UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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 June 30, 2009
		For the fiscal quarter ended September 30, 2009
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		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)
40 Westminster Street, Providence, RI		02940-6687
(Address of principal executive offices)		(Zip code)

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

~~Indicate by check mark whether the registrant~~ (~~1) has~~Registrant’s ~~filed~~telephone ~~all~~number, ~~reports~~including ~~required~~area ~~to be filed by Section 13 or 15(d~~code) 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 ~~submitted~~filed ~~electronically~~all ~~and~~reports ~~posted on its corporate Web site, if any, every Interactive Data File~~ required to be ~~submitted~~filed ~~and~~by ~~posted pursuant~~Section 13 toor ~~Rule 405~~15(d) of ~~Regulation S-T (§232.405~~the ofSecurities ~~this~~Exchange ~~chapter)~~Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such reports) and ~~post~~(2) has ~~such~~been subject ~~files)~~to such filing requirements for the past 90 days. Yes oþ. No o.

Indicate by check mark whether the registrant ishas ~~a large~~submitted ~~accelerated~~electronically ~~filer,~~and anposted ~~accelerated~~on ~~filer~~its corporate Web site, aif ~~non-accelerated~~any, ~~filer,~~every orInteractive aData ~~smaller~~File ~~reporting~~required ~~company.~~to ~~See~~be ~~the~~submitted ~~definitions~~and ofposted ~~“large~~pursuant ~~accelerated~~to ~~filer,”~~Rule 405 ~~“accelerated~~of ~~filer”~~Regulation S-T during ~~and~~the ~~“smaller~~preceding ~~reporting~~12 months ~~company”~~(or infor ~~Rule 12b-2~~such ofshorter ~~the~~period ~~Exchange~~that ~~Act.~~the ~~(Check~~registrant ~~one~~was required to submit and post such files):. Yes o. No o.

~~Large~~ Indicate by check mark whether the registrant is a large accelerated filer, oan ~~Accelerated~~accelerated filer, oa ~~Non~~non-accelerated filer or þa ~~Smaller~~smaller reporting company. oSee 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.	Smaller reporting company o.

(Do not check if a smaller reporting company)

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
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)		2
Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008 (unaudited)		2
Consolidated Balance Sheets at June 30, 2009 and January 3, 2009 (unaudited)		3
Consolidated Balance Sheets at September 30, 2009 and January 3, 2009 (unaudited)		3
Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)		4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)		4
Consolidated Statements of Changes in Equity through June 30, 2009 (unaudited)		5
Consolidated Statements of Changes in Equity through September 30, 2009 (unaudited)		5
Notes to the Consolidated Financial Statements (unaudited)		6
Item 1A. RISK FACTORS		2226
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		2226
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		3543
Item 4. CONTROLS AND PROCEDURES		3643
PART II. OTHER INFORMATION
Item 6. EXHIBITS		3643
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 Pursuant to Rule 13a-14(a)
EX-31.1 Section 302 Certification of CEO
Ex-31.2 - Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 - Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
EX-32.1 Section 906 Certification of CEO
Ex-32.2 - Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
EX-32.1 Section 906 Certification of CFO

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

TEXTRON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Finance charges	$	108		$	139		$	327		$	421
Gains on early extinguishment of debt		9			—			48			—
Rental revenues on operating leases		8			9			23			26
Portfolio (losses) gains		(54	)		(1	)		(114	)		1
Securitization gains (losses)		—			11			(27	)		51
Other income		—			26			22			76

Total revenues		71			184			279			575
Interest expense		33			70			128			227
Depreciation of equipment on operating leases		5			5			14			14

Net interest margin		33			109			137			334
Provision for losses		43			34			206			101
Selling and administrative expenses		54			57			160			160
Special charges		1			—			9			—

(Loss) income before income taxes and noncontrolling interest		(65	)		18			(238	)		73
Income tax (benefit) expense		(21	)		4			(76	)		24

Net (loss) income before noncontrolling interest		(44	)		14			(162	)		49
Noncontrolling interest, net of income taxes		(3	)		—			(2	)		—

Net (loss) income	$	(41	)	$	14		$	(160	)	$	49

(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.

TEXTRON FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			January 3,
	September 30,			January 3,
	2009			2009
	(In millions)
ASSETS
Assets
Cash and equivalents	$	~~521~~616		$	16
Finance receivables held for investment, net of unearned income:
Installment contracts		2,~~622~~458			2,787
Revolving loans		1,~~200~~173			1,208
Golf course and resort mortgages		1,~~133~~093			1,206
Distribution finance receivables		~~932~~481			647
Finance leases		~~560~~431			608
Leveraged leases		~~358~~359			459
Total finance receivables held for investment		65,~~805~~995			6,915
Allowance for losses on finance receivables held for investment		(~~284~~302	)		(191	)
Finance receivables held for investment — net		65,~~521~~693			6,724
Finance receivables held for sale		~~613~~998			1,658
Equipment on operating leases — net		~~235~~220			247
Other assets		~~629~~580			699
Total assets	$	8,~~519~~107		$	9,344
LIABILITIES AND EQUITY
Liabilities and equity
Liabilities
Accrued interest and other liabilities	$	~~348~~338		$	379
Amounts due to Textron Inc.		2847			161
Deferred income taxes		~~206~~226			337
Debt		76,~~057~~638			7,388
Total liabilities		7,~~639~~249			8,265
Equity
Shareholder’s equity
Capital surplus		1,~~305~~414			1,217
Investment in parent company preferred stock		(25	)		(25	)
Accumulated other comprehensive loss		(6148	)		(55	)
Retained deficit		(~~361~~502	)		(58	)
Total shareholder’s equity		~~858~~839			1,079
Noncontrolling interest		2219			—
Total equity		~~880~~858			1,079
Total liabilities and equity	$	8,~~519~~107		$	9,344

See Notes to the Consolidated Financial Statements.

