments		25		30
Fixed assets — net		26		24
Other		35		63

Total other assets	$	629	$	699

	March 31,			January 3,
	2009			2009
	(In millions)
Rental receivable	$	1,059		$	1,252
Nonrecourse debt		(623	)		(759	)
Estimated residual values of leased assets		194			229
		630			722
Less unearned income		(243	)		(263	)
Investment in leveraged leases		387			459
Deferred income taxes		(277	)		(350	)
Net investment in leveraged leases	$	110		$	109

Interest-only securities within retained interests in securitizations were $3 million and $12 million at June 30, 2009 and January 3, 2009, respectively.

Investments in other marketable securities represent investments ~~Loan~~in notes receivable issued by timeshare securitization trusts. ~~Impairment~~We have classified these investments as held to maturity as management has the intent and ability to hold them until maturity. At June 30, 2009, unrealized losses on these investments were $20 million. These investments have been in a continuous, unrealized loss position for greater than twelve months. These unrealized losses are the result of market yield expectations and are considered temporary due to the continued performance of the underlying collateral of the timeshare securitization trusts.

~~Textron~~Repossessed ~~Financial~~assets ~~periodically evaluates finance receivables, excluding homogeneous loan portfolios~~ and ~~finance~~properties ~~leases,~~are ~~for impairment.~~assets Awe ~~loan~~intend isto ~~considered impaired when it is probable~~sell ~~that~~in ~~the~~a ~~Company~~relatively ~~will~~short beperiod ~~unable~~of totime ~~collect~~and ~~all~~are ~~amounts~~initially ~~due~~recorded ~~according~~at to the ~~contractual~~lower ~~terms~~ of ~~the~~net ~~loan~~realizable ~~agreement.~~value ~~In addition,~~or the ~~Company~~previous ~~identifies loans that are considered~~carrying ~~impaired~~value ~~due to the significant modification~~ of the ~~original loan~~related ~~terms to reflect deferred principal payments generally at market interest rates, but which continue to accrue~~ finance ~~charges~~ ~~since full collection of principal and interest is not doubtful~~receivable. ~~Finance~~Subsequent ~~receivables~~declines ~~classified as held for sale of~~in ~~$887 million and $1.7 billion at March 31, 2009 and January 3, 2009 are reflected at~~ fair value, ~~and~~ are ~~excluded~~ ~~from~~recorded ~~the~~in ~~loan~~Portfolio ~~impairment~~(losses) ~~disclosures below~~gains.

	March 31,		January 3,
	2009		2009
	(In millions)
Impaired nonaccrual finance receivables	$	388	$	234
Impaired accrual finance receivables		91		19
Total impaired finance receivables	$	479	$	253
Impaired nonaccrual finance receivables with identified reserve requirements	$	278	$	182
Allowance for losses on impaired nonaccrual finance receivables	$	52	$	43

Operating assets received in satisfaction of troubled finance receivables are assets we intend to operate for a substantial period of time and/or make substantial improvements to prior to sale. As of June 30, 2009 they primarily represent the assets of operating golf courses that have been repossessed and investments in real estate associated with matured leveraged leases. These assets are initially recorded at the lower of net realizable value or the previous carrying value of the related finance receivable. The assets are measured for impairment on an ongoing basis by comparing the estimated future undiscounted cash flows to the current carrying value. If the sum of the undiscounted cash flows is estimated to be less than the carrying value, the Company records a charge to Portfolio (losses) gains for the shortfall between estimated fair value and the carrying amount. The cash flows related to these assets, net of investment made for capital improvements, are recorded in Selling and administrative expenses.

~~Nonaccrual~~To ~~finance~~conform ~~receivables~~with ~~include~~current ~~impaired~~presentation, ~~nonaccrual finance~~$66 million ~~receivables~~of ~~and accounts in homogeneous portfolios that~~assets ~~are~~previously ~~contractually~~classified ~~delinquent~~as byOther ~~more~~long-term ~~than~~investments ~~three months. The~~and ~~increase~~$18 million inof ~~nonaccrual~~assets ~~finance~~previously ~~receivables~~classified isas ~~primarily~~Repossessed ~~attributable~~assets toand ~~several~~properties ~~hotel~~are ~~and~~now ~~land~~classified ~~development~~as ~~accounts~~Operating assets ~~within~~received ~~Resort~~in ~~Finance~~satisfaction ~~segment~~of ~~and~~troubled tofinance areceivables ~~significant~~for ~~increase in~~the ~~delinquent~~period ~~accounts~~ended January 3, ~~combined with weakening collateral values in the Aviation Finance segment~~2009.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	March 31,		January 3,
	2009		2009
	(In millions)
Impaired nonaccrual finance receivables	$	388	$	234
Nonaccrual homogeneous finance receivables		56		43
Total nonaccrual finance receivables	$	444	$	277


Note 8.	Debt and Credit Facilities

The average recorded investment in impaired nonaccrual finance receivables during the first quarter of 2009 was $311 million compared to $88 million in the corresponding period in 2008. The average recorded investment in impaired accrual finance receivables amounted to $45 million in the first quarter of 2009 compared to $12 million in the corresponding period in 2008.


	June 30,		January 3,
	2009		2009
	(In millions)

Short-term debt:
Commercial paper	$	—	$	743
Other short-term debt		9		25

Total short-term debt		9		768
Line of credit facility:
Due 2012 (0.99%)		1,740		—
Long-term debt:
Fixed-rate notes
Due 2009 (weighted-average rates of 5.83% and 5.62%, respectively)		568		698
Due 2010 (weighted-average rates of 4.82% and 4.82%, respectively)		833		1,018
Due 2011 (weighted-average rates of 5.03% and 5.04%, respectively)		377		452
Due 2012 (weighted-average rates of 4.43% and 4.43%, respectively)		52		52
Due 2013 (weighted-average rates of 5.19% and 5.19%, respectively)		478		478
Due 2014 and thereafter (weighted-average rates of 5.79% and 5.05%, respectively)		164		152

Total fixed-rate notes		2,472		2,850
Variable-rate notes
Due 2009 (weighted-average rates of 0.92% and 2.78%, respectively)		383		836
Due 2010 (weighted-average rates of 1.21% and 3.09%, respectively)		1,262		1,297
Due 2011 (weighted-average rates of 1.31% and 3.40%, respectively)		239		275
Due 2013 (weighted-average rates of 1.56% and 3.07%, respectively)		100		100

Total variable-rate notes		1,984		2,508
Securitized on-balance sheet debt:
Amortization beginning 2009 (weighted-average rates of 1.56% and 3.90%, respectively)		484		853
Subordinated debt:
Due 2017 and thereafter (6.00%)		300		300
Unamortized premium (discount)		3		(3	)
Fair value adjustments		65		112

Total long-term, securitized on-balance sheet and subordinated debt		5,308		6,620

Total debt	$	7,057	$	7,388

~~Nonaccrual~~The ~~finance~~Company ~~receivables~~repurchased ~~resulted~~$393 million inof ~~Textron Financial’s~~our ~~finance~~medium ~~charges being reduced by~~term ~~$8 million~~notes ~~and~~prior ~~$1 million~~to inmaturity during the first ~~quarters~~six ofmonths ended ~~2009 and 2008~~June 30, ~~respectively~~2009. NoThese ~~finance~~repurchases ~~charges~~resulted ~~were~~in ~~recognized~~gains of ~~using~~$39 million for the ~~cash~~six ~~basis~~months ~~method~~ended June 30, 2009.

Textron Financial has a performance guarantee from Textron for leases with the U.S. and Canadian subsidiaries of Collins & Aikman Corporation (“C&A”). In 2005, C&A filed for bankruptcy protection and the lease terms expired. The outstanding balance on these leases totaled $11 million at both March 31, 2009 and January 3, 2009. We have not classified these leases as nonaccrual due to the performance guarantee from Textron.

Note 7. Other Assets

	March 31,		January 3,
	2009		2009
	(In millions)
Retained interests in securitizations	$	191	$	200
Operating assets received in satisfaction of troubled finance receivables		167		84
Repossessed assets and properties		94		70
Investments in other marketable securities		87		95
Other long-term investments		27		30
Fixed assets — net		26		24
Other		156		196
Total other assets	$	748	$	699

Interest-only securities within retained interests in securitizations were $3 million and $12 million at March 31, 2009 and January 3, 2009, respectively.

Investments in other marketable securities represent investments in notes receivable issued by timeshare securitization trusts. We have classified these investments as held to maturity as management has the intent and ability to hold them until maturity. No unrealized losses on these investments have been in a continuous, unrealized loss position for greater than twelve months as of March 31, 2009. Unrealized losses of $21 million are considered temporary due to the continued performance of the underlying collateral of the timeshare securitization trusts.

Repossessed assets and properties are assets we intend to sell in a relatively short period of time and are initially recorded at the lower of net realizable value or the previous carrying value of the related finance receivable. Subsequent declines in fair value are recorded in the Other component of Other income.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Operating~~Note ~~assets received in satisfaction of troubled finance receivables are assets we intend to operate for a substantial period of time and/or make substantial improvements to prior to sale~~9. AsComprehensive of(Loss) March 31, 2009 they primarily represent the assets of operating golf courses that have been repossessed and investments in real estate associated with matured leveraged leases. These assets are initially recorded at the lower of net realizable value or the previous carrying value of the related finance receivable. The assets are measured for impairment on an ongoing basis by comparing the estimated future undiscounted cash flows to the current carrying value. If the sum of the undiscounted cash flows is estimated to be less than the carrying value, the Company records a charge to Other income for the shortfall between estimated fair value and the carrying amount. The cash flows related to these assets, net of investment made for capital improvements, are recorded in Selling and administrative expenses. Income

To conform with current presentation, $66 million of assets previously classified as Other long-term investments and $18 million of assets previously classified as Repossessed assets and properties are now classified as Operating assets received in satisfaction of troubled finance receivables.

Note 8. Comprehensive (Loss) Income

Comprehensive (loss) income is summarized below:

	Three Months Ended						Six Months Ended
	March 31,			March 31,
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)
Net (loss) income	$	(5366	)	$	314		$	(119	)	$	35
Foreign currency translation, net of income taxes		2			(16	)
Net deferred loss on retained interests, net of income tax benefit of $3.6 million, $0.7 million and $4.7 million, respectively		(7	)		(1	)		(9	)		—
Net deferred gain on hedge contracts, net of income taxes of $0.4 million in 2008		—			1
Foreign currency translation, net of income taxes		1			5			3			(11	)
Net deferred (loss) gain on interest-only securities, net of income tax benefit of $1.2 million and income taxes of $0.4 million, respectively		(2	)		1
Net deferred loss on hedge contracts, net of income tax benefit of $0.3 million		—			(1	)		—			—
Comprehensive (loss) income	$	(5372	)	$	177		$	(125	)	$	24

Note 910. Fair Value of Financial Instruments

InWe measure fair value at the ~~first~~price ~~quarter~~that ofwould ~~2009,~~be wereceived ~~adopted~~to sell ~~FASB~~an ~~Statement~~asset ofor paid to transfer a liability in an orderly ~~Financial~~transaction ~~Accounting~~between ~~Standards~~market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability (the “~~SFAS~~inputs”) Nointo a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level ~~157~~1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to ~~“Fair~~develop ~~Value~~their ~~Measurements~~own assumptions. Observable inputs that do not meet the criteria of Level 1,” ~~for~~and ~~our~~include ~~nonfinancial~~quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, ~~recognized~~are orcategorized ~~disclosed~~as atLevel 2. ~~fair~~Level 3 inputs are ~~value~~those that reflect our estimates about the assumptions market participants would use in pricing the ~~financial~~asset ~~statements~~or liability, based on athe ~~recurring~~best ~~basis.~~information ~~This~~available in the circumstances. ~~adoption~~Valuation ~~did~~techniques ~~not~~for ~~have~~assets aand ~~material~~liabilities ~~impact~~measured onusing Level 3 ~~our~~inputs ~~financial~~may include methodologies such as the market ~~position~~approach, the income approach or ~~results~~the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of ~~operations~~current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

~~In accordance with the provisions of SFAS No. 157, we~~ ~~measure fair value at the price that would be received to sell~~Assets anRecorded ~~asset or paid to transfer a liability in an orderly transaction between market participants~~ at ~~the~~Fair ~~measurement~~Value ~~date. The~~on ~~Statement prioritizes the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into~~ a ~~three-tier~~Recurring ~~fair value hierarchy. This~~Basis fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections,

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset:


	June 30, 2009
	Level 2		Level 3
	(In millions)

Derivative financial instruments, net	$	60	$	—
Interest-only securities		—		3

Total assets	$	60	$	3

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset.

	March 31, 2009
			Significant
	Significant Other		Unobservable
	Observable Inputs		Inputs
	(Level 2)		(Level 3)
	(In millions)
Derivative financial instruments, net	$	84	$	—
Interest-only securities		—		3
Total assets	$	84	$	3

Changes in Fair Value for Unobservable Input

The table below presents the change in fair value measurements that used significant unobservable inputs (Level 3) during the three and six month periods ended ~~March~~ June 3130, 2009 and ~~March~~June 3130, 2008:

	March 31,			March 31,
	Three Months Ended						Six Months Ended
	2009			2008
	June 30,			June 30,			June 30,			June 30,
	(In millions)
	2009			2008			2009			2008
Interest-only securities
	(In millions)
Balance, beginning of period	$	12		$	43
Interest-only securities
Net gains for the period:
Balance, beginning of period	$	3		$	52		$	12		$	43
Increase due to securitization gains on sale of finance receivables		—			21
Net gains for the period:
Change in value recognized in Other income		—			1
Increase due to securitization gains on sale of finance receivables		—			21			—			42
Change in value recognized in Other comprehensive income		(3	)		2
Change in value recognized in Other income		—			—			—			1
Impairments		(6	)		—
Change in value recognized in Other comprehensive income		2			(2	)		(1	)		—
Collections		—			(15	)
Impairments recognized in earnings		(2	)		—			(8	)		—
Balance, end of period	$	3		$	52
Collections		—			(18	)		—			(33	)
Balance, end of period	$	3		$	53		$	3		$	53

Assets Recorded at Fair Value on a Nonrecurring Basis

The table below presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation of each asset.:


	June 30, 2009
	(Level 3)
	(In millions)

Finance receivables held for sale	$	613
Impaired loans		451
Retained interests in securitizations, excluding interest-only securities		110
Operating assets received in satisfaction of troubled finance receivables		41
Repossessed assets and properties		34

Total assets	$	1,249

Finance Receivables Held for Sale

Finance receivables held for sale are recorded at the lower of cost or fair value. The decrease in the fair value of the finance receivables held for sale was $11 million and $12 million during the three and six months ended June 30, 2009, respectively. There was no change to the methodology used to determine fair value for these receivables during 2009. See Note 6. Finance Receivables Held for Investment regarding the change in classification of certain finance receivables from held for sale to held for investment during the first six months of 2009.

Impaired Loans

Fair value measurements recorded during the quarter and six months ended June 30, 2009 on impaired loans resulted in an $85 million and $117 million charge, respectively, to Provision for losses in the Consolidated Statement of Operations, and were primarily related to initial fair value adjustments.

Retained Interests in Securitizations, excluding Interest-only securities

Retained interests in securitizations represent the Company’s subordinated interest in finance receivables sold to qualified special purpose trusts. The portion of our retained interests related to interest-only securities is recorded at fair

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	March 31, 2009
	Significant
	Unobservable
	Inputs
	(Level 3)
	(In millions)
Finance receivables held for sale	$	887
Impaired loans		226
Repossessed assets and properties		6
Operating assets received in satisfaction of troubled finance receivables		6
Total assets	$	1,125

value on a recurring basis, while the remaining retained interests are recorded at fair value on a nonrecurring basis. These retained interests, excluding interest-only securities are classified as held to maturity and recorded at the allocated carrying value, which is determined based on the relative fair values of the finance receivables sold and the interests retained. We estimate fair value upon the initial recognition of the retained interest based on the present value of expected future cash flows using our best estimates of key assumptions — credit losses, prepayment speeds, forward interest rate yield curves and discount rates commensurate with the risks involved. These inputs are classified as Level 3 since they reflect our own judgment regarding the assumptions market participants would use in pricing these assets based on the best information available in the circumstances as there is no active market for these assets. We review the fair values of the retained interests using a discounted cash flow model and updated assumptions, and compare such amounts with the amortized cost basis. If a decline in the fair value is determined to be other-than-temporary, we record a corresponding charge to income for the credit component and to Other comprehensive income for other components of the difference between fair value and the amortized cost basis. The credit component is determined based on the difference between the present value of the current projected cash flows and the projected cash flows at the time of the last recognized impairment, at a discount rate equivalent to the rate used to accrete the retained interests. The remaining difference between fair value and the amortized cost basis is attributable to market discount rates. During the first half of 2009, we recorded an $18 million impairment charge to Securitization (losses) gains and a $13 million charge to Other comprehensive income on the retained interests, excluding interest-only securities associated with the Distribution Finance revolving securitization.

~~Finance~~Repossessed ~~Receivables~~Assets ~~Held~~and ~~for~~Properties/Operating ~~Sale~~Assets Received in Satisfaction of Troubled Finance Receivables

~~Finance~~Fair ~~receivables~~value ~~held~~measurements ~~for sale are~~ recorded atduring the ~~lower~~quarter ofand six ~~cost~~months orended ~~fair~~June 30, ~~value.~~2009 ~~There~~on ~~was~~these noassets ~~significant~~resulted ~~change~~ in ~~the fair~~an ~~value~~$18 million ~~of the finance receivables held for sale~~ and no$22 million ~~changes~~charge, torespectively, ~~the~~recorded ~~methodology used~~ to ~~determine~~Portfolio ~~fair~~(losses) ~~value~~gains ~~for~~in ~~these receivables during~~ the ~~first quarter of 2009. See Note 6~~Consolidated ~~Finance~~Statement ~~Receivables Held for Investment regarding the change in classification~~ of ~~certain finance receivables from held for sale to held for investment during the first quarter of 2009~~Operations.

~~Impaired~~Assets ~~Loans~~and Liabilities Not Recorded at Fair Value

~~Fair~~The ~~value~~carrying ~~measurements~~values ~~recorded~~and ~~during~~estimated ~~the~~fair ~~quarter~~values ~~ended March 31,~~of ~~2009 on impaired loans resulted in a~~Textron ~~$32 million~~Financial’s ~~charge~~financial toinstruments ~~Provision~~which ~~for~~are ~~losses~~not inrecorded ~~the~~at ~~Consolidated Statement of Operations, and were primarily related to initial~~ fair value ~~adjustments~~are ~~for~~as ~~loans impaired during the~~follows: ~~quarter.~~

Repossessed Assets and Properties / Operating Assets Received in Satisfaction of Troubled Finance Receivables


	June 30, 2009				January 3, 2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(In millions)

Assets:
Installment contracts	$	2,515	$	2,165	$	2,748	$	2,408
Revolving loans		1,111		796		1,170		986
Golf course and resort mortgages		1,097		898		1,150		931
Distribution finance receivables		892		888		597		503
Investment in other marketable securities		80		60		95		78
Retained interests in securitizations, excluding interest-only securities		6		6		188		178

	$	5,701	$	4,813	$	5,948	$	5,084


Liabilities:
Fixed-rate debt	$	2,540	$	2,213	$	2,959	$	2,518
Variable-rate debt		1,984		1,840		2,508		2,292
Bank line of credit		1,740		1,434		—		—
Securitized on-balance sheet debt		484		462		853		824
Subordinated debt		300		129		300		105
Short-term debt		9		9		768		768
Amounts due to Textron Inc.		28		23		161		156

	$	7,085	$	6,110	$	7,549	$	6,663

The fair value of repossessed assets and properties and operating assets received in satisfaction of troubled finance receivables is determined based on the use of appraisals, industry pricing guides, input from market participants, the Company’s recent experience selling similar assets or internally developed discounted cash flow models. For repossessed assets and properties, which are considered assets held for sale, if the carrying amount of the asset is higher than the estimated fair value, the Company records a corresponding charge to income for the difference. For operating assets received in satisfaction of troubled finance receivables, if the sum of the undiscounted cash flows is estimated to be less than the carrying value, the Company records a charge to income for any shortfall between estimated fair value and the carrying amount. Fair value measurements recorded during the quarter ended March 31, 2009 on these assets resulted in a $4 million charge recorded to Other income in the Consolidated Statement of Operations.

Note 10. Derivative Financial Instruments

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~derivative instruments are included in either Other assets or~~ ~~Accrued interest and other liabilities in the Consolidated~~Finance ~~Balance Sheets.~~Receivables

There are no active, quoted market prices for these finance receivables. The ~~following~~estimate ~~table~~of ~~summarizes~~fair value was determined based on the ~~Company’s~~use ~~derivative~~of discounted cash flow models which incorporate ~~activities~~estimates ~~relating~~of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to ~~qualifying~~the ~~hedges~~expectations of current ~~interest~~market ~~rate~~participants ~~risk~~are compared to observable market inputs, including bids from prospective purchasers of similar loans and ~~foreign~~certain ~~currency~~bond ~~exposure~~market asindices for loans of ~~March~~similar perceived credit quality. Although we utilize and prioritize these market observable inputs in our discounted cash flow models, these inputs are rarely derived from markets with directly comparable loan structures, industries and collateral types. Therefore, all valuations of finance receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants. The carrying amounts of Textron Financial’s finance leases, leveraged leases and operating leases ($560 31million, $358 million and $235 million, respectively, at June 30, 2009 and $608 million, $459 million and $247 million, respectively, at January 3, 2009), are specifically excluded from this disclosure under generally accepted accounting principles. As a result, a significant portion of the assets that are included in the Company’s asset and liability management strategy are excluded from this fair value disclosure.

	Notional Amount				Fair Value Amount
					Assets				Liabilities
	March 31,		January 3,		March 31,		January 3,		March 31,			January 3,
	2009		2009		2009		2009		2009			2009
	(In millions)
Fair Value Hedges
Interest Rate Exchange Agreements
Fixed-rate debt	$	1,897	$	2,055	$	97	$	112	$	—		$	—
Fixed-rate receivable		379		32		—		—		(19	)		(7	)
Net Investment Hedges
Foreign Currency Forward Exchange Agreements
Foreign-dollar functional currency subsidiary equity		80		139		—		—		(3	)		—
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreements
Foreign-dollar denominated variable-rate debt		140		140		9		21		—			—
Foreign-dollar denominated variable-rate receivable		5		5		—		—		(1	)		(1	)
	$	2,501	$	2,371	$	106	$	133	$	(23	)	$	(8	)

Investments in Other Marketable Securities

AsOther amarketable ~~result~~securities ofrepresent ~~our~~investments ~~exit~~in ~~plan~~notes receivable ~~announced~~issued inby ~~December~~securitization ~~2008,~~trusts wewhich nopurchase ~~longer~~timeshare ~~view~~notes ~~our~~receivable ~~investments~~from intimeshare ~~our~~developers. ~~Canadian and United Kingdom~~These ~~subsidiaries~~notes are classified as ~~permanent.~~held ~~Therefore,~~to wematurity ~~began~~and ~~hedging~~are ~~our~~held ~~net~~at cost. ~~investments~~The inestimate ~~these subsidiaries during the fourth quarter~~ of ~~2008~~ tofair ~~prevent~~value ~~any~~was ~~reduction~~based inon ~~the~~observable ~~U.S. dollar~~market ~~equivalent~~inputs ~~cash~~for ~~flows~~similar wesecuritization ~~will~~interests ~~receive~~in ~~upon~~markets ~~liquidation~~that ~~of these~~are ~~subsidiaries~~currently inactive.

Debt

At June 30, 2009 and January 3, 2009, 63% and 82%, respectively, of the fair value of term debt was determined based on observable market transactions. The remaining 37% and 18%, respectively, was determined based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations. The fair values of short-term borrowings are assumed to approximate their carrying values.


Note 11.	Derivative Financial Instruments

Textron Financial utilizes derivative instruments to mitigate its exposure to fluctuations in interest rates and foreign currencies. These instruments include interest rate exchange agreements, foreign currency exchange agreements and interest rate cap and floor agreements. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company recorded a $5 million gain in earnings during the first half of 2009 as a result of the ineffectiveness of an interest rate exchange agreement. The Company did not experience a significant net gain or loss in earnings as a result of the ineffectiveness, or the exclusion of any component from its assessment of hedge effectiveness, of its derivative financial instruments in the first six months of 2008. The fair values of derivative instruments are included in either Other assets or Accrued interest and other liabilities in the Consolidated Balance Sheets.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes the Company’s ~~derivatives~~derivative activities relating to qualifying hedges of interest rate risk and foreign currency exposure~~, which~~ ~~have not been designated in hedge relationships~~ as of ~~March~~ June 3130, 2009 and January 3, 2009.

	Notional Amount				Fair Value Amount
					Assets				Liabilities
	March 31,		January 3,		March 31,		January 3,		March 31,			January 3,
	June 30,		January 3,		June 30,		January 3,		June 30,			January 3,
	2009		2009		2009		2009		2009			2009
	(In millions)				~~(In millions)~~
Foreign currency forward exchange agreements	$	654	$	536	$	1	$	—	$	—		$	—
Fair Value Hedges
Interest rate exchange agreements		—		336		—		—		—			(13	)
Interest Rate Exchange Agreements
	$	654	$	872	$	1	$	—	$	—		$	(13	)
Fixed-rate debt	$	1,682	$	2,055	$	65	$	112	$	—		$	—
Fixed-rate receivable		352		32		—		—		(12	)		(7	)
Net Investment Hedges
Foreign Currency Forward Exchange Agreements
Foreign-dollar functional currency subsidiary equity		71		139		3		—		—			—
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreements
Foreign-dollar denominated variable-rate debt		140		140		12		21		—			—
Foreign-dollar denominated variable-rate receivable		5		5		—		—		(1	)		(1	)
	$	2,250	$	2,371	$	80	$	133	$	(13	)	$	(8	)

As a result of our exit plan announced in December 2008, we no longer view our investments in our Canadian and United Kingdom subsidiaries as permanent. Therefore, we began hedging our net investments in these subsidiaries during the fourth quarter of 2008 to prevent any reduction in the U.S. dollar equivalent cash flows we will receive upon liquidation of these subsidiaries.

The following table summarizes the Company’s derivatives relating to interest rate risk and foreign currency exposure, which have not been designated in hedge relationships as of June 30, 2009 and January 3, 2009:


	Notional Amount				Fair Value Amount
					Assets				Liabilities
	June 30,		January 3,		June 30,		January 3,		June 30,			January 3,
	2009		2009		2009		2009		2009			2009
	(In millions)

Foreign currency forward exchange agreements	$	572	$	536	$	—	$	—	$	(7	)	$	—
Interest rate exchange agreements		—		336		—		—		—			(13	)

	$	572	$	872	$	—	$	—	$	(7	)	$	(13	)

Foreign currency forward exchange agreements are utilized by the Company to convert foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. Gains and losses related to these instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities.

In December 2008, the Company amended the terms of its Aviation Finance securitization resulting in the consolidation of the special purpose entity which holds the finance receivables previously sold. The special purpose entity also held interest rate exchange agreements which had been issued upon the purchase of fixed rate finance receivables from the Company. These interest rate exchange agreements did not qualify as highly effective hedges of the fixed rate finance receivables when the special purpose entity was consolidated due to the difference between actual and expected receivable amortization since the inception of these contracts. These interest rate exchange agreements have subsequently been amended and designated as effective hedges of the finance receivables.

Textron Financial also enters into back-to-back interest rate exchange agreements and interest rate caps in relation to asset-backed securitizations, which are not included in the preceding table. Since these instruments are utilized by Textron Financial to facilitate the securitization transaction, rather than mitigate risk, and are designed to have an equal and offsetting impact to the Company, they are not designated in hedging relationships.

The effect of derivative instruments in the Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 is as follows.

		Amount of Gain/(Loss)
		Three Months Ended
		March 31,			March 31,
	Gain/(Loss) Location	2009			2008
		(In millions)
Fair Value Hedges
Interest rate exchange agreements	Interest expense	$	2		$	48
Non-designated Hedges
Interest rate exchange agreements	Other income	$	(1	)	$	—
Foreign currency forward exchange agreements	Selling and administrative expenses	$	—		$	(3	)

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	Amount of Gain/(Loss) in
	Other Comprehensive
	Income Three Months						Gain/(Loss) Amount
	Ended						Three Months Ended
	March 31,		March 31,				March 31,			March 31,
	2009		2008			Gain/(Loss) Location	2009			2008
	(In millions)
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreement
Interest impact	$	1	$	(1	)	Interest expense	$	1		$	—
Foreign exchange impact						Selling and administrative expenses		(12	)		1

~~Note~~ The ~~11.~~effect ~~Receivable~~of ~~Securitizations~~derivative instruments in the Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 is as follows:

As of March 31, 2009, we have one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Company and issues asset-backed notes to investors. These finance receivables typically have short durations, which results in significant collections of previously purchased finance receivables and significant additional purchases of replacement finance receivables from the Company on a monthly basis. Proceeds from securitizations in the table below include amounts received related to the incremental increase in the issuance of asset-backed notes to investors, and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration finance receivables.


		Amount of Gain/(Loss)
		Three Months Ended						Six Months Ended
		June 30,			June 30,			June 30,			June 30,
	Gain/(Loss) Location	2009			2008			2009			2008
		(In millions)

Fair Value Hedges
Interest rate exchange agreements	Interest expense	$	(19	)	$	(37	)	$	(15	)	$	13
Interest rate exchange agreements	Finance charges		8			1			6			(1	)
Non-designated Hedges
Interest rate exchange agreements	Other income	$	—		$	—		$	1		$	—
Foreign currency forward exchange agreements	Selling and administrative expenses		(52	)		—			(52	)		(3	)

~~The~~Note ~~table~~12. ~~below~~Receivable summarizes net pre-tax (impairments) gains recognized and certain cash flows received from and paid to the Distribution Finance revolving securitization trust during the three months ended March 31, 2009 and March 31, 2008, respectively. Securitizations

	2009			2008
	(In millions)
Net pre-tax (impairments) gains	$	(6	)	$	15
Proceeds from securitizations		—			250
Cash flows received on retained interests		—			13
Servicing fees received		8			8

As of June 30, 2009, we have one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Company and issues asset-backed notes to investors. These finance receivables typically have short durations, which result in significant collections of previously purchased finance receivables and significant additional purchases of replacement finance receivables from the Company on a monthly basis. Proceeds from securitizations in the table below include amounts received related to the incremental increase in the issuance of asset-backed notes to investors, and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration finance receivables.