TEXTRON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS


	2009			2008
	(In millions)
Cash flows from operating activities:
Net (loss) income	$	(160	)	$	49
Net income attributable to noncontrolling interest		(2	)		—

Net (loss) income before noncontrolling interest		(162	)		49
Adjustments to reconcile net (loss) income before noncontrolling interest to net cash provided by operating activities:
Provision for losses		206			101
Deferred income tax provision		(116	)		(27	)
Increase (decrease) in income taxes payable		99			(3	)
Portfolio losses		114			1
Gains on early extinguishment of debt		(48	)		—
Impairments/gains in excess of collections on securitizations and syndications		25			(5	)
Depreciation and amortization		27			31
Decrease in accrued interest and other liabilities		(28	)		(3	)
Other — net		19			10

Net cash provided by operating activities		136			154

Cash flows from investing activities:
Finance receivables originated or purchased		(3,044	)		(9,489	)
Finance receivables repaid		3,937			8,602
Proceeds from receivable sales, including securitizations		252			746
Proceeds from disposition of other assets, including repossessed assets and properties and operating leases		197			27
Other investments		139			(90	)
Purchase of assets for operating leases		(11	)		(21	)

Net cash provided (used) by investing activities		1,470			(225	)

Cash flows from financing activities:
Proceeds from line of credit		1,740			—
Proceeds from issuance of long-term debt		—			1,161
Principal payments on long-term debt		(1,250	)		(1,139	)
Net (decrease) increase in commercial paper		(743	)		5
Net (decrease) increase in other short-term debt		(25	)		25
Proceeds from issuance of secured debt		16			300
Principal payments on secured debt		(425	)		—
Principal payments on nonrecourse debt		(148	)		(62	)
Net decrease in intercompany loan due to Textron Inc.		(115	)		—
Proceeds from sale of noncontrolling interest		21			—
Capital contributions from Textron Inc.		204			7
Dividends paid to Textron Inc.		(291	)		(149	)

Net cash (used) provided by financing activities		(1,016	)		148

Effect of exchange rate changes on cash		10			(1	)

Net increase in cash and equivalents		600			76
Cash and equivalents at beginning of year		16			60

Cash and equivalents at end of period	$	616		$	136

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.

TEXTRON FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

				Investment			Accumulated
				in Parent			Other						Total
				In Parent			Other						Total
				Company			Comprehensive			Retained			Share-
	Capital			Preferred			Income			Earnings			holder’s			Noncontrolling			Total
	Surplus			Stock			(Loss)			(Deficit)			Equity			Interest			Equity
	(In millions)
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) income		—			—			—			(~~119~~160	)		(~~119~~160	)		1(2	)		(~~118~~162	)
Other comprehensive loss:
Other comprehensive gain:
Change in unrealized net losses on retained interests, net of income tax benefit		—			—			(91	)		—			(91	)		—			(91	)
Foreign currency translation, net of income taxes		—			—			36			—			36			—			36
Other comprehensive loss		—			—			(6	)		—			(6	)		—			(6	)
Change in unrealized net gain on hedge contracts, net of income taxes		—			—			2			—			2			—			2
Comprehensive loss		—			—			—			—			(125	)		—			(125	)
Other comprehensive gain		—			—			7			—			7			—			7
Capital contributions from Textron Inc.		93			—			—			—			93			—			93
Comprehensive loss		—			—			—			—			(153	)		(2	)		(155	)
Dividends to Textron Inc.		(5	)		—			—			(184	)		(189	)		—			(189	)
Capital contributions from Textron Inc.		204			—			—			—			204			—			204
Dividends to Textron Inc.		(7	)		—			—			(284	)		(291	)		—			(291	)
Sale of noncontrolling interest		—			—			—			—			—			21			21
Balance June 30, 2009	$	1,305		$	(25	)	$	(61	)	$	(361	)	$	858		$	22		$	880
Balance September 30, 2009	$	1,414		$	(25	)	$	(48	)	$	(502	)	$	839		$	19		$	858

See Notes to the Consolidated Financial Statements.

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 ~~June~~September 30, 2009, and its consolidated results of operations and cash flows for each of the interim ~~periods~~ 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~~ October 3130, 2009, which is the date that these financial statements were issued.

~~During~~In the ~~second~~fourth quarter of ~~2009~~2008, ~~the~~Textron ~~Company~~announced ~~made~~ a ~~change~~plan to exit ~~consolidate~~all ~~the~~of ~~management~~our ofcommercial ~~the~~finance ~~portion~~business, ofother ~~the~~than ~~Golf~~that ~~Finance~~portion ~~segment~~of ~~that~~the ~~finances~~business ~~customer~~supporting ~~purchases~~the financing of ~~E-Z-GO~~ ~~golf~~customer purchases ~~cars~~of ~~and~~products ~~Jacobsen~~which ~~turf-care~~Textron ~~equipment~~manufactures. ~~with~~In the ~~Aviation~~second ~~Finance~~quarter of ~~segment.~~2009, ~~This~~we ~~decision~~changed isour ~~consistent~~management ~~with~~structure for the ~~previously~~captive ~~announced~~business ~~plan~~ to ~~exit~~facilitate ~~all~~the management of ~~the~~operations ~~commercial~~of ~~finance business,~~this ~~other~~ongoing ~~than~~business. ~~that~~Due ~~portion~~to ofthis ~~the~~change, ~~business~~we ~~supporting~~consolidated the ~~financing~~ portion of ~~customer~~the ~~purchases~~Golf ofFinance ~~products~~segment ~~which~~that ~~Textron~~finances ~~manufactures~~customer purchases ~~and~~of ~~will~~E-Z-GO ~~facilitate~~golf cars ~~the~~and ~~management~~Jacobsen ofturf-care ~~operations~~equipment ~~and~~into ~~evaluation~~the ofAviation Finance ~~the~~segment, ~~Company’s~~which ~~performance~~finances incustomer ~~line~~purchase ~~with~~of ~~this strategic~~Textron ~~decision~~manufactured aircraft. As a result, the Company’s segment reporting has been adjusted to form a new Captive Finance segment and the remainder of the former 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166 “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”. This standard eliminates the concept of a qualifying special purpose entity (“QSPE”) and its exclusion 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~~will result in the consolidation of ~~our~~any remaining off-balance sheet securitization trusts, which ~~hold~~include ~~our~~ securitized finance receivables and the related debt. AsThe ~~our~~adoption ~~off-balance~~of ~~sheet~~this ~~securitization~~standard ~~trusts~~will ~~are~~not ~~winding~~have ~~down~~a inmaterial ~~connection with our liquidation plan, we are currently assessing the~~ impact ~~the~~on ~~adoption of this standard may have~~ our on financial position, results of operations ~~and~~or 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 changes 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~~We ~~adoption~~are ofcurrently ~~this~~assessing ~~standard~~the isimpact ~~not~~the ~~expected to~~adoption ~~have~~of ~~any~~this ~~significant~~standard ~~impact~~may have on our financial position, or results of of operations or liquidity.