The ~~Company~~table ~~had~~below ~~$182 million~~summarizes ~~and~~net ~~$191 million~~pre-tax ~~of seller~~(losses) ~~certificates~~gains, ~~associated with $1.7 billion and~~including ~~$2.2 billion~~impairments ofrecognized ~~finance~~and ~~receivables~~certain incash ~~the~~flows ~~Distribution Finance~~received ~~securitization~~from ~~trust as of March 31, 2009~~ and ~~January 3,~~paid ~~2009, respectively. In addition~~ to the ~~$1.7 billion~~ ~~finance~~Distribution ~~receivables,~~Finance ~~the~~revolving ~~trust~~securitization ~~held~~trust ~~$502 million of cash as of March 31, 2009. This cash was accumulated by the trust~~ during the ~~first~~three ~~quarter~~and ofsix ~~2009, from~~months ~~collections~~ended ~~of finance receivables~~June 30, ~~to pay off $600 million of maturing asset-backed notes and $42 million of our retained interests in April~~ 2009. ~~We review the fair values of the retained interests quarterly using updated assumptions~~ and ~~compare such amounts with the carrying~~ ~~value. When the carrying value exceeds the fair value~~June 30, ~~we determine whether the decline in fair value is other than temporary. If the value of the decline is other than temporary~~2008, ~~the~~ ~~retained interests are written down to fair value with a corresponding charge to income~~respectively. ~~When a change in fair value of~~ interest-only securities is deemed temporary, we record a corresponding credit or charge to Other comprehensive income for any unrealized gains or losses. During the first quarter of 2009, we recorded a $6 million impairment charge to income and a $2 million charge to Other comprehensive income on the interest-only securities associated with the Distribution Finance revolving securitization. There was no impairment charge recorded on the remaining retained


	Three Months Ended					Six Months Ended
	June 30,			June 30,		June 30,			June 30,
	2009			2008		2009			2008
	(In millions)

Net pre-tax (losses) gains, including impairments	$	(20	)	$	15	$	(27	)	$	30
Proceeds from securitizations		—			—		—			250
Cash flows received on retained interests		42			16		42			29
Servicing fees received		7			9		15			17

The Company had $110 million and $191 million of retained interests associated with $1.2 billion and $2.2 billion of finance receivables in the Distribution Finance securitization trust as of June 30, 2009 and January 3, 2009, respectively. In addition to the $1.2 billion of finance receivables, the trust held $112 million of cash as of June 30, 2009. This cash was accumulated by the trust during the second quarter of 2009, from collections of finance receivables, in connection with the maturity of $149 million of the notes in July 2009, including $44 million

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~interests,~~retained ~~which~~seller ~~are~~certificates ~~classified~~owned asby ~~held~~the toCompany. ~~maturity,~~As ~~as the~~of ~~$23~~June ~~million~~30, ~~shortfall~~2009, ~~between~~the ~~fair~~trust ~~value~~had ~~and~~$1.2 billion ~~carrying~~of ~~value~~remaining ~~was~~asset-backed ~~deemed temporary~~notes.

AtIn ~~March 31~~addition to our retained interests, the trust holds $30 million of cash in reserve accounts as of June 30, 2009, which can be used by the ~~key~~trust ~~economic~~to ~~assumptions~~cover ~~used~~credit inlosses. ~~measuring~~During the ~~retained~~first ~~interests~~six ~~related~~months of 2009, $11 million of cash was provided to the ~~Distribution~~trust, beyond the amount which was ~~Finance~~previously ~~revolving~~contractually ~~securitization~~required, ~~and~~to prevent the ~~potential additional~~early ~~losses~~amortization ~~based~~of ona portion of the ~~sensitivity~~trust debt. As a result of ~~these~~the cash ~~assumptions~~reserve ~~are~~accounts, the Company’s maximum loss exposure ~~presented~~related ~~below~~to the trust is $140 million, which represents the sum of the retained interest and the cash reserves.

	Assumptions at			10% Adverse			20% Adverse
	March 31, 2009			Change			Change
	(Dollars in millions)
Expected credit losses (annual rate)		1.89	%	$	(3	)	$	(5	)
Monthly payment rate		12.8	%		(3	)		(5	)
Residual cash flows discount rate		18.5	%		(4	)		(7	)

In March 2009, the FASB issued FASB Staff Position (“FSP”) No. 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments”, which we adopted in the second quarter of 2009. The FSP amends the other-than-temporary impairment criteria associated with marketable debt securities and beneficial interests in securitized financial assets. It requires that an entity evaluate for and record an other-than-temporary impairment when it concludes that it does not intend to sell an impaired security and does not believe it likely that it will be required to sell the security before recovery of the amortized cost basis, regardless of the entity’s positive intent and ability to hold the asset to maturity. Once an entity has determined that an other-than-temporary impairment has occurred, it is required to record the credit loss component of the difference between the security’s amortized cost basis and the estimated fair value in earnings, whereas the remaining difference is to be recognized as a component of Other comprehensive income and amortized over the remaining life of the security.

~~Net~~In ~~charge-offs~~the assecond aquarter ~~percentage~~ of ~~distribution~~2009, ~~finance receivables~~we ~~was~~determined ~~3.85%~~that ~~and~~our ~~1.94%~~retained interests ~~for~~in the ~~three~~Distribution ~~months~~Finance ~~ended~~securitization were ~~March 31,~~other-than-temporarily impaired ~~2009~~ and ~~twelve~~recorded ~~months~~a ~~ended~~total ~~January 3,~~other-than-temporary impairment ~~2009,~~charge ~~respectively~~of $31 million. ~~The~~Including other-than-temporary impairments ~~60+~~recognized ~~days~~in ~~contractual~~the ~~delinquency~~first quarter under previous ~~percentage~~generally ~~for~~accepted ~~distribution~~accounting ~~finance~~principles, ~~receivables~~we ~~was~~have ~~2.71%~~recorded ~~and~~the ~~2.08%~~following atcharges ~~March 31,~~for ~~2009~~the ~~and~~six ~~January~~months ended June 330, 2009~~, respectively~~.

Note 12. Income Taxes


	Six Months Ended
	June 30, 2009
	(In millions)

Total other-than-temporary impairment	$	(39	)
Portion of other-than-temporary impairment recognized in Other comprehensive income, before income taxes		13

Net other-than-temporary impairment recognized in earnings	$	(26	)

AThe ~~reconciliation~~amortized cost basis of our retained interests, subsequent to the ~~federal~~recognition ~~statutory~~of ~~income~~the ~~tax~~net ~~rate~~other-than-temporary toimpairment in earnings, is $123 million at June 30, 2009. The component of the ~~effective~~other-than-temporary impairment ~~income~~recorded ~~tax~~in ~~rate~~earnings is ~~provided~~primarily ~~below:~~due to credit losses and the portion recognized in other comprehensive income is attributable to an increase in market discount rates. Since we have the intent and ability to hold these retained interests to maturity, changes in market discount rates do not affect our ultimate realization of our investment.

	Three Months Ended
	March 31,			March 31,
	2009			2008
Federal statutory income tax rate		(35.0	)%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		—			1.8
Foreign tax rate differential		13.0			(12.7	)
Canadian dollar functional currency		—			0.1
Change in state valuation allowance		(0.9	)		(0.5	)
Tax contingencies		2.1			5.3
Tax credits		(1.0	)		(1.9	)
Change in status of foreign subsidiary		(0.1	)		—
Other, net		(0.4	)		(0.3	)
Effective income tax rate		(22.3	)%		26.8	%

At June 30, 2009, the key economic assumptions used in measuring the retained interests related to the Distribution Finance revolving securitization and the potential additional losses based on the sensitivity of these assumptions are presented below.

For the three months ended March 31, 2009, the difference between the statutory rate and the effective tax rate is primarily attributable to the effects of events related to cross border financing and interest on tax contingencies, the majority of which is associated with leveraged leases, partially offset by tax credits and a reduction in the state valuation allowance.


	Assumptions at			25% Adverse			50% Adverse
	June 30, 2009			Change			Change
	(Dollars in millions)

Expected credit losses (annual rate)		2.85	%	$	(9	)	$	(18	)
Monthly payment rate		12.1	%		(4	)		(7	)
Residual cash flows discount rate		12.9	%		(6	)		(12	)

~~For~~Net ~~the~~charge-offs ~~three~~as ~~months~~a ~~ended~~percentage ~~March 31,~~of ~~2008,~~distribution ~~the difference~~finance ~~between~~receivables ~~the~~were ~~statutory~~3.81% ~~rate~~ and ~~the~~1.94% ~~effective~~for ~~tax~~the ~~rate~~six ismonths ended ~~primarily~~June 30, ~~attributable~~2009 toand ~~benefits~~twelve ~~relating~~months toended aJanuary 3, ~~capital loss~~2009, ~~carryback~~respectively. byThe ~~one~~60+ ofdays ~~the~~contractual ~~Company’s~~delinquency ~~wholly-owned Canadian~~percentage ~~subsidiaries~~for ~~and~~distribution ~~tax~~finance ~~credits,~~receivables ~~partially~~were ~~offset~~5.74% byand ~~state~~2.08% ~~tax~~at ~~expense~~June 30, 2009 and ~~interest~~January 3, ~~on tax contingencies~~2009, ~~the majority of which is associated with leveraged leases~~respectively.

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~During~~Note the third quarter of 2008, the Company received an offer from the Internal Revenue Service (“IRS”) to participate in a settlement initiative related to its challenge of tax deductions taken by the Company related to certain leveraged lease transactions with a total initial investment of approximately $209 million and one finance lease transaction with a current investment balance of $35 million13. ~~Based~~Income on the terms of the settlement initiative and management’s decision to accept the offer to participate, we revised our estimate of this tax contingency. Final resolution of the settlement initiative will also result in the acceleration of cash payments to the IRS. At March 31, 2009, $137 million of federal deferred tax liabilities were recorded on our Consolidated Balance Sheets related to these leases. In addition, $62 million of federal tax liabilities are included in Accrued interest and other liabilities related to these leases at March 31, 2009. The majority of such cash payments are expected to occur over a period of years in connection with the conclusion of IRS examinations of the relevant tax years. Taxes

~~Note~~ A ~~13.~~reconciliation ~~Contingencies~~of the federal statutory income tax rate to the effective income tax rate is provided below:

There are pending or threatened lawsuits and other proceedings against Textron Financial and its subsidiaries. Some of these suits and proceedings seek compensatory, treble or punitive damages in substantial amounts. These suits and proceedings are being defended by, or contested on behalf of, Textron Financial and its subsidiaries. On the basis of information presently available, Textron Financial believes any such liability would not have a material effect on Textron Financial’s financial position or results of operations.


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008

Federal statutory income tax rate		(35.0	)%		35.0	%		(35.0	)%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		(2.4	)		43.8			(1.4	)		11.7
Foreign tax rate differential		(6.6	)		15.2			(0.5	)		(6.1	)
Canadian dollar functional currency		—			0.2			—			0.1
Change in state valuation allowance		0.2			(83.8	)		(0.3	)		(20.1	)
Tax contingencies		1.2			73.8			1.6			21.4
Tax credits		(0.7	)		(6.8	)		(0.8	)		(3.0	)
Change in status of foreign subsidiary		4.5			—			4.3			—
Other, net		0.3			(9.1	)		0.1			(2.4	)

Effective income tax rate		(38.5	)%		68.3	%		(32.0	)%		36.6	%

~~Note~~ The ~~14.~~difference ~~Financial~~between ~~Information~~the ~~about~~statutory ~~Operating~~and ~~Segments~~effective tax rate for the three months ended June 30, 2009 is primarily attributable to a change in management’s assessment of the realizability of a deferred tax asset in one of the Company’s wholly-owned Canadian subsidiaries and the benefit for state taxes, partially offset by an increase in estimate of the taxable amount of a distribution from a Canadian subsidiary and interest on tax contingencies, the majority of which is associated with leveraged leases.

~~During~~The ~~the~~difference ~~fourth~~between ~~quarter~~the ofstatutory ~~2008,~~and ~~Textron~~effective ~~announced~~tax arate ~~plan to~~for ~~exit~~the ~~all~~six ofmonths ~~the~~ended ~~commercial~~June 30, ~~finance~~2009 ~~business~~is ~~of Textron~~primarily ~~Financial,~~attributable ~~other~~to ~~than~~an ~~that~~increase ~~portion~~in estimate of the ~~business~~taxable ~~supporting~~amount of ~~the~~a ~~financing~~distribution offrom ~~customer~~a ~~purchases~~Canadian ofsubsidiary ~~products~~and ~~which~~interest ~~Textron~~on tax ~~manufactures.~~contingencies, ~~Textron~~the ~~Financial~~majority ~~will~~of ~~continue~~which tois ~~originate~~associated ~~new~~with ~~customer~~leveraged ~~relationships~~leases, ~~and~~partially ~~finance~~offset ~~receivables~~by in the ~~Aviation~~benefit for state ~~Finance~~taxes and ~~Golf~~tax ~~Finance segments~~credits.

The ~~Company~~difference ~~continues~~between tothe ~~operate~~statutory inand ~~six~~effective ~~segments~~tax ~~aggregated~~rate for ~~based~~the onthree ~~similar~~and ~~product~~six ~~types~~months orended ~~industries:~~June 30, ~~Asset-Based~~2008 is primarily ~~Lending,~~attributable ~~Aviation~~to ~~Finance,~~a ~~Distribution~~change ~~Finance,~~in ~~Golf~~management’s ~~Finance,~~assessment of the ~~Resort~~amount ~~Finance~~of ~~and~~the ~~Structured~~state ~~Capital.~~deferred Intax ~~addition,~~asset ~~the~~that ~~Company~~is realizable, ~~maintains~~offset aby ~~Corporate~~interest ~~and~~on ~~Other~~tax ~~segment~~contingencies, ~~that~~the ~~includes~~majority ~~other~~of which ~~liquidating~~is ~~portfolios~~associated with leveraged leases, and ~~unallocated~~state ~~Corporate~~tax ~~expenses~~expense.

During the third quarter of 2008, the Company received an offer from the Internal Revenue Service (“IRS”) to participate in a settlement initiative related to its challenge of tax deductions taken by the Company related to certain leveraged lease transactions with a total initial investment of approximately $209 million and one finance lease transaction with a current investment balance of $36 million. Based on the terms of the settlement initiative and management’s decision to accept the offer to participate, we revised our estimate of this tax contingency. Final resolution of the settlement initiative will also result in the acceleration of cash payments to the IRS. At June 30, 2009, $103 million of federal deferred tax liabilities were recorded on our Consolidated Balance Sheets related to these leases. In addition, $95 million of federal tax liabilities are included in Accrued interest and other liabilities related to these leases at June 30, 2009. The majority of such cash payments are expected to occur over a period of years in connection with the conclusion of IRS examinations of the relevant tax years.


Note 14.	Contingencies

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	Three Months Ended
	March 31,			March 31,
	2009			2008
	(In millions)
Revenues:
Aviation Finance	$	42		$	50
Resort Finance		28			35
Golf Finance		23			34
Distribution Finance		20			65
Asset-Based Lending		12			20
Structured Capital		(2	)		9
Corporate and Other		(1	)		1
Total revenues	$	122		$	214
(Loss) income before special charges and income taxes:(1)(2)
Aviation Finance	$	(20	)	$	17
Resort Finance		(14	)		15
Golf Finance		(14	)		9
Distribution Finance		(13	)		12
Asset-Based Lending		5			(12	)
Structured Capital		(5	)		5
Corporate and Other		(5	)		(4	)
(Loss) income before special charges and income taxes	$	(66	)	$	42
Special charges		3			—
(Loss) income before income taxes	$	(69	)	$	42

suits and proceedings are being defended by, or contested on behalf of, Textron Financial and its subsidiaries. On the basis of information presently available, Textron Financial believes any such liability would not have a material effect on Textron Financial’s financial position or results of operations.

	March 31,		January 3,
	2009		2009
	(In millions)
Finance assets:(3)
Aviation Finance	$	2,971	$	3,035
Golf Finance		1,748		1,806
Resort Finance		1,704		1,727
Distribution Finance		1,405		1,389
Structured Capital		559		603
Asset-Based Lending		506		649
Corporate and Other		72		90
Total finance assets	$	8,965	$	9,299


Note 15.	Financial Information about Operating Segments

~~(1)~~ The ~~Interest~~Company ~~expense~~operates isin ~~allocated~~six tosegments ~~each~~aggregated ~~segment~~based inon ~~proportion~~similar product totypes ~~its~~or ~~net~~industries: ~~investment~~Asset-Based inLending, ~~finance~~Captive Finance, ~~assets.~~Distribution ~~Net~~Finance, ~~investment~~Golf inMortgage ~~finance~~Finance, ~~assets~~Resort Finance ~~includes~~and ~~finance~~Structured ~~assets~~Capital. ~~less~~In ~~deferred~~addition, ~~income~~the ~~taxes,~~Company maintains ~~security~~a ~~deposits~~Corporate and ~~other~~Other ~~specifically~~segment ~~identified~~that ~~liabilities.~~includes ~~The~~other liquidating ~~interest~~portfolios ~~allocated~~and ~~matches~~unallocated ~~all~~Corporate ~~variable-rate finance assets with variable-~~expenses.

As described in Note 1. Basis of Presentation, during the second quarter of 2009 the Company made a change to consolidate the management of the portion of the Golf Finance segment that finances customer purchases of E-Z-GO golf cars and Jacobsen turf-care equipment with the Aviation Finance segment to form a new Captive Finance segment. The Company will continue to originate new customer relationships and finance receivables in the Captive Finance segment. The segment information in the table below has been recast to conform with this modification to the Captive Finance and Golf Mortgage Finance segments.


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)

Revenues:
Captive Finance	$	42		$	58		$	95		$	120
Resort Finance		24			31			52			66
Golf Mortgage Finance		10			20			22			42
Asset-Based Lending		8			17			20			37
Structured Capital		(8	)		(9	)		(10	)		—
Distribution Finance		(16	)		60			4			125
Corporate and Other		26			—			25			1

Total revenues	$	86		$	177		$	208		$	391

(Loss) income before special charges, income taxes and noncontrolling interest:(1)(2)
Captive Finance	$	(19	)	$	18		$	(44	)	$	36
Resort Finance		(7	)		15			(21	)		30
Golf Mortgage Finance		(7	)		(8	)		(16	)		—
Asset-Based Lending		4			4			9			(8	)
Structured Capital		(44	)		(11	)		(49	)		(6	)
Distribution Finance		(39	)		(3	)		(52	)		9
Corporate and Other		13			(2	)		8			(6	)

(Loss) income before special charges, income taxes and noncontrolling interest	$	(99	)	$	13		$	(165	)	$	55

Special charges		5			—			8			—

(Loss) income before income taxes and noncontrolling interest	$	(104	)	$	13		$	(173	)	$	55

Item 1. Financial Statements (Continued)

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	rate debt costs and all fixed-rate finance assets with fixed-rate debt costs. Due to our significant difficulty in accessing the capital markets, the interest rate is determined based on a theoretical approach. If this allocation results in greater or less interest expense than was actually incurred by the Company, the remaining balance is included in the Corporate and Other segment’s interest expense. This resulted in the allocation of $11 million of interest expense to the six operating segments in excess of the interest expense actually incurred by the Company.
	June 30,		January 3,
(2)	Due to management’s decision to downsize the commercial finance business of Textron Financial and the resulting variations in personnel levels and job responsibilities, indirect expenses are no longer being allocated to each segment. These indirect expenses of $16 million were aggregated in the Corporate and Other segment in the first quarter of 2009. Prior to 2009, indirect expenses were allocated to each segment based on the use of such resources and were based primarily upon the segment’s proportion of net investment in finance assets, headcount, number of transactions, computer resources and senior management time.
	2009		2009
(3)	Finance assets include: finance receivables; equipment on operating leases, net of accumulated depreciation; repossessed assets and properties; operating assets received in satisfaction of troubled finance receivables; retained interests in securitizations; investment in equipment residuals; acquisition, development and construction arrangements; investments in other marketable securities and other short- and long-term investments (some of which are classified in Other assets on Textron Financial’s Consolidated Balance Sheets).
	(In millions)
Finance assets:(3)
Captive Finance	$	3,462	$	3,668
Resort Finance		1,644		1,727
Golf Mortgage Finance		1,085		1,173
Distribution Finance		1,060		1,389
Structured Capital		556		603
Asset-Based Lending		275		649
Corporate and Other		62		90
Total finance assets	$	8,144	$	9,299


(1)		Interest expense is allocated to each segment in proportion to its net investment in finance assets. Net investment in finance assets includes finance assets less deferred income taxes, security deposits and other specifically identified liabilities. The interest allocated matches all variable-rate finance assets with variable-rate debt costs and all fixed-rate finance assets with fixed-rate debt costs. Due to our significant difficulty in accessing the capital markets, the interest rate is partially determined using a theoretical approach. If this allocation results in greater or less interest expense than was actually incurred by the Company, the remaining balance is included in the Corporate and Other segment’s interest expense. This resulted in the allocation of $6 million and $17 million of interest expense to the six operating segments in excess of the interest expense actually incurred by the Company for the three and six months ended June 30, 2009, respectively.

(2)		Due to management’s decision to downsize the commercial finance business of Textron Financial and the resulting variations in personnel levels and job responsibilities, indirect expenses are no longer being allocated to each segment. These indirect expenses of $16 million and $32 million for the three and six months ended June 30, 2009, respectively, were aggregated in the Corporate and Other segment. Prior to 2009, indirect expenses were allocated to each segment based on the use of such resources and were based primarily upon the segment’s proportion of net investment in finance assets, headcount, number of transactions, computer resources and senior management time.

(3)		Finance assets include: finance receivables; equipment on operating leases, net of accumulated depreciation; repossessed assets and properties; operating assets received in satisfaction of troubled finance receivables; retained interests in securitizations; investment in equipment residuals; acquisition, development and construction arrangements; investments in other marketable securities and other short- and long-term investments (some of which are classified in Other assets on Textron Financial’s Consolidated Balance Sheets).


Item 1A.	*Risk Factors*

Our business, financial condition and results of operations are ~~ability~~subject to ~~fund~~various ~~our~~risks, ~~captive~~including ~~financing~~the ~~activities~~risk atfactors ~~economically~~discussed ~~competitive~~in ~~levels~~our ~~depends~~Annual Report on Form 10-K for ~~our~~the ~~ability~~fiscal toyear ~~borrow~~ended January 3, 2009 and ~~the~~those additional ~~cost~~and updated risk factors discussed in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009, all of ~~borrowing~~which should be carefully considered by investors in our securities. The risks discussed in our SEC filings are those that we believe currently are the ~~credit~~most ~~markets~~significant, although additional risks not presently known to us or that we currently deem less significant also may impact our business, financial condition or results of operations, perhaps materially.

The long-term viability and profitability of our business of the financing of customer purchases of Textron-manufactured products is dependent, in part, on our ability to borrow and the cost of borrowing in the credit markets. This ability and cost, in turn, are dependent on our credit ratings and are subject to credit market volatility. With our recent lack of access to the credit markets, we are currently funding our customer financing activity through a combination of cash generated from operations, cash on hand from our drawdown of our bank credit line, revolving securitization facilities and third-party funding arrangements. Our ability to continue to offer customer financing for the products which Textron manufactures is largely dependent on our ability to obtain funding at a reasonable cost. In addition, because we, as a non-bank finance company, do not have access to any of the various assistance programs being provided by the federal government to banking institutions, we may not be able to continue to offer customer financing at rates and terms competitive with those offered by banking institutions. If we are unable to continue to offer competitive customer financing, it could adversely affect our results of operations and financial condition.

If our estimates or assumptions used in determining the fair value of certain of our assets and our allowance for losses on finance receivables prove to be incorrect, our cash flow, profitability, financial condition, and business prospects could be materially adversely affected.

We use estimates and various assumptions in determining the fair value of certain of our assets, including finance receivables held-for-sale and interest-only securities representing, retained interests from securitizations of receivables, which do not have active, quoted market prices. We also use estimates and assumptions in determining our allowance for losses on finance receivables and in determining the residual values of leased equipment and the value of repossessed assets and properties. It is difficult to determine the accuracy of these estimates and assumptions, and our actual experience may differ materially from these estimates and assumptions. A material difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition, and business prospects.

If we fail to comply with the covenants contained in our various debt agreements, it may adversely affect our liquidity, results of operations and financial condition.

Our credit facility contains affirmative and negative covenants including (i) limitations on creation of liens on assets; (ii) prohibition of certain consolidations, mergers or sale or transfer of all or any substantial part of our assets; (iii) the requirement to continue in the finance business and maintain existence, rights and franchises, (iv) maintenance of maximum leverage (not to exceed nine times consolidated net worth and qualifying subordinated obligations, as defined), (v) maintenance of minimum consolidated net worth ($200 million), (vi) maintenance of a fixed charges coverage ratio (no less than 125%) and (vii) limitations on debt incurred by certain subsidiaries. The indentures governing our outstanding senior notes also contain covenants, including limitations on creation of liens on assets and maintenance of existence, rights and franchises; in addition, consolidations, mergers or sale of all or substantially all of our assets may only be effected if certain provisions are complied with. We also have issued various debt securities under other agreements which contain substantially similar covenants related to some or all of the items addressed in our credit facility and indentures.

Some of these covenants may limit our ability to engage in certain financing structures, create liens, sell assets or effect a consolidation or merger. In addition, our various agreements contain certain cross-default or cross-acceleration provisions which could result in a default under one agreement triggering rights or actions under another agreement. As a result, an event of default under our credit facility, for example, could result in all outstanding obligations under some or all of our other debt agreements to become immediately due and payable. If such acceleration were to occur, we may not have adequate funds to satisfy all of our outstanding obligations.

Failure to comply with material provisions of the covenants in the credit facility, the indentures or any of our other debt agreements could have a material adverse effect on our liquidity and financial condition.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

TEXTRON FINANCIAL CORPORATION

Key Business Initiatives and Trends

On December 22, 2008, due to continued weakness in the economy and in order to address Textron’s long-term liquidity position, Textron announced a plan to exit all of the commercial finance business of Textron Financial, other than that portion of the business supporting the financing of customer purchases of products which Textron manufactures. The current exit plan applies to $6.5.4 billion of managed finance receivables within our $98.96 billion managed finance receivable portfolio. The exit plan will be effected through a combination of orderly liquidation and selected sales and is expected to be substantially complete over the next two to four years. The portion of the business supporting the financing of customer purchases of products which Textron manufactures is primarily operated within our Captive Finance segment. The Captive Finance segment was established during the second quarter of 2009 based on the management consolidation of the Aviation Finance segment and the portion of the Golf Finance ~~segments~~segment that finances customer purchases of E-Z-GO golf cars and Jacobsen turf-care equipment.

We achieved $~~926~~2.2 ~~million~~billion of managed finance receivable reductions during the first ~~quarter~~six months of 2009. Reductions were achieved in all six of our operating segments, but were primarily driven by a $~~495~~1.3 ~~million~~billion (1538%) reduction in Distribution Finance and a $~~142~~373 million (2258%) reduction in Asset Based Lending. The ~~receivable~~reductions ~~liquidations~~ resulted from the ~~the~~ combination of scheduled finance receivable collections, discounted payoffs of loans, sales of assets, repossession of collateral and charge-offs. InThe ~~both~~ Distribution Finance receivable reduction includes a $274 million or 47% reduction in marine floorplan receivables. These collections were aided by discount programs which encouraged borrowers to liquidate inventory and resulted in $22 million of our Portfolio losses for the first six months of the year. The reduction in Asset Based Lending also included a sale of $109 million of finance receivables at their carrying value. In both Distribution Finance and Asset Based Lending, a significant amount of the reduction also resulted from the transition of borrowers with revolving lines of credit to new lenders. Repossession, foreclosure, or the maturity of leveraged leases with residual values represented $~~171~~229 million of the managed finance receivable reduction. However, we also generated $83194 million from the collection or sale of these assets ~~and~~ and other investments during the first ~~quarter.~~six months of the year. The primary reason for the net increase in these assets was the foreclosure of 13 golf courses related to a single borrower in January 2009.

As a result of the December downsizing plan, $2.9 billion of the managed liquidating receivables were designated for sale or transfer, of which about $1.2 billion were securitized receivables and $1.7 billion were owned assets classified as held for sale. During the first ~~quarter~~six months, the balance of ~~these~~ these managed receivables was reduced by approximately $~~400~~1.1 ~~million~~billion to $21.58 billion. Approximately $~~900~~600 million of this balance is currently securitized and $1.52 billion are owned assets. WeThe ~~did~~$109 million ~~not~~sale of ~~have~~Asset ~~any~~Based Lending receivables represents the only ~~portfolio~~significant ~~sales~~sale in excess of $50 million during the first ~~quarter~~six months of the year, however we have sold several other individual and small groups of loans and continue to see interest in many of the portfolios ~~originally~~ classified as held for sale. Following an effort to market the portfolios held for sale in the first ~~quarter~~ six months of 2009, and the progress made in liquidating our portfolios, we decided that we will be able to maximize the economic value of a portion of the finance receivables held for sale through orderly liquidation rather than selling the portfolios. Accordingly, since we now intend to hold a portion of these finance receivables for the foreseeable future, we have ~~classified~~ reclassified $~~654~~719 million, net of a $~~157~~178 million valuation allowance, from the held for sale classification to held for investment. ~~There~~during ~~was~~the nofirst ~~significant~~six months of 2009. The total change in the fair value of these reclassified finance receivables orand the ~~remaining~~ ~~$887 million of finance receivables that continue to be classified as held for sale at March 31, 2009.~~

~~Portfolio quality statistics weakened during the first quarter~~ ~~of 2009. Nonaccrual finance receivables increased to~~22 $444 million (6.11%) as of March 31, 2009 from $277 million (4.01%) as of January 3, 2009 and 60+ day delinquency as a percentage of finance receivables held for investment increased to 4.29% as of March 31, 2009 from 2.59% as of January 3, 2009. This deterioration was most significant in the Resort Finance and Aviation Finance portfolios. We expect these statistics to continue to deteriorate in subsequent quarters as a result of continued difficult general economic conditions, the lack of liquidity for borrowers in many of our industries and the continued implementation of our plan to downsize our commercial finance portfolios which do not provide support for the purchase of Textron manufactured products. As a result of this continued trend, Allowance for losses on finance receivables held for investment increased $29 million as compared to January 3, 2009.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)*

remaining $613 million of finance receivables that continue to be classified as held for sale at June 30, 2009 was $12 million.

Portfolio quality statistics weakened during the first six months of 2009. Nonaccrual finance receivables increased to $683 million (10.04% as a percentage of finance receivables held for investment) as of June 30, 2009 from $277 million (4.01% as a percentage of finance receivables held for investment) as of January 3, 2009 and 60+ day delinquency as a percentage of finance receivables held for investment increased to 6.62% as of June 30, 2009 from 2.59% as of January 3, 2009. This deterioration was most significant in the Resort Finance and Aviation Finance portfolios. We expect the percentages of nonaccrual finance receivables and delinquency to continue to deteriorate in subsequent quarters as a result of continued difficult general economic conditions, the lack of liquidity for borrowers in many of our industries and the continued implementation of our plan to downsize our non-captive commercial finance portfolios. We expect nonaccrual finance receivables to liquidate more slowly than our performing finance receivables. As a result of this continued trend, Allowance for losses on finance receivables held for investment increased $93 million as compared to January 3, 2009.

Financial Condition

Liquidity and Capital Resources

Textron Financial has historically mitigated liquidity risk (i.e., the risk that we will be unable to fund maturing liabilities or the origination of new finance receivables) by developing and preserving reliable sources of capital. We have traditionally used a variety of financial resources to meet these capital needs. Cash has been provided from finance receivable collections, sales and securitizations, as well as the issuance of commercial paper and term debt in the public and private markets. We have historically utilized both our $1.75 billion committed bank credit lines and Textron’s $1.25 billion committed bank credit line to support the issuance of commercial paper. We also borrow available cash from Textron when it is in the collective economic interest of Textron Financial and Textron.