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.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Other income is summarized below:

	Three Months Ended					~~Six~~Nine Months Ended
	June 30,			June 30,		June 30,			June 30,
	September 30,			September 30,		September 30,			September 30,
	2009			2008		2009			2008
	(In millions)
Servicing income	$	75		$	11	$	1722		$	2132
Investment income		23			68		69			1018
Late charges		1			1		23			23
Prepayment income		—			1		(1	)		23
Syndication income		—			—		—			2
Other		(29	)		65		(211	)		1318
Total other income	$	8—		$	2526	$	22		$	5076

The Other component of Other income includes ~~commitment~~adjustments ~~fees~~to the valuation allowance for finance receivables held for sale, 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, weTextron announced a ~~restructuring~~plan to exit ~~program~~all ~~resulting~~of inthe acommercial ~~total~~finance ~~charge~~business of ~~$27 million~~Textron ~~which~~Financial, ~~included~~other ~~$11 million~~than ofthat ~~non-cash~~portion ~~asset~~supporting ~~impairments, $1 million~~the financing of ~~contract termination costs and~~customer ~~$15 million~~purchases of ~~estimated~~products ~~employee~~which ~~severance~~Textron ~~costs~~manufactures. In conjunction ~~addition,~~with ~~during~~ the ~~first~~exit ~~six~~plan, ~~months~~we ofannounced ~~2009,~~a ~~the~~restructuring ~~Company~~program to ~~incurred~~downsize ~~employee severance~~ and ~~pension~~consolidate ~~curtailment~~our ~~costs~~operations. ~~and contract~~We ~~termination~~have ~~costs of $7 million and~~incurred $1 million, ~~respectively.~~in Asseverance ofcosts ~~June 30,~~in ~~2009,~~the ~~since inception~~third quarter of ~~the~~2009 under ~~program~~this ~~the~~plan, ~~Company~~and ~~has~~$8 million ~~paid~~in employee severance ~~related~~and ~~benefits~~pension ~~and~~curtailment ~~contract termination~~ costs ofand $~~11 million and $~~1 million, ~~respectively,~~in ~~which were charged against the~~contract ~~restructuring~~termination ~~reserve.~~costs ~~The~~for ~~detail of~~ the ~~reserve~~nine ~~account~~months isended September 30, ~~presented below:~~2009.

	Severance
	and Pension
	Curtailment			Contract
	Costs			Terminations			Total
	(In millions)
Balance at January 3, 2009	$	11		$	1		$	12
Additions		7			1			8
Cash Paid		(7	)		(1	)		(8	)
Balance at June 30, 2009	$	11		$	1		$	12

We record restructuring costs in Special charges on our Consolidated Statements of Operations, as these costs are generally of a nonrecurring nature and are not included in Segment (loss) income, which is our measure used for evaluating performance and for decision-making purposes. Restructuring costs by segment for the three and nine months ended September 30, 2009 are summarized below. There were no restructuring costs recorded in the three and nine months ended September 30, 2008.

Note 5. Managed and Serviced Finance Receivables


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2009		2009
	(In millions)
Corporate and Other	$	1	$	7
Distribution Finance		—		2

Total Restructuring costs	$	1	$	9

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

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

~~Third-party~~An ~~portfolio~~analysis ~~servicing largely relates to finance receivable portfolios~~ of ~~resort~~our ~~developers~~restructuring ~~and~~reserve ~~loan~~is ~~portfolio servicing~~presented ~~for third-party financial institutions.~~below:


	Severance
	and Pension			Contract
	Curtailment			Termination
	Costs			Costs			Total
	(In millions)
Balance at January 3, 2009	$	11		$	1		$	12
Additions		8			1			9
Cash Paid		(8	)		(2	)		(10	)

Balance at September 30, 2009	$	11		$	—		$	11

Restructuring costs since the inception of the program through September 30, 2009 are summarized below by segment:


	Distribution		Captive		Asset-Based		Corporate
	Finance		Finance		Lending		and Other		Total
	(In millions)
Severance and pension curtailment costs	$	3	$	1	$	1	$	18	$	23
Non-cash asset impairments		7		3		1		—		11
Contract termination costs		2		—		—		—		2

Total Restructuring costs	$	12	$	4	$	2	$	18	$	36

We expect to incur additional costs to exit the non-captive portion of our business over the next two to three years. These costs are expected to be primarily attributable to severance and retention benefits and are not reasonably estimable at this time.


Note 5.	Managed and Serviced Finance Receivables


	September 30,			January 3,
	2009			2009
	(In millions)
Total managed and serviced finance receivables	$	8,926		$	12,173
Nonrecourse participations		(772	)		(820	)
Third-party portfolio servicing		(348	)		(532	)

Total managed finance receivables		7,806			10,821
Securitized finance receivables		(813	)		(2,248	)

Finance receivables		6,993			8,573
Finance receivables held for sale		(998	)		(1,658	)

Finance receivables held for investment	$	5,995		$	6,915

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~~Third-party ~~receivables~~portfolio ~~held~~servicing ~~for~~largely ~~investment~~relates ~~include~~to ~~approximately $0.6 billion and $1.1 billion of~~ finance ~~receivables~~ ~~that~~receivable ~~have~~portfolios ~~been legally sold to special purpose entities (“SPE’s”) and are consolidated subsidiaries~~ of ~~Textron~~ ~~Financial~~resort asdevelopers ~~of June 30, 2009~~ and ~~January 3, 2009,~~loan ~~respectively. The assets of the SPE’s are pledged as~~portfolio ~~collateral~~servicing for ~~$484 million and $853 million of debt as of June 30, 2009 and January 3, 2009, respectively, which have been reflected as securitized on~~third-~~balance~~party ~~sheet~~financial ~~debt~~institutions. Finance receivables held for investment also include approximately $18 million and $102 million of finance receivables that were unfunded at June 30, 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.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On July 14, 2009, a newly formed subsidiary of Textron entered into a $500 million credit facility with the Export-Import Bank of the United States. The facility expires in December 2010. This facility provides funding for the financing of sales of Cessna Aircraft Company and Bell Helicopter products to non-U.S. buyers. Textron Financial originates and services loans and finance leases as servicer for the new subsidiary, which is wholly-owned and consolidated by Textron, and has provided a full guarantee of the debt obligations under this facility. These loans and finance leases which totaled $30 million as of September 30, 2009, are also included in Third-party portfolio servicing.