Due to the reduced availability of traditional sources of liquidity, we expect to substantially rely on cash from finance receivable collections to fund maturing debt obligations. Under the exit plan, we originally expected to liquidate at least $2.6 billion of managed finance receivables, net of originations, in 2009, and expected to use approximately $2.0 billion of proceeds from liquidations to pay maturing securitized off-balance sheet debt. During the first six months of 2009, we liquidated $2.2 billion of managed finance receivables and now expect to reduce managed finance receivables by at least $3.4 billion, net of originations, in 2009.

On February 3, 2009, we borrowed the $1.74 billion available balance of the $1.75 billion committed bank credit line. Textron also borrowed the available balance of its $1.25 billion committed bank credit line. A portion of these borrowings were utilized to repay the $743 million of commercial paper outstanding as of January 3, 2009. The remaining cash, combined with the proceeds from liquidation, is being utilized to repay our maturing term debt and securitization funding sources. Our bank credit line provides funding at favorable borrowing spreads to LIBOR and has reduced our interest expense as compared to the borrowing spreads we had been achieving on commercial paper issuances. Amounts borrowed under the credit facilities are due in April 2012.

Due to the progress made reducing our managed finance receivables and the availability of cash from the credit line, we repurchased $369 million and $393 million of our medium term notes prior to maturity during the three and six month periods ended June 30, 2009, respectively. These repurchases resulted in gains of $37 million and $39 million for the three and six month periods ended June 30, 2009, respectively, and will reduce our interest expense in future periods by approximately $7 million. We intend to continually evaluate opportunities to strategically repurchase our outstanding debt if it is in our economic interest, depending on our cash needs and market conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

~~have~~The ~~traditionally~~following ~~used~~table asummarizes ~~variety~~Textron ~~of financial resources to meet~~Financial’s ~~these~~contractual ~~capital~~payments ~~needs.~~and ~~Cash~~receipts, ~~has~~including ~~been~~all ~~provided~~managed ~~from~~ finance ~~receivable~~receivables ~~collections, sales~~ and ~~securitizations, as well as the issuance of commercial paper and term debt in the public and private markets. We have historically utilized~~ both ~~our $1.75 billion~~on- ~~committed bank credit lines~~ and ~~Textron’s~~ ~~$1.25 billion~~off-balance ~~committed~~sheet ~~bank~~funding ~~credit line to~~sources ~~support~~as ~~the issuance~~ of ~~commercial~~June 30, ~~paper.~~2009, Wefor ~~also borrow available cash from Textron when it is in~~ the ~~collective economic~~specified ~~interest of Textron Financial and Textron.~~periods:

Due to the unprecedented levels of volatility of the credit markets in the second half of 2008, our deteriorating financial performance and the reductions in our credit ratings, our access the commercial paper, term debt and securitization markets on favorable terms has been significantly restricted. On February 3, 2009, we borrowed the $1.74 billion available balance of the $1.75 billion committed bank credit line due to the current economic environment and the risks associated with the capital markets in general, including the continued difficulty in accessing sufficient commercial paper on a daily basis. Textron also borrowed the available balance of its $1.25 billion committed bank credit line. A portion of these borrowings were utilized to repay commercial paper, which has been reduced from $743 million outstanding as of January 3, 2009 to $8 million outstanding as of March 31, 2009. The remaining cash, combined with the proceeds from liquidation, will be used to repay our maturing term debt and securitization funding sources. These facilities provide funding at favorable borrowing spreads to LIBOR and will reduce our interest expense as compared to the borrowing spreads we had been achieving on commercial paper issuances prior to borrowing the remaining available balance on the credit line. Amounts borrowed under the credit facilities are due in April 2012.


	Payments/Receipts Due by Period
	Less Than		1-2		2-3			3-4		4-5		More Than
	1 Year		Years		Years			Years		Years		5 Years		Total
	(In millions)

Payments due:
Multi-year credit facilities	$	—	$	—	$	1,740		$	—	$	—	$	—	$	1,740
Other short-term debt		9		—		—			—		—		—		9
Term debt		2,253		1,382		53			578		31		159		4,456
Securitized on-balance sheet debt		68		66		96			76		71		107		484
Subordinated debt		—		—		—			—		—		300		300
Securitized off-balance sheet debt		1,161		5		—			—		—		31		1,197
Interest payments on debt		132		82		61			41		29		78		423
Loan commitments		16		6		2			—		—		5		29
Operating lease rental payments		5		4		3			1		1		—		14

Total payments due		3,644		1,545		1,955			696		132		680		8,652

Cash and contractual receipts:
Finance receivable receipts — held for investment		1,625		1,302		1,121			828		491		1,582		6,949
Finance receivable receipts — held for sale		198		211		109			118		18		51		705
Securitized off-balance sheet finance receivable and cash receipts		1,302		5		—			—		—		31		1,338
Interest receipts on finance receivables		442		328		233			166		118		214		1,501
Operating lease rental receipts		27		22		18			13		7		16		103

Total contractual receipts		3,594		1,868		1,481			1,125		634		1,894		10,596
Cash		521		—		—			—		—		—		521

Total cash and contractual receipts		4,115		1,868		1,481			1,125		634		1,894		11,117

Net cash and contractual receipts (payments)	$	471	$	323	$	(474	)	$	429	$	502	$	1,214	$	2,465

Cumulative net cash and contractual receipts	$	471	$	794	$	320		$	749	$	1,251	$	2,465

~~Due~~This toliquidity ~~the~~profile, ~~reduced~~combined ~~availability~~with ofthe ~~traditional~~excess ~~sources~~cash ofgenerated ~~liquidity,~~by weour ~~expect~~borrowing tounder ~~substantially~~the ~~rely~~committed oncredit ~~cash~~facility, ~~from~~is ~~finance~~an ~~receivable~~indicator ~~collections~~of toour ~~fund~~ability ~~maturing~~to ~~debt~~repay ~~obligations.~~outstanding ~~Under~~funding ~~the exit plan~~obligations, weassuming ~~originally~~contractual ~~expected~~collection ~~to liquidate at least $2.6 billion~~ of ~~managed~~ finance ~~receivables, net of~~ ~~originations~~receivables, inabsent ~~2009,~~access ~~and~~to ~~expected~~new tosources ~~use~~of ~~approximately~~liquidity or ~~$2.0 billion~~origination of ~~proceeds~~additional ~~from~~finance ~~liquidations~~receivables. toThis ~~pay maturing~~profile ~~securitized~~excludes ~~off-balance~~cash ~~sheet~~which ~~debt.~~may ~~During~~be ~~the~~generated ~~first~~by ~~quarter,~~the wedisposal of ~~liquidated~~operating ~~$926 million~~lease ofresidual ~~managed~~assets ~~finance~~and ~~receivables~~Other ~~and~~assets in addition to ~~now~~cash ~~expect~~which may be used to ~~liquidate~~pay atfuture ~~least~~income ~~$3.0 billion,~~taxes ~~net~~and ofAccrued ~~originations,~~interest inand ~~2009~~other liabilities.

Securitized on-balance sheet and securitized off-balance sheet debt payments are based on the contractual receipts of the underlying finance receivables. These payments do not represent contractual obligations of the Company and we do not provide legal recourse to investors that purchase interests in Textron Financial’s securitizations beyond the credit enhancement inherent in the retained subordinate interests. Finance receivable receipts are based on contractual cash flows. These amounts could differ due to sales, prepayments, charge-offs and other factors, including the inability of borrowers to repay the balance of the loan at the contractual maturity date. Finance receivable receipts on the held for sale portfolio represent the contractual balance of the finance receivables and therefore exclude the potential negative impact from selling the portfolio at the estimated fair value. Securitized off-balance sheet finance receivable and cash receipts include $112 million of cash collections accumulated in the Distribution Finance revolving securitization trust collection account which was utilized to payoff maturing

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

~~The~~securitized ~~following~~off-balance ~~table~~sheet ~~summarizes~~debt ~~Textron~~in ~~Financial’s~~July 2009. Interest ~~contractual~~ payments and receipts, ~~including~~in ~~all~~the ~~managed~~table ~~finance~~above reflect the current ~~receivables~~interest ~~and~~rate ~~both~~paid or received on- the related debt and ~~off-balance~~finance receivables. ~~sheet~~They ~~funding~~do ~~sources~~not include anticipated changes in either asmarket ofinterest ~~March 31,~~rates ~~2009~~or changes in borrower performance, ~~for~~which could have an impact on the ~~specified~~interest ~~periods:~~rate according to the terms of the related debt or finance receivable contract.

	Payments/Receipts Due by Period
	Less Than		1-2			2-3		3-4			4-5		More Than
	1 Year		Years			Years		Years			Years		5 Years		Total
	(In millions)
Payments due:
Multi-year credit facilities and commercial paper	$	8	$	—		$	—	$	1,740		$	—	$	—	$	1,748
Other short-term debt		16		—			—		—			—		—		16
Term debt		2,075		2,211			53		203			428		147		5,117
Securitized on-balance sheet debt		218		67			79		87			71		153		675
Subordinated debt		—		—			—		—			—		300		300
Securitized off-balance sheet debt		2,031		5			—		—			—		31		2,067
Loan commitments		42		6			2		—			—		66		116
Operating lease rental payments		5		4			4		1			1		1		16
Total payments due		4,395		2,293			138		2,031			500		698		10,055
Cash and contractual receipts:
Finance receivable receipts — held for investment		1,802		1,421			1,158		828			528		1,692		7,429
Finance receivable receipts — held for sale		349		195			224		205			6		64		1,043
Securitized off-balance sheet finance receivable and cash receipts		2,202		5			—		—			—		31		2,238
Operating lease rental receipts		30		26			22		16			9		22		125
Total contractual receipts		4,383		1,647			1,404		1,049			543		1,809		10,835
Cash		637		—			—		—			—		—		637
Total cash and contractual receipts		5,020		1,647			1,404		1,049			543		1,809		11,472
Net cash and contractual receipts (payments)	$	625	$	(646	)	$	1,266	$	(982	)	$	43	$	1,111	$	1,417
Cumulative net cash and contractual receipts (payments)	$	625	$	(21	)	$	1,245	$	263		$	306	$	1,417

At June 30, 2009, Textron Financial had unused commitments to fund new and existing customers under $643 million of committed revolving lines of credit. These loan commitments generally have an original duration of less than three years and funding under these facilities is dependent on the availability of eligible collateral and compliance with customary financial covenants. Since many of the agreements will not be used to the extent committed or will expire unused, the total commitment amount does not represent future cash requirements. We also have ongoing customer relationships, including manufacturers and dealers in the Distribution Finance segment, which do not contractually obligate the Company to provide funding, however, we may choose to fund under these relationships to facilitate an orderly liquidation and mitigate credit losses. Neither of these potential types of fundings is included as a contractual obligation in the table above.

~~This~~In addition to the liquidity ~~profile,~~sources ~~combined~~contained ~~with~~in the ~~excess~~table above, ~~cash~~management ~~generated~~continues to pursue multiple avenues for byimproving our ~~borrowing~~liquidity ~~under~~profile. ~~the~~These ~~committed~~avenues ~~credit~~include additional ~~facility~~financing secured by finance receivables, issales anof ~~indicator~~portfolios ofclassified ~~our~~as ~~ability~~held tofor ~~repay~~sale, ~~outstanding~~transfers ~~funding~~of existing funding obligations, ~~assuming~~to ~~contractual~~new ~~collection~~financing ofproviders ~~all~~and ~~finance~~loans from ~~receivables,~~government ~~absent~~agencies ~~access~~specializing toin ~~new~~assistance ~~sources~~with the financing of ~~liquidity~~the ~~or origination~~foreign sale of ~~additional~~products ~~finance~~manufactured ~~receivables~~in the United States and Canada. The ~~future~~successful execution of these ~~receipt~~financing ofsolutions ~~interest~~would wemitigate ~~charge~~the ~~borrowers~~inherent onrisks associated with collecting our managed finance ~~receivables~~receivable portfolio in ~~and~~accordance ~~payments~~with ofits ~~interest~~contractual ~~charged~~maturity onin ~~debt~~the ~~obligations~~current ~~are~~economic ~~excluded~~environment ~~from~~and ~~this~~aid ~~presentation.~~in ~~This~~the ~~profile~~financing ~~also~~of ~~excludes~~Textron ~~cash~~manufactured ~~which~~products ~~may~~in bethe ~~generated~~future. byDepending on the ~~disposal~~success of ~~operating lease~~these ~~residual~~initiatives ~~assets~~ and ~~Other~~changes ~~assets~~ in ~~addition~~external tofactors ~~cash~~affecting ~~which may~~the bemarketability ~~used~~and tovalue ~~pay~~of ~~future~~our ~~income~~assets, ~~taxes~~we ~~and~~may ~~Accrued~~also ~~interest~~consider ~~and~~the ~~other~~sale ~~liabilities~~of assets currently classified as held for investment.

~~Securitized~~On ~~on-balance~~July 14, ~~sheet~~2009, ~~and~~a ~~securitized~~newly ~~off~~formed, wholly-~~balance~~owned ~~sheet~~finance ~~debt~~subsidiary ~~payments~~of ~~are~~Textron ~~based~~entered oninto ~~the~~a ~~contractual~~$500 million ~~receipts of the~~revolving ~~underlying~~credit ~~finance~~facility ~~receivables.~~with ~~These~~the ~~payments~~Export-Import doBank ~~not represent contractual obligations~~ of the ~~Company and we do not provide~~United ~~legal~~States. ~~recourse~~The torevolving ~~investors~~period ~~that~~of ~~purchase~~the ~~interests~~facility expires in ~~Textron~~December ~~Financial’s~~2010. ~~securitizations~~This ~~beyond~~facility ~~the~~will ~~credit~~provide ~~enhancement inherent~~funding infor the ~~retained~~financing ~~subordinate interests. Finance~~of ~~receivable~~sales ~~receipts~~of ~~are~~Cessna ~~based~~Aircraft onCompany ~~contractual~~and ~~cash~~Bell ~~flows.~~Helicopter ~~These~~products to ~~amounts~~non-U.S. buyers. TFC ~~could~~will ~~differ~~originate ~~due~~and toservice ~~sales,~~loans ~~prepayments,~~and ~~charge-offs~~finance ~~and~~leases on ~~other~~behalf ~~factors,~~of ~~including~~ the ~~inability~~new ofTextron ~~borrowers~~finance tosubsidiary ~~repay~~and ~~the~~provide a full ~~balance~~guarantee of the ~~loan~~debt atobligations ~~the~~under ~~contractual~~this ~~maturity date~~facility.

In April 2009, Textron signed a 253-year agreement with a subsidiary of The PNC Financial Services Group to become a provider of financing for a portion of the sales of E-Z-GO golf cars. We expect this agreement to reduce finance receivable originations in our Captive Finance segment.

~~Table~~ In June 2009, we signed an agreement with TCF Inventory Finance, Inc. to transfer the rights to financing programs with two large manufacturers of ~~Contents~~lawn and garden products in the Distribution Finance segment. New fundings under these programs are being assumed by TCF Bank and will reduce the Company’s originations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Contractual receipts and payments exclude finance charges from finance receivables, debt interest payments and other items. Finance receivable receipts on the held for sale portfolio represent the contractual balance of the finance receivables and therefore exclude the potential negative impact from selling the portfolio at the estimated fair value. Securitized off-balance sheet finance receivable and cash receipts include $502 million of cash collections accumulated in the Distribution Finance revolving securitization trust collection account which will be utilized to payoff maturing securitized off-balance sheet debt in April 2009.