Note 6.	Finance Receivables Held for Investment

Portfolio Maturities

Portfolio maturities of finance receivables held for investment outstanding at ~~June~~September 30, 2009, excluding valuation allowance, were as follows:

Less Than

1-2

2-3

3-4

4-5

More Than

Less than

1-2

2-3

3-4

4-5

More than

1 Year

Years

5 Years

Total

1 year

Years

5 years

Total

(In millions)

Installment contracts

~~411~~389

~~327~~313

~~363~~345

~~363~~331

~~329~~289

~~829~~791

2,~~622~~458

Revolving loans

~~264~~183

~~405~~486

~~376~~348

~~196~~177

413

2219

1,~~267~~226

Golf course and resort mortgages

~~132~~156

~~268~~251

~~221~~223

~~175~~194

~~108~~87

~~242~~195

1,~~146~~106

Distribution finance receivables

~~680~~405

~~174~~75

5215

493

381

3—

~~996~~499

Finance leases

~~141~~96

~~128~~93

~~112~~83

5538

149

~~110~~112

~~560~~431

Leveraged leases

(32

)

—1

(36

)

(10

)

~~376~~374

~~358~~359

Total finance receivables held for investment

1,~~625~~227

1,~~302~~219

1,~~121~~008

~~828~~733

~~491~~401

1,~~582~~491

6,~~949~~079

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.

InFinance ~~connection~~receivables ~~with~~held ~~our~~for ~~fourth~~investment ~~quarter~~include ~~2008~~approximately $549 million ~~plan~~and to$1.1 billion ~~exit~~of ~~portions~~finance receivables ofthat ~~the~~have ~~commercial~~been ~~finance~~legally ~~business,~~sold weto ~~classified~~special ~~certain~~purpose entities ~~finance~~(“SPEs”) ~~receivables~~and asare ~~held~~consolidated ~~for~~subsidiaries ~~sale.~~of ~~Following an effort to~~Textron ~~market~~Financial ~~the~~as ~~portfolios~~of ~~held~~September 30, ~~for~~2009 ~~sale~~ and ~~the progress made in~~January 3, ~~liquidating our portfolios~~2009, werespectively. ~~believe~~The ~~that~~assets weof ~~will~~the beSPEs ~~able~~are topledged as ~~maximize~~collateral ~~the~~for ~~economic~~$443 million ~~value~~and $853 million of adebt as ~~portion~~ of ~~the~~September 30, ~~finance~~2009 and January 3, 2009, ~~receivables~~respectively, ~~held~~which ~~for~~have ~~sale~~been ~~through~~reflected ~~orderly~~as ~~liquidation rather~~securitized ~~than~~on-balance ~~selling~~sheet ~~the portfolios~~debt. ~~Accordingly,~~Third-party ~~since~~investors wehave ~~now~~no ~~intend~~legal recourse to Textron Financial beyond the credit enhancement ~~hold~~provided aby ~~portion~~the assets of ~~these~~the ~~finance~~SPEs. Finance receivables ~~for~~held ~~the foreseeable~~for ~~future,~~investment wealso ~~have~~include ~~reclassified~~approximately $~~654~~19 million and $65102 million, ~~net~~ of ~~valuation~~finance ~~allowances,~~receivables ~~from~~that ~~the~~were ~~held~~unfunded ~~for~~at ~~sale~~September 30, ~~classification~~2009 toand ~~held~~January 3, ~~for~~2009, ~~investment during the first and~~respectively, ~~second~~primarily ~~quarter~~as ofa ~~2009,~~result ~~respectively.~~of ~~The~~holdback ~~remaining~~arrangements ~~balance~~and ofpayables to ~~these~~manufacturers ~~reclassified~~for ~~finance~~inventory ~~receivables~~financed ~~was~~by ~~$697 million,~~dealers. The ~~net~~corresponding ofliability ais ~~$144 million~~included ~~valuation~~in ~~allowance~~Accrued atinterest ~~June 30,~~and ~~2009.~~other ~~The~~liabilities ~~valuation~~on ~~allowance~~Textron isFinancial’s ~~excluded from the portfolio~~Consolidated ~~maturities~~Balance ~~table above~~Sheets.

Following an effort to market the portfolios held for sale in 8the first 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 intended to hold a portion of these finance receivables for the foreseeable future, we reclassified $719 million, net of

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

a $178 million valuation allowance, from the held for sale ~~Loan~~classification to held for investment in the second quarter of ~~Impairment~~2009.

~~Textron~~As ~~Financial~~a ~~periodically~~result ~~evaluates~~of ~~finance~~the ~~receivables, excluding~~significant ~~homogeneous~~influence ~~loan~~of ~~portfolios~~economic and ~~finance leases, for~~ ~~impairment.~~liquidity Aconditions ~~loan~~on isour ~~considered~~business ~~impaired~~plans, ~~when~~strategies ~~it is probable~~and ~~that~~liquidity ~~the~~position, ~~Company~~and ~~will be unable to collect all amounts due according to~~ the ~~contractual~~rapid ~~terms~~changes ofin ~~the~~these ~~loan~~and ~~agreement. In~~other ~~addition,~~factors ~~the~~we ~~Company~~utilize ~~identifies loans that are considered impaired due~~ to ~~the~~determine ~~significant~~which ~~modification~~assets ofare ~~the~~classified ~~original~~as ~~loan~~held ~~terms~~for tosale, ~~reflect~~we ~~deferred~~currently ~~principal~~believe ~~payments~~the ~~generally~~term at“foreseeable ~~market~~future” ~~interest~~represents ~~rates,~~a ~~but~~time ~~which~~period ~~continue~~of six to ~~accrue~~nine ~~finance~~months. ~~charges~~Unanticipated ~~since~~changes ~~full~~in ~~collection~~both ofinternal ~~principal~~ and ~~interest~~external ~~is not~~factors ~~doubtful.~~affecting ~~Finance~~our ~~receivables~~financial ~~classified~~performance, asliquidity ~~held~~position ~~for~~or ~~sale of~~the ~~$613 million~~value and ~~$1.7 billion at June 30, 2009~~/or ~~and~~marketability ~~January 3,~~of ~~2009~~our ~~are~~finance ~~reflected~~receivables atcould ~~fair~~result ~~value,~~in ~~and are~~a ~~excluded~~modification ~~from~~of ~~the~~this ~~loan impairment disclosures below~~assessment.