At March 31, 2009, Textron Financial had unused commitments to fund new and existing customers under $1.0 billion of committed revolving lines of credit. These loan commitments generally have an original duration of less than three years and funding under these facilities is dependent on the availability of eligible collateral and compliance with customary financial covenants. Since many of the agreements will not be used to the extent committed or will expire unused, the total commitment amount does not necessarily represent future cash requirements. We also have ongoing customer relationships, including manufacturers and dealers in the Distribution Finance segment, which do not contractually obligate the Company to provide funding, however, we may choose to fund under these relationships to facilitate an orderly liquidation and mitigate credit losses. Neither of these potential fundings is included as a contractual obligation in the table above.

In addition to the liquidity sources contained in the table above, management is pursuing multiple avenues for improving our liquidity profile. These avenues include additional financing secured by finance receivables, sales of portfolios classified as held for sale, transfers of existing funding obligations to new financing providers and loans from government agencies specializing in assistance with the financing of the foreign sale of products manufactured in the United States and Canada. The successful execution of these financing solutions would mitigate the inherent risks associated with collecting our managed finance receivable portfolio in accordance with its contractual maturity in the current economic environment and aid in the financing of Textron manufactured products in the future. Depending on the success of these initiatives and changes in external factors affecting the marketability and value of our assets, we may also consider the sale of assets currently classified as held for investment.

In April 2009, Textron signed a 3-year agreement with a subsidiary of The PNC Financial Services Group to become a provider of financing for a portion of the sales of E-Z-GO golf cars. We expect this agreement to reduce finance receivable originations in our Golf Finance segment.

The major rating agencies regularly evaluate us and our parent company. Both our long- and short-term credit ratings were downgraded since the end of 2008. In connection with these rating actions, the rating agencies have cited execution risks associated with our decision to exit portions of our commercial finance business, lower than expected business and financial outlook for 2009, the increase in outstanding debt resulting from the borrowing under our credit facilities, weak economic conditions and continued liquidity and funding constraints. Our current credit ratings prevent us from accessing the commercial paper markets, and may adversely affect the cost and other terms upon which we are able to obtain other financing as well as our access to the capital markets. The credit ratings and outlooks of these three rating agencies are as follows:


	Fitch Ratings	Moody’s	Standard & Poor’s

Long-term ratings	BB+	Baa3	BB+
Short-term ratings	B	P3	B
Outlook	Negative	Negative	Developing


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)*

Cash flows from operations are summarized below:

	Three Months Ended
	Six Months Ended
	March 31,			March 31,
	June 30,			June 30,
	2009			2008
	(In millions)
Operating activities	$	1872		$	5283
Investing activities		~~327~~1,043			(~~477~~134	)
Financing activities		~~274~~(616	)		~~412~~46

Cash flows provided by investing activities during the first six months of 2009 increased by $1.2 billion as compared to the first six months of 2008. This was primarily due to a $4.1 billion decrease in finance receivable originations resulting from our decision to exit portions of our commercial finance business, partially offset by a $2.8 billion decrease in finance receivable collections and $433 million of lower proceeds from receivable sales, including securitizations.

Cash flows provided by financing activities decreased $662 million in the first six months of 2009, as compared to the first six months of 2008 as a result of the decrease in managed finance receivables, which reduced the need to raise cash from financing activities, partially offset by the $505 million increase in cash held by the Company as compared to January 3, 2009. We also generated $21 million of cash during the first quarter of 2009 from the sale of a 51% residual interest in the Aviation Finance securitization trust to Textron, which is reflected as a Noncontrolling interest on our Consolidated Balance Sheets.

Because the finance business involves the purchase and carrying of receivables, a relatively high ratio of borrowings to net worth is customary. Debt as a percentage of total capitalization was 89% at June 30, 2009 compared to 86% at January 3, 2009. Textron Financial’s ratio of earnings to fixed charges was (0.80)x for the six months ended June 30, 2009 compared to 1.35x for the corresponding period in 2008. Textron made cash payments of $88 million and $109 million on April 14, 2009 and July 10, 2009, respectively, to maintain compliance with the fixed charge coverage ratio required by the Support Agreement and Textron Financial’s credit facility.

During the first six months of 2009, Textron Financial declared and paid dividends to Textron of $189 million compared to dividends declared and paid of $147 million during the corresponding period of 2008. The payment of these dividends represents a return of Textron’s investment consistent with maintaining our targeted leverage ratio. Textron also contributed capital of $5 million to Textron Financial in both the first six months of 2009 and 2008, which consisted of Textron’s dividend on preferred stock owned by Textron Funding Corporation, which is a wholly-owned subsidiary of Textron Financial.

Off-Balance Sheet Arrangements

As of June 30, 2009, we have one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Company and issues asset-backed notes to investors. These finance receivables typically have short durations, which results in significant collections of previously purchased finance receivables and significant additional purchases of replacement finance receivables from the Company on a monthly basis. Due to required amortization and accumulation periods associated with the scheduled maturity of the remaining asset-backed notes, the trust’s revolving period will end in the third quarter of 2009.

The trust had $1.3 billion of notes outstanding as of June 30, 2009. We own $141 million of these notes, representing our remaining retained interests. During the six months ended June 30, 2009, we recognized a $26 million other-than-temporary impairment charge and a $13 million unrealized loss in Other comprehensive income on our retained interests in this trust. In connection with the maturity of $149 million of the notes in July 2009, including $44 million retained seller certificates owned by the Company, the trust accumulated $112 million of cash during the second quarter of 2009 from collections of finance receivables.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

~~The decrease in cash flows from operating activities in the~~Results ~~first quarter~~ of ~~2009, as compared to the first quarter of 2008,~~Operations ~~was mostly due to a reduction in Net interest margin, primarily driven by lower average finance receivables, higher borrowing costs and a reduction in Other income.~~

~~Cash flows provided by investing activities during the first~~ ~~quarter of 2009 increased by $804 million as compared to~~Revenues the first quarter of 2008. This was primarily due to a $1.7 billion decrease in finance receivable originations resulting from our decision to exit portions of our commercial finance business. These increases were partially offset by a $579 million decrease in finance receivable collections and $400 million of lower proceeds from receivable sales, including securitizations.

~~Cash~~Revenues ~~flows~~decreased ~~provided~~$91 million byand ~~financing activities decreased~~ $~~138~~183 million ~~in the first quarter 2009, as compared to the~~for ~~first quarter of 2008 as a result of~~ the ~~decrease~~three inand ~~managed finance~~six ~~receivables,~~months ~~which~~ended ~~reduced the need to raise cash from financing activities~~June 30, ~~partially~~2009 ~~offset by the $621 million increase in cash held by the Company~~ as compared to ~~January 3~~2008, ~~2009.~~respectively, Weprimarily ~~also~~due ~~generated~~to ~~$21 million of cash during~~ the ~~first quarter of 2009 from the sale of a 51% residual~~following: ~~interest in the Aviation Finance securitization trust to Textron, which is reflected as a Noncontrolling interest on our Consolidated Balance Sheets.~~

Because the finance business involves the purchase and carrying of receivables, a relatively high ratio of borrowings to net worth is customary. Debt as a percentage of total capitalization was 89% at March 31, 2009 compared to 86% at January 3, 2009. Textron Financial’s ratio of earnings to fixed charges was (0.25)x for the three months ended March 31, 2009 compared to 1.48x for the corresponding period in 2008. On April 14, 2009, Textron made an $88 million cash payment to maintain compliance with the fixed charge coverage ratio required by the Support Agreement and Textron Financial’s credit facility.


	Three Months			Six Months
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)

Portfolio losses	$	(47	)	$	(62	)
Lower market interest rates		(23	)		(62	)
Lower securitization gains		(20	)		(41	)
Lower other income		(17	)		(28	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Lower average finance receivables of $588 million and $488 million, respectively		(10	)		(17	)
Gains on debt extinguishment		37			39
Benefit from variable-rate receivable interest rate floors		12			28

~~During the first quarter of 2009, Textron Financial declared and~~ ~~paid dividends to Textron of $86 million compared to~~(Loss) ~~dividends~~Income ~~declared~~before ~~and~~Special ~~paid~~Charges, ofIncome ~~$144 million~~Taxes during the corresponding period of 2008. The payment of these dividends represents a return of Textron’s investment consistent with maintaining our targeted leverage ratio. Textron contributed capital of $2 million to Textron Financial in both the first quarter of 2009 and ~~2008, which consisted of~~Noncontrolling ~~Textron’s dividend on preferred stock owned by Textron~~Interest ~~Funding Corporation, which is a wholly-owned subsidiary of Textron Financial.~~

Income before special charges, income taxes and noncontrolling ~~Off-Balance~~interest decreased $112 million and $220 million for ~~Sheet~~the ~~Arrangements~~three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to the following:


	Three Months			Six Months
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)

Increase in provision for losses	$	(47	)	$	(96	)
Portfolio losses		(47	)		(62	)
Lower securitization gains		(20	)		(41	)
Lower other income		(17	)		(28	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Revenue impact of lower average finance receivables of $588 million and $488 million, respectively		(10	)		(17	)
Gains on debt extinguishment		37			39
Benefit from variable-rate receivable interest rate floors		12			28

~~During~~The ~~the~~increase ~~first~~in ~~quarter~~provision offor ~~2009,~~losses wefor ~~recognized~~the ~~a $6 million~~three ~~other than temporary impairment charge~~ and asix ~~$2 million~~months ~~unrealized~~ended ~~loss~~June 30, on2009 ~~our~~as ~~retained~~compared ~~interests~~to inthe corresponding ~~this~~period ~~trust.~~of ~~The~~2008 ~~trust~~was ~~had~~primarily ~~$2.2 billion~~the result of ~~notes~~increases ~~outstanding~~in the asCaptive offinance ~~March 31,~~portfolio ~~2009. We own~~ ($~~182~~23 million ~~of these~~and ~~notes~~$57 million, ~~representing~~respectively) ~~our~~related ~~remaining~~to ~~retained~~a ~~interest. There was~~significant noincrease ~~impairment~~in ~~charge~~delinquent ~~recorded~~accounts onand ~~these~~declining ~~retained~~aircraft ~~interests~~values, ~~which~~ ~~are~~and ~~classified~~the asResort ~~held~~finance toportfolio ~~maturity~~($21 million and $50 million, asrespectively) reflecting the ~~$23 million~~lack of liquidity ~~shortfall~~available ~~between~~to ~~fair~~borrowers ~~value~~in ~~and~~this ~~carrying~~industry. ~~value~~In ~~was~~addition, ~~deemed~~a specific ~~temporary.~~reserve Inwas ~~connection~~established ~~with~~during the ~~maturity~~second quarter of ~~$642 million~~2009 on one ofautomobile ~~the~~manufacturer ~~notes~~lease inwithin ~~April~~the ~~2009,~~Structured ~~including~~Finance portfolio ($4232 million). ~~retained~~These increases were partially ~~seller~~offset ~~certificates~~by ~~owned~~specific byreserving ~~the~~actions ~~Company,~~taken ~~the~~on ~~trust~~two ~~accumulated~~accounts ~~$502 million of cash~~ during the ~~first~~three ~~quarter~~and ofsix ~~2009~~months ~~from~~ended June 30, 2008 ~~collections~~($12 million ofand ~~finance~~$27 million, ~~receivables~~respectively).

Portfolio losses include discounts taken on the sale or early termination of finance assets ($30 million and $32 million, respectively) for the three and six months ended of 2009, including discounts associated with the liquidation of distribution finance and golf mortgage receivables and impairment charges associated with repossessed aircraft ($13 million and $16 million, respectively) for the three and six months ended June 30, 2009. Lower

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

other income also includes an increase to the held for sale ~~RESULTS~~valuation allowance ($11 million and $12 million, OFrespectively) ~~OPERATIONS~~for the three and six months ended of 2009, to reflect changes in fair value.

Revenues

Revenues decreased $92 million in the first quarter of 2009 as compared to 2008, primarily due to the following:

	2009 vs. 2008
	(In millions)
Lower market interest rates	$	(39	)
Lower securitization gains		(21	)
Lower other income, including asset impairments and prepayment income		(19	)
Benefit from variable-rate receivable interest rate floors		16
Acceleration of deferred loan origination cost amortization		(8	)
Lower average finance receivables of $389 million		(7	)
Increased impairments of retained interests in securitizations		(6	)
Gain on sale of a leveraged lease investment in 2008		(5	)

(Loss) Income before Special Charges and Income Taxes

(Loss) income before special charges and income taxes decreased $108 million in 2009 as compared to 2008, primarily due to the following:

	2009 vs. 2008
	(In millions)
Increase in the provision for loan losses	$	(49	)
Lower securitization gains		(21	)
Lower other income, including asset impairments and prepayment income		(19	)
Benefit from variable-rate receivable interest rate floors		16
Acceleration of deferred loan origination cost amortization		(8	)
Higher borrowing costs, relative market rates		(8	)
Lower average finance receivables of $389 million		(7	)
Increased impairments of retained interests in securitizations		(6	)
Gain on sale of a leveraged lease investment in 2008		(5	)

The increase in provision for loan losses was primarily the result of increases in the reserve rates utilized to establish general reserves for the Resort Finance segment ($26 million), Aviation Finance segment ($20 million), marine portfolio ($6 million) and Golf Finance segment ($5 million), and specific reserving actions taken on several accounts within these portfolios ($30 million). These increases were partially offset by a decrease in general reserves related to the liquidation of finance receivables.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Income Taxes

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

	Three Months Ended						Six Months Ended
	March 31,			March 31,
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
Federal statutory income tax rate		(35.0	)%		35.0	%		(35.0	)%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		—(2.4	)		143.8			(1.4	)		11.7
Foreign tax rate differential		13(6.06	)		~~(12~~15.72	)		(0.5	)		(6.1	)
Canadian dollar functional currency		—			0.12			—			0.1
Change in state valuation allowance		(0.92	)		(083.58	)		(0.3	)		(20.1	)
Tax contingencies		2.1.2			573.38			1.6			21.4
Tax credits		(1.0.7	)		(16.98	)		(0.8	)		(3.0	)
Change in status of foreign subsidiary		(04.15	)		—			4.3			—
Other, net		(0.43	)		(09.31	)		0.1			(2.4	)
Effective income tax rate		(2238.35	)%		2668.83	%		(32.0	)%		36.6	%

~~For~~The difference between the statutory and effective tax rate for the three months ended ~~March~~June 3130, 2009, ~~the~~is ~~difference~~primarily ~~between~~attributable ~~the~~to ~~statutory~~a ~~rate~~change ~~and~~in ~~the~~management’s ~~effective~~assessment ~~tax~~of ~~rate is~~the ~~primarily~~realizability ~~attributable~~of toa ~~the~~deferred ~~effects~~tax ofasset ~~events~~in ~~related~~one toof ~~cross~~the ~~border~~Company’s ~~financing~~wholly-owned Canadian subsidiaries and ~~interest~~the benefit onfor ~~tax~~state ~~contingencies~~taxes, ~~the~~partially ~~majority~~offset by an increase in estimate of ~~which~~the istaxable ~~associated~~amount ~~with~~of ~~leveraged~~a ~~leases,~~distribution ~~partially~~from ~~offset~~a Canadian bysubsidiary and interest on tax ~~credits~~contingencies, ~~and~~the amajority ~~reduction~~of which inis ~~the~~associated ~~state~~with ~~valuation~~leveraged ~~allowance~~leases.

~~For~~The ~~the three months ended March 31, 2008, the~~ difference between the statutory ~~rate~~ and ~~the~~ effective tax rate isfor ~~primarily~~the ~~attributable~~six tomonths ~~benefits~~ended ~~relating~~June 30, to2009 ais ~~capital loss~~primarily ~~carryback~~attributable byto ~~one~~an increase in estimate of the ~~Company’s~~taxable ~~wholly-owned~~amount ~~Canadian~~of ~~subsidiaries~~a ~~and~~distribution ~~tax~~from ~~credits,~~a ~~partially~~Canadian ~~offset~~subsidiary ~~by state tax expense~~ and interest on tax contingencies, the majority of which is associated with leveraged leases, partially offset by the benefit for state taxes and tax credits.