	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

In the third quarter of 2009, we received unanticipated inquiries to purchase receivable portfolios classified as held for investment. Due to the nature of these inquiries, we determined a sale of these portfolios would be consistent with our goal to maximize the economic value of our portfolio and accelerate cash collections. As a result, $313 million, net of a $40 million valuation allowance, of the finance receivables reclassified from held for sale to held for investment in the second quarter of 2009 were reclassified as held for sale in the third quarter of 2009 and $108 million of additional finance receivables, net of a $3 million valuation allowance, were also classified as held for sale.

~~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~~Receivable ~~accounts, combined with weakening aircraft values in~~Impairment ~~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

Textron Financial periodically evaluates finance receivables held for investment, excluding homogeneous loan portfolios and finance leases, for impairment. Finance receivables classified as held for sale are reflected at fair value and are excluded from this assessment. A finance receivable 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 agreement. In addition, the Company identifies finance receivables that are considered impaired due to the significant modification of the original 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. The Company performs a valuation of the collateral supporting impaired nonaccrual finance receivables on a quarterly basis using the methods described in Note 10. Fair Value of Financial Instruments.

~~The average recorded investment in impaired nonaccrual finance~~ ~~receivables during the first six months of 2009 was~~Impaired ~~$417 million~~Finance ~~compared to $108 million in the~~Receivables corresponding period in 2008. The average recorded investment in impaired accrual finance receivables amounted to $62 million in the first six months of 2009 compared to $28 million in the corresponding period in 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.


	September 30,		January 3,
	2009		2009
	(In millions)
Impaired nonaccrual finance receivables	$	781	$	234
Impaired accrual finance receivables		276		19

Total impaired finance receivables		1,057		253
Less: Impaired finance receivables without identified reserve requirements		378		71

Impaired nonaccrual finance receivables with identified reserve requirements	$	679	$	182

Allowance for losses on impaired nonaccrual finance receivables	$	147	$	43

Nonaccrual finance receivables include impaired nonaccrual 9finance receivables and accounts in homogeneous portfolios that are contractually delinquent by more than three months.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Nonaccrual Finance Receivables


	September 30,		January 3,
	2009		2009
	(In millions)
Impaired nonaccrual finance receivables	$	781	$	234
Nonaccrual homogeneous finance receivables		57		43

Total nonaccrual finance receivables	$	838	$	277

A summary of nonaccrual finance receivables, impaired nonaccrual finance receivables and related allowance for losses by collateral type is as follows:


		September 30, 2009						January 3, 2009
						Allowance for						Allowance
						Losses on						for Losses
				Impaired		Impaired				Impaired		on Impaired
		Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual
		Finance		Finance		Finance		Finance		Finance		Finance
		Receivables		Receivables		Receivables		Receivables		Receivables		Receivables
		(In millions)
*Segment:*	*Collateral Type:*
Resort Finance	Notes receivable(1)	$	303	$	300	$	42	$	78	$	74	$	9
	Hotels		62		62		7		—		—		—
	Resort construction and inventory		67		67		—		—		—		—
	Land		17		17		4		—		—		—
Distribution Finance	Dealer inventory		89		67		21		43		34		3
Captive Finance	General aviation aircraft		139		123		24		17		6		2
	Golf equipment		16		3		1		18		—		—
Golf Mortgage Finance	Golf course property		96		95		21		107		107		25
	Marinas		8		8		—		—		—		—
Structured Capital	Capital equipment		32		32		27		—		—		—
Corporate and Other	Other		9		7		—		14		13		4

	Total	$	838	$	781	$	147	$	277	$	234	$	43


(1)		Finance receivables collateralized primarily by timeshare notes receivable may also be collateralized by certain real estate and other assets of our borrowers.

The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers in the Resort Finance segment, weaker general economic conditions and weaker aircraft values in the Captive Finance segment. The increase in Resort Finance included one $212 million account, which is primarily collateralized by timeshare notes receivable and several resort properties. The increase in nonaccrual finance receivables and the allowance for losses on impaired nonaccrual finance receivables in the Structured Capital segment is due to a $32 million lease that is secured by automobile manufacturing equipment.

The average recorded investment in impaired nonaccrual finance receivables during the first nine months of 2009 was $508 million compared to $121 million in the corresponding period in 2008. The average recorded

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

investment in impaired accrual finance receivables amounted to $116 million in the first nine months of 2009 compared to $38 million in the corresponding period in 2008.

Nonaccrual finance receivables resulted in Textron Financial’s finance charges being reduced by $36 million and $10 million in the first nine months of 2009 and 2008, respectively, as no finance charges were recognized using the cash basis method.


Note 7.	Other Assets

	June 30,			January 3,
		September 30,				January 3,
	~~2009~~	2009		~~2009~~		2009
	~~(In millions)~~	(In millions)
Operating assets received in satisfaction of troubled finance receivables	$	~~192~~$	168	$	84	$	84
Retained interests in securitizations		~~119~~	93		~~200~~		200
Investments in other marketable securities		80			95
Derivative financial instruments			80				133
Derivative financial instruments		77			133
Investments in other marketable securities			74				95
Repossessed assets and properties		75	74		70		70
Other long-term investments		25	39		30		30
Fixed assets — net		26	25		24		24
Other		35	27		63		63
Total other assets	$	~~629~~$	580	$	~~699~~	$	699

Interest-only securities within retained interests in securitizations were $3 million and $12 million at ~~June~~September 30, 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. At ~~June~~September 30, 2009, unrealized losses on these investments were $20 13 million. These investments have been in a continuous, unrealized loss position for greater than twelve ~~twelve~~ months. These unrealized losses are the result of market yield ~~yield~~ expectations and are considered temporary due to the continued ~~continued~~ performance of the underlying collateral of the timeshare ~~timeshare~~ securitization trusts. In reaching our conclusion that the investments are not other-than-temporarily impaired, we relied on industry analyst reports, credit ratings specific to each investment and information on delinquency, loss and payment experience of the collateral underlying each security.

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 Portfolio (losses) gains.

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~~ September 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.

~~To conform with current presentation, $66 million of assets~~ ~~previously classified as Other long-term investments and~~12 $18 million of assets previously classified as Repossessed assets and properties are now classified as Operating assets received in satisfaction of troubled finance receivables for the period ended January 3, 2009.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 as of January 3, 2009.