The difference between the statutory and effective tax rate for the three and six months ended June 30, 2008 is primarily attributable to a change in management’s assessment of the amount of the state deferred tax asset that is realizable, offset by interest on tax contingencies, the majority of which is associated with leveraged leases, and state tax expense.

Credit Quality

Nonaccrual Finance Receivables

We classify finance receivables as nonaccrual and suspend the recognition of earnings when accounts are contractually delinquent by more than three months, unless collection of principal and interest is not doubtful. In addition, earlier suspension may occur if we have significant doubt about the ability of the obligor to meet current contractual terms. Doubt may be created by payment delinquency, reduction in the obligor’s cash flows, deterioration in the loan to collateral value relationship or other relevant considerations.

WeNonaccrual ~~have decided to present nonaccrual~~ finance receivables, repossessed assets and properties and operating assets received in satisfaction of troubled finance receivables are presented separately as opposed ~~opposed~~ to combining these ~~categories~~ as nonperforming assets due to their increasing significance and inherent differences. Nonaccrual ~~Nonaccrual~~ finance receivables are carried at their amortized cost, net of the allowance for losses, while repossessed assets and ~~and~~ properties and operating assets received in satisfaction of troubled finance receivables are both initially recorded at the lower of their previous carrying value or net realizable value. In addition, operating assets received in satisfaction of troubled finance ~~receivables are assets we intend to operate for~~ ~~a substantial period of time and/or make substantial improvements to prior to sale.~~


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)*

receivables are assets we intend to operate for a substantial period of time and/or make substantial improvements to prior to sale.

The following table sets forth certain information about nonaccrual finance receivables and the related percentages of each business segment’s finance receivables held for investment. Finance receivables held for sale are reflected at fair value, and are not included in the credit performance statistics below:


	June 30,				January 3,
	2009				2009
	(Dollars in millions)

Resort Finance	$	349	22.40	%	$	78	4.96	%
Captive Finance		109	3.41	%		35	1.03	%
Distribution Finance		94	12.06	%		43	9.02	%
Golf Mortgage Finance		88	11.48	%		107	12.11	%
Structured Capital		32	8.00	%		—	—
Corporate and Other		11	23.38	%		14	20.46	%

Total nonaccrual finance receivables	$	683	10.04	%	$	277	4.01	%

We believe that the percentage of nonaccrual finance receivables generally will continue to increase as we execute our liquidation plan under the current economic conditions. We expect nonaccrual finance receivables to liquidate more slowly than our performing finance receivables. The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers within the Resort Finance segment and to a significant increase in delinquent accounts and weakening aircraft values in the Captive Finance segment.

Allowance for losses on finance receivables held for investment is presented in the following table:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)

Allowance for losses on finance receivables beginning of period	$	220		$	105		$	191		$	89
Provision for losses		87			40			163			67
Less net charge-offs:
Distribution Finance		11			14			23			23
Asset-Based Lending		—			4			—			4
Captive Finance		9			1			17			4
Golf Mortgage Finance		1			—			22			—
Resort Finance		2			—			4			(1	)
Corporate and Other		—			—			4			—

Total net charge-offs		23			19			70			30

Allowance for losses on finance receivables end of period	$	284		$	126		$	284		$	126

Net charge-offs as a percentage of average finance receivables held for investment		1.33	%		0.89	%		2.03	%		0.68	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)


	June 30,			January 3,
	2009			2009
	(Dollars in millions)

Nonaccrual finance receivables as a percentage of finance receivables held for investment		10.04	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		4.18	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		41.6	%		68.9	%
60+ days contractual delinquency as a percentage of finance receivables held for investment		6.62	%		2.59	%
Operating assets received in satisfaction of troubled finance receivables	$	192		$	84
Repossessed assets and properties		75			70

	March 31, 2009				January 3, 2009
	(Dollars in millions)
Resort Finance	$	200	12.79	%	$	78	4.96	%
Golf Finance		103	7.41	%		125	8.37	%
Aviation Finance		66	2.44	%		17	0.62	%
Distribution Finance		65	6.33	%		43	9.02	%
Corporate and Other		10	18.48	%		14	20.46	%
Total nonaccrual finance receivables	$	444	6.11	%	$	277	4.01	%

The ratio of allowance for losses to nonaccrual finance receivables held for investment decreased primarily as a result of the Resort Finance and Captive Finance accounts mentioned above for which specific reserves were either not established or established at a percentage of the outstanding balance. This reflects our best estimate of loss based on a detailed review of our workout strategy and estimates of collateral value. The increase in Golf Mortgage Finance net charge-offs is primarily due to the charge-off upon foreclosure of 13 golf courses related to one account, which had been specifically reserved in prior periods. The increase in Captive Finance net charge-offs principally reflects the impact of declining aircraft values on the probability and severity of loss in the aircraft portfolio.

WeThe ~~believe that nonaccrual finance receivables generally will continue to~~ increase asin weoperating ~~execute~~assets ~~our~~received ~~liquidation~~in ~~plan~~satisfaction ~~under~~of ~~the~~troubled ~~current~~finance ~~economic~~receivables ~~conditions.~~primarily ~~The~~reflects ~~liquidation~~an ~~plan~~increase ~~is also~~in ~~likely~~the tonumber ~~result~~of ingolf acourses ~~slower~~whose ~~rate~~ownership ofwas ~~liquidation~~transferred ~~for nonaccrual~~from ~~finance~~the ~~receivables.~~borrower ~~The~~and ~~increase~~investments in ~~nonaccrual~~real ~~finance~~estate associated with ~~receivables~~leveraged isleases ~~primarily~~which ~~attributable~~matured toduring ~~several~~the ~~hotel~~first ~~and~~six ~~land~~months of ~~development~~2009. ~~accounts~~We ~~within~~intend ~~Resort~~to ~~Finance~~operate ~~segment~~ and toimprove ~~a significant~~the ~~increase~~performance inof ~~delinquent accounts, combined with~~these ~~weakening~~properties ~~collateral~~prior ~~values~~to intheir ~~the~~eventual ~~Aviation Finance segment~~disposition.

Allowance for losses on finance receivables held for investment is presented in the following table.

	March 31,			March 31,
	2009			2008
	(Dollars in millions)
Allowance for losses on finance receivables held for investment, beginning of year	$	191		$	89
Provision for losses		76			27
Less net charge-offs:
Golf Finance		23			1
Distribution Finance		12			9
Aviation Finance		6			2
Resort Finance		2			(1	)
Corporate and Other		4			—
Total net charge-offs		47			11
Allowance for losses on finance receivables held for investment, end of period	$	220		$	105
Net charge-offs as a percentage of average finance receivables held for investment		2.82	%		0.47	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

	March 31,			January 3,
	2009			2009
	(Dollars in millions)
Nonaccrual finance receivables as a percentage of finance receivables held for investment		6.11	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		3.03	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		49.6	%		68.9	%
60+ days contractual delinquency as a percentage of finance receivables held for investment		4.29	%		2.59	%
Operating assets received in satisfaction of troubled finance receivables	$	167		$	84
Repossessed assets and properties		94			70

The ratio of allowance for losses to nonaccrual finance receivables held for investment decreased primarily as a result of the Resort Finance and Aviation Finance accounts mentioned above for which specific reserves were either not established or established at a low percentage of the outstanding balance. This reflects our best estimate of loss based on a detailed review of our workout strategy and estimates of collateral value. The increase in Golf Finance charge-offs is primarily due to the charge-off upon foreclosure of 13 golf courses related to one account, which had been specifically reserved in prior periods.

The increase in operating assets received in satisfaction of troubled finance receivables primarily reflects an increase in the number of golf courses whose ownership was transferred from the borrower during the quarter. We intend to operate and improve the performance of these properties prior to their eventual disposition.

Managed Finance Receivables

Managed finance receivables consist of finance receivables held for investment, finance receivables held for sale and finance receivables that we continue to service, but have sold in securitizations or similar structures in which substantial risks of ownership are retained. The managed finance receivables of our business segments are presented in the following table.:

	March 31,				January 3,
	June 30,				January 3,
	2009				2009
	(Dollars in millions)
Distribution Finance	$	2,884	29	%	$	3,379	31	%
Captive Finance	$	3,195	37	%	$	3,403	31	%
Aviation Finance		2,717	28	%		2,795	26	%
Distribution Finance		2,085	24	%		3,379	31	%
Golf Finance		1,675	17	%		1,785	16	%
Resort Finance		1,568	18	%		1,636	15	%
Resort Finance		1,623	16	%		1,636	15	%
Golf Mortgage Finance		1,039	12	%		1,177	11	%
Asset-Based Lending		507	5	%		649	6	%
Structured Capital		405	5	%		508	5	%
Structured Capital		434	4	%		508	5	%
Asset-Based Lending		275	3	%		649	6	%
Corporate and Other		5546	1	%		69	1	%
Total managed finance receivables	$	98,~~895~~613	100	%	$	10,821	100	%

Managed finance receivables decreased primarily as a result of the continued liquidation of certain portfolios, mostly within the Distribution Finance and Asset-Based Lending segments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Operating Results by Segment

Segment (loss) income presented in the tables below reflects amounts before special charges, ~~and~~ income taxes and noncontrolling interest.

~~Aviation~~30 ~~Finance~~

	March 31,			March 31,
	2009			2008
	(In millions)
Revenues	$	42		$	50
Net interest margin	$	15		$	25
Selling and administrative expenses		5			7
Provision for losses		30			1
Segment (loss) income	$	(20	)	$	17

~~Aviation~~Item ~~Finance segment income decreased $37 million in the first quarter of 2009 compared with the first quarter of 2008~~2. ~~Provision~~Management’s ~~for~~Discussion ~~losses~~and ~~increased~~Analysis ~~primarily as a result~~ of ~~an increase~~Financial inCondition ~~the reserve rate utilized to establish the provision for losses ($20 million)~~ and ~~other~~Results ~~specific~~of ~~reserving actions~~Operations ~~($5 million)~~— ~~as delinquent and nonaccrual loans increased significantly and collateral values continued to weaken. Net interest margin declined mostly due to lower securitization gains~~ (~~$5 million~~Continued) ~~and impairments recorded on repossessed assets ($3 million) as a result of weakening collateral values.~~

Captive Finance


	Three Months Ended					Six Months Ended
	June 30,			June 30,		June 30,			June 30,
	2009			2008		2009			2008
	(In millions)

Revenues	$	42		$	58	$	95		$	120
Segment (loss) income	$	(19	)	$	18	$	(44	)	$	36

Revenues decreased $16 million and $25 million for the three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to an increase in portfolio losses ($12 million and $16 million, respectively) and lower securitization gains ($3 million and $8 million, respectively). Portfolio losses primarily include impairments recorded on repossessed assets as a result of weakening aircraft values.

Segment income decreased $37 million and $80 million for the three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to higher loss provision ($23 million and $57 million, respectively) and an increase in portfolio losses ($12 million and $16 million, respectively). Provision for losses increased primarily as a result of an increase in the reserve rate utilized to establish the provision for losses ($13 million and $33 million, respectively) and other specific reserving actions ($8 million and $13 million, respectively) as delinquent and nonaccrual loans increased significantly and aircraft values continued to decline.

Resort Finance

	March 31,			March 31,
	Three Months Ended						Six Months Ended
	2009			2008
	June 30,			June 30,			June 30,			June 30,
	(In millions)
	2009			2008			2009			2008
Revenues	$	28		$	35
	(In millions)
Net interest margin	$	19		$	20
Revenues	$	24		$	31		$	52		$	66
Selling and administrative expenses		5			6
Segment (loss) income	$	(7	)	$	15		$	(21	)	$	30
Provision for losses		28			(1	)
Segment (loss) income	$	(14	)	$	15

~~Resort~~Revenues ~~Finance segment income~~ decreased $297 million inand ~~the first~~$14 million ~~quarter~~for ~~of 2009 compared with~~ the ~~first quarter of 2008~~ ~~primarily~~three ~~the~~and ~~result~~six ofmonths ~~higher~~ended ~~provision for losses. Provision for losses increased $29~~June ~~million~~30, ~~principally~~2009 ~~reflecting~~as ancompared to ~~increase~~2008, inrespectively, ~~the~~primarily ~~reserve~~due ~~rate utilized~~ to ~~establish~~ the ~~provision~~decrease in market ~~for~~interest ~~losses~~rates ($267 million) and ~~other specific reserving actions taken on several accounts (~~$1018 million~~). The~~, ~~increase in reserve rates is primarily a result of increasing default rates in our customers’ timeshare notes receivable portfolios and the lack of liquidity available to this industry~~respectively).

Segment income decreased $22 million and $51 million ~~Golf~~for the three and six months ended June 30, 2009 as ~~Finance~~compared to 2008, respectively, mostly due to an increase in provision for losses ($21 million and $50 million, respectively) reflecting the establishment of loss reserves due to the lack of liquidity available to borrowers in this industry.

	March 31,			March 31,
	2009			2008
	(In millions)
Revenues	$	23		$	34
Net interest margin	$	7		$	15
Selling and administrative expenses		8			6
Provision for losses		13			—
Segment (loss) income	$	(14	)	$	9

Golf Mortgage Finance


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)

Revenues	$	10		$	20		$	22		$	42
Segment loss	$	(7	)	$	(8	)	$	(16	)	$	—

Revenues decreased $10 million and $20 million for the three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to an increase in portfolio losses ($3 million and $6 million, respectively), a decrease in market interest rates ($3 million and $9 million, respectively) and lower securitization gains of $2 million for both periods.

The decrease of $1 million in segment loss for the three months ended June 30, 2009 as compared to 2008 is primarily due to higher portfolio losses ($3 million) and lower interest margin, excluding other income ($3 million), partially offset by lower provision for losses ($10 million) mostly attributable to a $12 million specific reserve established for one account in 2008. The increase in segment loss of $16 million for the six months ended June 30,

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

~~Golf Finance segment income decreased $23 million during the first quarter of~~ 2009 as compared to ~~the first quarter of~~ 2008 principally ~~reflecting~~reflects ~~higher provision for losses and a decrease in net interest margin. The increase in provision for losses is the result of~~ an increase in ~~the reserve rate utilized~~ toportfolio ~~establish the provision for~~ losses ($56 million) and ~~specific~~ ~~reserving~~lower ~~actions~~pure ~~taken on several accounts~~interest ~~($6 million). The decrease in net interest~~ margin ispercentage ~~mostly due to discounted prepayments of loans~~ ($26 million)~~, lower pricing relative to market rates ($2 million) and higher borrowing costs ($2 million)~~.

Distribution Finance

	March 31,			March 31,
	2009			2008
	(In millions)
Revenues	$	20		$	65
Net interest margin	$	9		$	47
Selling and administrative expenses		17			25
Provision for losses		5			10
Segment (loss) income	$	(13	)	$	12

Distribution Finance segment income decreased $25 million in the first quarter of 2009 compared to the first quarter of 2008 due to a decrease in net interest margin, partially offset by lower selling and administrative expenses and provision for losses. The decrease in net interest margin is primarily attributable to lower net securitization gains of $21 million, including $6 million of impairment charges recorded on retained interests in 2009, an increase in borrowing costs ($10 million), the acceleration of deferred loan origination cost amortization ($9 million) and lower average finance receivables of $763 million ($7 million), partially offset by the benefit obtained from floor rates in effect for a substantial portion of the portfolio ($11 million). Selling and administrative expenses decreased primarily as a result of a decline in managed finance receivables and a change in our expense allocation methodology as more fully discussed in Note 14 Financial Information about Operating Segments. Provision for losses decreased mostly as a result of the classification of $760 million of finance receivables as held for sale at January 3, 2009 and the liquidation of finance receivables. Finance receivables classified as held for sale are carried at fair value resulting in no loss provision. These decreases were partially offset by an increase in the reserve rate utilized to establish the provision for losses for the marine portfolio ($6 million) and other specific reserving actions taken on several marine accounts ($9 million).

Asset-Based Lending

	March 31,		March 31,
	Three Months Ended					Six Months Ended
	2009		2008
	June 30,		June 30,			June 30,		June 30,
	(In millions)
	2009		2008			2009		2008
Revenues	$	12	$	20
	(In millions)
Net interest margin	$	8	$	11
Revenues	$	8	$	17		$	20	$	37
Selling and administrative expenses		3		6
Segment income (loss)	$	4	$	4		$	9	$	(8	)
Provision for losses		—		17
Segment income (loss)	$	5	$	(12	)

~~Asset-Based~~Revenues ~~Lending~~decreased ~~segment~~$9 million ~~income~~and ~~increased~~ $17 million ~~in the~~for ~~first quarter of 2009 compared to~~ the ~~first quarter of 2008~~ ~~primarily~~three ~~due~~and tosix amonths ~~decrease~~ended inJune 30, ~~provision~~2009 ~~for~~as ~~losses~~compared ~~related~~ to a ~~$15 million specific reserving action taken for one account in~~ 2008., ~~Net~~primarily ~~interest~~due ~~margin~~to ~~declined mostly the result of~~ lower average finance receivables of ~~$186 million~~ ($2439 million) and ~~lower prepayment income (~~$1312 million~~). Selling~~, ~~and~~respectively, ~~administrative expenses decreased primarily~~ as a result of athe ~~change~~continued inliquidation ~~our~~of ~~expense~~the ~~allocation methodology as more fully discussed in Note 14 Financial Information about Operating Segments~~portfolio.

Segment income was unchanged for the three months ended 33June 30, 2009 and increased $17 million for the six months ended June 30, 2009 as compared to 2008. The increase in segment income for the six months ended June 30, 2009 was primarily due to lower provision for losses mostly the result of a $15 million specific reserving action taken for one account during 2008.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Structured Capital

	March 31,			March 31,
	Three Months Ended						Six Months Ended
	2009			2008
	June 30,			June 30,			June 30,			June 30,
	(In millions)
	2009			2008			2009			2008
Revenues	$	(2	)	$	9
	(In millions)
Net interest margin	$	(4	)	$	6
Revenues	$	(8	)	$	(9	)	$	(10	)	$	—
Selling and administrative expenses		1			1
Segment loss	$	(44	)	$	(11	)	$	(49	)	$	(6	)
Segment (loss) income	$	(5	)	$	5

~~Structured~~The ~~Capital~~decrease ~~segment~~in ~~income~~revenues ~~decreased~~of $10 million in for the ~~first~~six ~~quarter~~months ended ofJune 30, 2009 ~~compared~~was ~~to 2008~~ primarily due to ahigher portfolio losses ($514 million), ~~gain~~partially ~~recognized~~offset ~~upon~~by ~~the sale of~~ a ~~leveraged~~reduction in leveraged lease ~~investment~~earnings inresulting from the ~~first~~adoption ~~quarter~~ of ~~2008 and impairment~~ ~~charges taken on two lease investments~~ FSP 13-2 in ~~2009~~2008 ($49 million).

Segment loss increased $33 million and $43 million for the three months and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to higher provision for losses as a result of a $32 million specific reserve established for one automobile manufacturer lease during the second quarter of 2009.

Distribution Finance


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008
	(In millions)

Revenues	$	(16	)	$	60		$	4		$	125
Segment (loss) income	$	(39	)	$	(3	)	$	(52	)	$	9


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)*

Revenues decreased $76 million and $121 million for the three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to the following:


	Three Months			Six Months
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)

Lower securitization gains	$	(15	)	$	(31	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Portfolio losses		(24	)		(24	)
Lower average finance receivables of $525 million and $644 million, respectively		(5	)		(12	)
Lower market interest rates		(5	)		(13	)
Lower other income		(6	)		(7	)
Benefit from variable-rate receivable interest rate floors		8			19

Portfolio losses include $22 million of discounts recorded on the early termination of marine finance assets during the three months ended June 30, 2009.

Segment income decreased $36 million and $61 million for the three and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to the following:


	Three Months			Six Months
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)

Lower securitization gains	$	(15	)	$	(31	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Portfolio losses		(24	)		(24	)
Revenue impact of lower average finance receivables of $525 million and $644 million, respectively		(5	)		(12	)
Lower other income		(6	)		(7	)
Provision for losses		19			24
Benefit from variable-rate receivable interest rate floors		8			19
Lower selling and administrative expenses		10			18

Provision for losses decreased for both the three and six months ended June 30, 2009 mostly as a result of the classification of $760 million of finance receivables as held for sale at January 3, 2009 and the overall reduction of finance receivables from the $1.6 billion at June 30, 2008 to $931 million at June 30, 2009.

Corporate and Other Segment

	March 31,			March 31,
	Three Months Ended						Six Months Ended
	2009			2008
	June 30,			June 30,			June 30,		June 30,
	(In millions)
	2009			2008			2009		2008
Revenues	$	(1	)	$	1
	(In millions)
Net interest margin	$	9		$	(1	)
Revenues	$	26		$	—		$	25	$	1
Selling and administrative expenses		14			3
Segment income (loss)	$	13		$	(2	)	$	8	$	(6	)
Provision for losses		—			—
Segment loss	$	(5	)	$	(4	)

~~Corporate~~Revenues ~~and~~increased ~~Other~~$26 million ~~segment~~and ~~loss increased~~ $124 million infor the ~~the~~three ~~first~~months ~~quarter~~and ofsix ~~2009~~months ~~compared~~ended toJune 30, ~~the~~2009 ~~first~~as ~~quarter of 2008.~~compared ~~The~~to ~~increase~~2008, inrespectively, ~~segment loss was~~ primarily due to agains on early debt extinguishment ($1137 million ~~increase in selling~~ and ~~administrative expenses~~$39 million, ~~associated~~respectively), ~~with~~partially aoffset ~~change~~by inlower ~~our~~other ~~allocation methodology which~~income ~~resulted~~($11 million inand ~~lower~~$15 million, ~~allocations~~respectively). ~~of overhead expenses to our~~Lower ~~segments.~~other ~~This~~income ~~was~~includes ~~partially~~an ~~offset~~increase ~~by higher net interest margin, mostly related~~ to the ~~impact~~held offor asale ~~change~~valuation allowance in($11 million ~~our~~and ~~interest~~$12 million, respectively) ~~expense~~for ~~allocation~~the ~~methodology.~~three ~~Both~~and ofsix ~~these~~months ~~methodology changes~~ended ~~are~~of ~~more~~2009, ~~fully~~to ~~described~~reflect ~~in Note 14 Financial~~changes ~~Information~~in ~~about~~fair ~~Operating Segments~~value.

~~Selected~~ ~~Financial Ratios~~33

	Three Months Ended
	March 31,			March 31,
	2009			2008
Net interest margin as a percentage of average net investment(1)		3.11	%		5.79	%
Return on average equity		(20.26	)%		11.05	%
Return on average assets		(2.25	)%		1.29	%
Selling and administrative expenses as a percentage of average managed and serviced finance receivables(2)		1.82	%		1.71	%
Operating efficiency ratio(3)		84.1	%		43.9	%
Net charge-offs as a percentage of average finance receivables held for investment		2.82	%		0.47	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

	March 31,			January 3,
	2009			2009
60+ days contractual delinquency as a percentage of finance receivables held for investment(4)		4.29	%		2.59	%
Nonaccrual finance receivables as a percentage of finance receivables held for investment		6.11	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		3.03	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		49.6	%		68.9	%
Total debt to tangible equity(5)		7.82	x		6.52x

Segment income increased $15 million and $14 million for the three months and six months ended June 30, 2009 as compared to 2008, respectively, primarily due to gains on early debt extinguishment ($37 million and $39 million, respectively) and a change in unallocated interest expense ($7 million and $20 million, respectively), partially offset by lower other income ($11 million and $15 million, respectively) and a change in unallocated selling and administrative expenses ($19 million and $30 million, respectively). Selling and administrative and interest expense allocation methodologies are more fully described in Note 15. Financial Information about Operating Segments.

Selected Financial Ratios


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2009			2008			2009			2008

Net interest margin as a percentage of average net investment(1)		2.13	%		4.91	%		2.63	%		5.35	%
Return on average equity		(25.25	)%		1.60	%		(22.99	)%		6.46	%
Return on average assets		(2.82	)%		0.17	%		(2.53	)%		0.72	%
Selling and administrative expenses as a percentage of average managed and serviced finance receivables(2)		2.02	%		1.53	%		1.92	%		1.62	%
Operating efficiency ratio(3)		129.3	%		48.0	%		101.9	%		45.8	%
Net charge-offs as a percentage of average finance receivables held for investment		1.33	%		0.89	%		2.03	%		0.68	%


	June 30,			January 3,
	2009			2009

60+ days contractual delinquency as a percentage of finance receivables held for investment(4)		6.62	%		2.59	%
Nonaccrual finance receivables as a percentage of finance receivables held for investment		10.04	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		4.18	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		41.6	%		68.9	%
Total debt to tangible equity(5)		7.50	x		6.52x


(1)		Represents revenues earned less interest expense on borrowings and operating lease depreciation as a percentage of average net investment. Average net investment includes finance receivables plus operating leases, less deferred taxes on leveraged leases.

(2)		Average managed and serviced finance receivables include owned receivables, receivables serviced under securitizations, participations and third-party portfolio servicing agreements.

(3)		Operating efficiency ratio is selling and administrative expenses divided by net interest margin.

(4)		Delinquency excludes any captive finance receivables with recourse to Textron. Captive finance receivables represent third-party finance receivables originated in connection with the sale or lease of Textron manufactured products. Percentages are expressed as a function of total Textron Financial independent and nonrecourse captive finance receivables.

(5)		Tangible equity equals Total equity, excluding Accumulated other comprehensive income (loss).

Recent Accounting Pronouncements

In ~~March~~June 2009, the Financial Accounting Standards Board (“FASB”) issued ~~FASB~~Statement ~~Staff~~of ~~Position~~Financial Accounting Standards (“~~FSP~~SFAS”) No. ~~115-2 and FAS 124-2~~ 166 “~~Recognition~~Accounting and Presentation of Other-Than-Temporary Impairments”. The FSP amends the other-than-temporary impairment criteria associated with marketable debt securities and beneficial interests in securitized financial assets. It requires that an entity evaluate for ~~and record an~~ ~~other-than-temporary~~Transfers ~~impairment~~of ~~when~~Financial itAssets — ~~concludes that it does not intend to sell~~ an ~~impaired~~amendment ~~security and does not believe it likely that it will be required to sell the security before recovery~~ of ~~the amortized cost basis, regardless of the~~FASB ~~entity’s~~Statement ~~positive~~No. 140”. ~~intent~~This ~~and~~standard ~~ability~~eliminates ~~to hold~~ the ~~asset to~~ ~~maturity.~~concept ~~Once an entity has determined that an other-than-temporary impairment has occurred, it is required to record the credit loss component~~ of ~~the difference between the security’s amortized cost basis and the estimated fair value in earnings, whereas the remaining difference is to be recognized as~~ a ~~component~~qualifying ofspecial ~~Other~~purpose ~~comprehensive income and~~entity ~~amortized~~(“QSPE”) ~~over the remaining life of the security. The FSP is effective for interim~~ and ~~annual reporting periods ending after June 15, 2009 and the Company is currently evaluating the potential effect adoption may have on~~ its ~~Statement of Position~~exclusion ~~and Results of Operations.~~

~~In March 2009, the FASB issued FSP~~ ~~No. 157-4~~34 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significant Decreased and Identifying Transactions That Are Not Orderly”. The FSP requires entities to evaluate the significance and relevance of market factors for Level 2 fair value inputs to determine if, due to reduced volume and market activity, the factors are still relevant and substantive measures of fair value. The FSP is effective for interim and annual reporting periods ending after June 15, 2009 and the Company does not believe the adoption will have a material effect on its Statement of Position or Results of Operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

from consolidation by the primary beneficiary in that variable interest entity (“VIE”) or the transferor of financial assets to the VIE. The new accounting guidance also requires that former QSPE’s be reevaluated for consolidation. This standard is effective beginning in the first quarter of 2010 and early application is prohibited. The adoption of this standard may result in the consolidation of our off-balance sheet securitization trusts, which hold our securitized finance receivables and debt. As our off-balance sheet securitization trusts are winding down in connection with our liquidation plan, we are currently assessing the impact the adoption of this standard may have our on financial position, results of operations and liquidity when we are required to adopt it next year.

Also in June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”. This standard changed the approach to determining the primary beneficiary of a VIE and requires companies to more frequently assess whether they must consolidate VIEs. This standard is effective in the first quarter of 2010 and early application is prohibited. The adoption of this standard is not expected to have any significant impact on our financial position or results of operations.

Forward-looking Information

Certain statements in this Quarterly Report on Form 10-Q and other oral and written statements made by Textron Financial 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 Risk Factors contained ~~herein~~in our Annual Report on Form 10-K for the year ended January 3, 2009, those additional and updated risk factors discussed in our ~~2008~~Quarterly ~~Annual~~ Report on Form 10-KQ for the fiscal quarter ended March 31, 2009, and including the following: (a) changes in worldwide economic, political or regulatory conditions that impact interest and foreign exchange rates; (b) the occurrence of slowdowns or downturns in customer markets in which Textron products are sold or supplied and financed or where we offer financing; (c) the ability to realize full value of finance receivables and investments in securities; (d) the ability to control costs and successful implementation of various cost reduction programs, including our current restructuring program; (e) increases in pension expenses and other post-retirement employee costs; (f) the impact of changes in tax legislation; (g) the ability to maintain portfolio credit quality and certain minimum levels of financial performance required under our committed ~~credit~~bank ~~facilities~~line of credit and under our Support Agreement with Textron; (h) access to financing, including securitizations, at competitive rates; (i) access to equity in the form of retained earnings and capital contributions from Textron; (j) uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies; (k) the launching of significant new products or programs which could result in unanticipated expenses; (l) risks and uncertainties related to acquisitions and dispositions, including difficulties or unanticipated expenses in connection with the consummation of acquisitions or dispositions, the disruption of current plans and operations, or the failure to achieve anticipated synergies and opportunities; (m) the ability to successfully exit from our commercial finance business, other than the captive finance business, including effecting an orderly liquidation or sale of certain portfolios and businesses; (n) uncertainty in estimating the market value of our Finance receivables held for sale and our Allowance for losses on finance receivables held for investment; (o) bankruptcy or other financial problems at major customers that could cause disruptions or difficulty in collecting amounts owed by such customers; (p) legislative or regulatory actions impacting our operations; and (q) continued volatility and further deterioration of the capital markets.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

For information regarding Textron Financial’s Quantitative and Qualitative Disclosure About Market Risk, see “Risk Management” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Interest Rate Sensitivity”, in Item 7 of our 2008 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 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 Financial’s internal control over financial reporting during the quarter ended ~~March~~June 3130, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

TEXTRON FINANCIAL CORPORATION


Item 6.	*Exhibits*


12		Computation of Ratio of Earnings to Fixed Charges
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

PART II. OTHER INFORMATION TEXTRON FINANCIAL CORPORATION Item 6. Exhibits 12 Computation of Ratio of Earnings to Fixed Charges 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 37

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 Financial Corporation

/s/ Thomas J. Cullen

Thomas J. Cullen

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: ~~April~~July 2931, 2009

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