Note 8.	Debt and Credit Facilities

	June 30,				January 3,
		September 30,					January 3,
	~~2009~~	2009			~~2009~~		2009
	~~(In millions)~~	(In millions)
Short-term debt:
Commercial paper	$	—$	—		$	~~743~~	$	743
Other short-term debt		9	—			25		25
Total short-term debt		9	—			~~768~~		768
Line of credit facility:
Due 2012 (0.99%)		1,740				—
Due 2012 (0.91)%			1,740					—
Long-term debt:
Fixed-rate notes
Due 2009 (weighted-average rates of 5.83% and 5.62%, respectively)		568				698
Due 2009 (weighted-average rates of 5.84% and 5.62%, respectively)			556					698
Due 2010 (weighted-average rates of 4.82% and 4.82%, respectively)		833				1,018
Due 2010 (weighted-average rates of 4.79% and 4.82%, respectively)			711					1,018
Due 2011 (weighted-average rates of 5.03% and 5.04%, respectively)		~~377~~	370			~~452~~		452
Due 2012 (weighted-average rates of 4.43% and 4.43%, respectively)		52	52			52		52
Due 2013 (weighted-average rates of 5.19% and 5.19%, respectively)		~~478~~	478			~~478~~		478
Due 2014 and thereafter (weighted-average rates of 5.79% and 5.05%, respectively)		164				152
Due 2014 and thereafter (weighted-average rates of 5.79% and 5.68%, respectively)			164					152
Total fixed-rate notes		~~2,472~~	2,331			~~2,850~~		2,850
Variable-rate notes
Due 2009 (weighted-average rates of 0.92% and 2.78%, respectively)		383				836
Due 2009 (weighted-average rates of 0.58% and 2.78%, respectively)			199					836
Due 2010 (weighted-average rates of 1.21% and 3.09%, respectively)		1,262				1,297
Due 2010 (weighted-average rates of 0.87% and 3.09%, respectively)			1,255					1,297
Due 2011 (weighted-average rates of 1.31% and 3.40%, respectively)		239				275
Due 2011 (weighted-average rates of 0.94% and 3.40%, respectively)			206					275
Due 2013 (weighted-average rates of 1.56% and 3.07%, respectively)		100				100
Due 2013 (weighted-average rates of 1.29% and 3.07%, respectively)			100					100
Total variable-rate notes		~~1,984~~	1,760			~~2,508~~		2,508
Securitized on-balance sheet debt:
Amortization beginning 2009 (weighted-average rates of 1.56% and 3.90%, respectively)		484				853
Amortization beginning 2009 (weighted-average rates of 1.32% and 3.90%, respectively)			443					853
Subordinated debt:
Due 2017 and thereafter (6.00%)		~~300~~	300			~~300~~		300
Unamortized premium (discount)		3				(3	)
Unamortized discount			(2	)				(3	)
Fair value adjustments		65	66			~~112~~		112
Total long-term, securitized on-balance sheet and subordinated debt		~~5,308~~	4,898			~~6,620~~		6,620
Total debt	$	~~7,057~~$	6,638		$	~~7,388~~	$	7,388

The Company ~~repurchased~~extinguished through open market transactions $~~393~~595 million of our medium term notes prior to maturity during the first ~~six~~nine months ended ~~June~~ September 30, 2009. These ~~repurchases~~transactions resulted in gains of $9 million and $3948 million for the ~~six~~three and nine months ended ~~June~~ September 30, 2009, respectively.

1113

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On September 14, 2009, Textron Inc. and Textron Financial Corporation announced separate cash tender offers for up to $650 million aggregate principal amount of five separate series of outstanding debt securities with maturity dates ranging from November 2009 to June 2012. On October 13, 2009, Textron Financial Corporation extinguished $319 million of its medium-term notes with maturity dates ranging from 2009 to 2011 and will recognize a gain on these early extinguishments of $8 million in the fourth quarter of 2009.


Note 9.	Comprehensive (Loss) Income

Comprehensive (loss) income is summarized below:

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Net (loss) income	$	(6641	)	$	414		$	(~~119~~160	)	$	3549
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	)		—
Foreign currency translation, net of income taxes		3			(22	)		6			(33	)
Foreign currency translation, net of income taxes		1			5			3			(11	)
Net deferred gain (loss) on retained interests, net of income taxes of $4.2 million and income tax benefits of $0.3 million, $0.5 million and $0.3 million, respectively		8			(1	)		(1	)		(1	)
Net deferred loss on hedge contracts, net of income tax benefit of $0.3 million		—			(1	)		—			—
Amortization of deferred losses on hedge contracts, net of income taxes of $0.4 million and $0.4 million in 2008, respectively		—			1			—			1
Comprehensive (loss) income	$	(72	)	$	7		$	(125	)	$	24
Net deferred gain on hedge contracts, net of income taxes of $1.0 million, $1.1 million, $0.8 million and $1.2 million, respectively		2			2			2			2
Comprehensive (loss) income	$	(28	)	$	(6	)	$	(153	)	$	18


Note 10.	Fair Value of Financial Instruments

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This 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, 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.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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:

	June 30, 2009
	September 30, 2009
	Level 2		Level 3
	(In millions)
Derivative financial instruments, net	$	60	$	—
	Level 2		Level 3
Interest-only securities		—		3
Derivative financial instruments, net	$	75	$	—
Total assets	$	60	$	3
Retained interests in securitizations		—		88
Total assets	$	75	$	88

12Derivatives

The Company’s derivative contracts are not exchange-traded. Derivative financial instruments are measured at fair value utilizing widely accepted, third-party developed valuation models. The actual terms of each individual contract are entered into the model in addition to interest rate and foreign exchange rate data which is based on readily observable market data published by third-party leading financial news and data providers. Credit risk is factored into the fair value of derivative assets and liabilities based on the differential between both the Company’s credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty, however, this had no significant impact on the valuation as of September 30, 2009 as most of our counterparties are AA-rated and the vast majority of our derivative instruments are in an asset position.

Retained Interests in Securitizations

Retained interests represent the Company’s subordinated interest in finance receivables sold to qualified special purpose trusts and include interest-only securities, seller certificates, cash reserve accounts and servicing rights and obligations. These retained interests are initially 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 quarterly using a discounted cash flow model and updated assumptions, and compare such amounts with the amortized cost basis. When a change in fair value is deemed temporary, we record a corresponding credit or charge to Other comprehensive income for any unrealized gains or losses. 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. Changes in the assumptions utilized can have a significant impact on the valuation as described in Note 12. Receivable Securitizations. During the nine months ended September 30, 2009, we recorded a $26 million impairment charge to Securitization (losses) gains on the retained interests, including interest-only securities associated with the Distribution Finance revolving securitization.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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~~nine month periods ~~ended~~ ~~June~~ended September 30, 2009 and ~~June~~September 30, 2008:

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Interest-only securities
Retained Interests in Securitizations
Balance, beginning of period	$	3		$	5253		$	12		$	43
Transfers from nonrecurring classification		110			—			110			—
Net gains for the period:
Increase due to securitization gains on sale of finance receivables		—			2117			—			4259
Change in value recognized in Other income		—			—1			—			12
Change in value recognized in Other comprehensive income		2			(2	)		(1	)		—
Change in value recognized in Other comprehensive Income		12			—			11			—
Impairments recognized in earnings		(2—	)		—(5	)		(8	)		—(5	)
Collections		—			(18	)		—			(33	)
Collections, net		(37	)		(18	)		(37	)		(51	)
Balance, end of period	$	388		$	5348		$	388		$	5348

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
	September 30, 2009
	(Level 3)
	(In millions)
Finance receivables held for sale	$	613
	(Level 3)
Impaired loans		451
Finance receivables held for sale	$	998
Retained interests in securitizations, excluding interest-only securities		110
Impaired finance receivables		532
Operating assets received in satisfaction of troubled finance receivables		41
Repossessed assets and properties		37
Repossessed assets and properties		34
Operating assets received in satisfaction of troubled finance receivables		6
Total assets	$	1,~~249~~573

Finance Receivables Held for Sale

Finance receivables held for sale are recorded at the lower of cost or fair value. ~~The~~As ~~decrease~~a inresult of the ~~fair~~Company’s ~~value~~plan to exit portions of ~~the~~our commercial finance business through a combination of orderly liquidation of finance receivables ~~held~~as they ~~for~~mature ~~sale~~and ~~was~~selected sales, $11998 million ~~and~~of finance ~~$12~~receivables have been classified as held for sale as of September ~~million~~30, ~~during~~2009. ~~the~~The ~~three~~finance ~~and~~receivables ~~six~~held ~~months~~for ~~ended~~sale ~~June~~as of September 30, 2009 primarily include asset-based revolving lines of credit, ~~respectively~~dealer inventory financing and golf mortgages. ~~There~~The ~~was~~majority noof ~~change~~the finance receivables held for sale were identified at the individual loan level. Golf and resort mortgages classified as held for sale were identified as a portion of a larger portfolio with common characteristics based on the intention to balance the sale of certain loans with the ~~methodology~~collection ~~used~~of others to ~~determine~~maximize economic value. These finance receivables are recorded at fair value ~~for~~on ~~these~~a ~~receivables~~nonrecurring basis during ~~2009.~~periods ~~See~~in ~~Note 6.~~which ~~Finance~~the ~~Receivables~~fair ~~Held~~value ~~for Investment~~is ~~regarding~~lower than the ~~change~~cost value. The decrease in ~~classification~~the fair value of ~~certain~~ the finance receivables ~~from~~ held for sale towas ~~held~~$4 million ~~for~~and ~~investment~~$16 million during ~~during~~ the ~~first~~three ~~six~~and nine months ofended September 30, 2009, respectively. See Note 6. Finance Receivables Held for Investment

~~Impaired~~ ~~Loans~~16

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

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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~~change ~~market participants would use~~ in ~~pricing~~ ~~these~~classification ~~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~~certain ~~retained interests using a~~finance ~~discounted~~receivables ~~cash~~from ~~flow~~held 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~~sale ~~credit component and~~ to ~~Other~~held ~~comprehensive income~~ for ~~other~~investment ~~components of~~during the ~~difference between fair value and the amortized cost~~ ~~basis.~~first ~~The~~nine ~~credit~~months ~~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.

There are no active, quoted market prices for our finance ~~Repossessed~~receivables. The estimate of fair value was determined based on ~~Assets~~the use of discounted cash flow models to estimate the exit price we expect to receive in the principal market for each type of loan in an orderly transaction, which includes both the sale of pools of similar assets and ~~Properties~~the sale of individual loans. The models incorporate estimates of the rate of return, financing cost, capital structure and/~~Operating~~or discount ~~Assets~~rate ~~Received~~expectations of prospective purchasers combined with estimated loan cash flows based on credit losses, payment rates and credit line utilization rates. Where available, the assumptions related to the expectations of prospective purchasers are compared to observable market inputs, including bids from prospective purchasers and certain bond market indices for loans of similar perceived credit quality. Although we utilize and prioritize these market observable inputs in ~~Satisfaction~~our discounted cash flow models, these inputs are rarely derived from markets with directly comparable loan structures, industries and collateral types. Therefore, valuations of finance ~~Troubled~~receivables ~~Finance~~held ~~Receivables~~for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.

~~Fair value measurements recorded during the quarter and six~~ ~~months ended June 30, 2009 on these assets resulted in an~~Impaired ~~$18 million~~Finance ~~and $22 million charge, respectively,~~Receivables ~~recorded to Portfolio (losses) gains in the Consolidated Statement of Operations.~~

Finance receivable impairment is measured by comparing the expected future cash flows discounted at the finance receivable’s effective interest rate, or the fair value of the collateral if the finance receivable is collateral dependent, to its carrying amount. If the carrying amount is higher, we establish a reserve based on this difference. This evaluation is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the underlying collateral, which may differ from actual results. Impaired nonaccrual finance receivables are included in the table above since the measurement of required reserves on our impaired finance receivables is significantly dependent on the fair value of the underlying collateral. Fair values of collateral are determined based on the use of appraisals, industry pricing guides, input from market participants, our recent experience selling similar assets or internally developed discounted cash flow models. Fair value measurements recorded during the quarter and nine months ended September 30, 2009 on impaired finance receivables resulted in a $26 million and $143 million charge, respectively, to Provision for losses in the Consolidated Statement of Operations, and were primarily related to initial fair value adjustments.

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

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. During the three and nine months ended September 30, 2009, charges on these assets totaled $6 million and $28 million, respectively, and were recorded in Portfolio (losses) gains in the Consolidated Statement of Operations.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Assets and Liabilities Not Recorded at Fair Value

The carrying values and estimated fair values of Textron Financial’s financial instruments which are not recorded at fair value are as follows:

	June 30, 2009				January 3, 2009
	September 30, 2009				January 3, 2009
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(In millions)
Assets:
Installment contracts	$	2,~~515~~361	$	2,~~165~~151	$	2,748	$	2,408
Revolving loans		1,~~111~~086		~~796~~814		1,170		986
Golf course and resort mortgages		1,~~097~~051		~~898~~909		1,150		931
Distribution finance receivables		~~892~~443		~~888~~431		597		503
Investment in other marketable securities		8074		6061		95		78
Retained interests in securitizations, excluding interest-only securities		65		65		188		178
	$	5,~~701~~020	$	4,~~813~~371	$	5,948	$	5,084
Liabilities:
Fixed-rate debt	$	2,~~540~~395	$	2,~~213~~292	$	2,959	$	2,518
Variable-rate debt		1,~~984~~760		1,~~840~~726		2,508		2,292
Bank line of credit		1,740		1,~~434~~659		—		—
Securitized on-balance sheet debt		~~484~~443		~~462~~427		853		824
Subordinated debt		300		~~129~~195		300		105
Short-term debt		9—		9—		768		768
Amounts due to Textron Inc.		2847		2345		161		156
	$	76,~~085~~685	$	6,~~110~~344	$	7,549	$	6,663

At September 30, 2009, retained interests in 14securitizations totaling $88 million were recorded at fair value on a recurring basis and, accordingly, are not reflected in the table above.

Finance Receivables Held for Investment

There are no active, quoted market prices for these finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models which incorporate estimates 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 the expectations of current market participants are compared to observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans of 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 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 ($431 million, $359 million and $220 million, respectively, at September 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.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Finance Receivables

There are no active, quoted market prices for these finance receivables. The estimate of fair value was determined based on the use of discounted cash flow models which incorporate estimates 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 the expectations of current market participants are compared to observable market inputs, including bids from prospective purchasers of similar loans and certain bond market indices for loans of 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 million, $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.

Investments in Other Marketable Securities

Other marketable securities represent investments in notes receivable issued by securitization trusts which purchase timeshare notes receivable from timeshare developers. These notes are classified as held to maturity and are held at cost. The estimate of fair value was based on observable market inputs for similar securitization interests in markets that are currently inactive.

Debt

At ~~June~~September 30, 2009 and January 3, 2009, 6361% and 82%, respectively, of the fair value of term debt was determined based on observable market transactions. The remaining 3739% 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 $52 million gain in earnings during the first ~~half~~nine months 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~~nine 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.

1519

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes the Company’s derivative activities relating to qualifying hedges of interest rate risk and foreign currency exposure as of ~~June~~September 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,
	September 30,		January 3,		September 30,		January 3,		September 30,			January 3,
	2009		2009		2009		2009		2009			2009
	(In millions)
Fair Value Hedges
Interest Rate Exchange Agreements
Fixed-rate debt	$	1,~~682~~361	$	2,055	$	6551	$	112	$	—		$	—
Fixed-rate receivable		~~352~~329		32		—		—		(124	)		(7	)
Net Investment Hedges
Foreign Currency Forward Exchange Agreements
Foreign-dollar functional currency subsidiary equity		7182		139		32		—		—			—
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreements
Foreign-dollar denominated variable-rate debt		140		140		1224		21		—			—
Foreign-dollar denominated variable-rate receivable		54		5		—		—		(1	)		(1	)
	$	21,~~250~~916	$	2,371	$	8077	$	133	$	(135	)	$	(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~~September 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,
	September 30,		January 3,		September 30,		January 3,		September 30,			January 3,
	2009		2009		2009		2009		2009			2009
	(In millions)
Foreign currency forward exchange agreements	$	~~572~~513	$	536	$	—3	$	—	$	(7—	)	$	—
Interest rate exchange agreements		—		336		—		—		—			(13	)
	$	~~572~~513	$	872	$	—3	$	—	$	(7—	)	$	(13	)

~~Foreign currency forward exchange agreements are utilized by the~~ ~~Company to convert foreign currency denominated assets and~~20 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.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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.

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 and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 is as follows:

		Amount of Gain/(Loss)
		Three Months Ended						~~Six~~Nine Months Ended
		June 30,			June 30,			June 30,			June 30,
		September 30,			September 30,			September 30,			September 30,
	Gain/(Loss) Location	2009			2008			2009			2008
		(In millions)
Fair Value Hedges
Interest rate exchange agreements	Interest expense	$	~~(19~~2	)	$	~~(37~~14	)	$	(1513	)	$	1327
Interest rate exchange agreements	Finance charges		82			1—			68			(1	)
Non-designated Hedges
Interest rate exchange agreements	Other income	$	—		$	—		$	1		$	—
Foreign currency forward exchange agreements	Selling and administrative expenses		(52	)		—			(52	)		(3	)
Foreign currency forward	Selling and
exchange agreements	administrative expenses		(30	)		—			(82	)		(3	)


Note 12.	Receivable Securitizations

As of ~~June~~September 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 table below summarizes net pre-tax (losses) gains, including impairments recognized and certain cash flows received from and paid to the Distribution Finance revolving securitization trust during the three and ~~six~~nine months ended ~~June~~September 30, 2009 ~~and~~ ~~June~~and September 30, 2008, respectively.

	Three Months Ended					~~Six~~Nine Months Ended
	June 30,			June 30,		June 30,			June 30,
	September 30,			September 30,		September 30,			September 30,
	2009			2008		2009			2008
	(In millions)
Net pre-tax (losses) gains, including impairments	$	~~(20~~—	)	$	1510	$	(27	)	$	3040
Proceeds from securitizations		—			—		—			250
Cash flows received on retained interests		4275			1615		42117			2944
Servicing fees received		73			98		1518			1725

~~The Company had $110 million and $191 million of~~ ~~retained interests associated with $1.2 billion and~~21 $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

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The Company had $103 million and $191 million of retained ~~seller~~interests ~~certificates~~associated ~~owned~~with by$775 million and $2.2 billion of finance receivables in the ~~Company~~Distribution Finance securitization trust as of September 30, 2009 and January 3, 2009, respectively. AsThe trust had $978 million of asset-backed notes outstanding as of ~~June~~September 30, 2009, of which $103 million represent our retained interests. In connection with the maturity of the notes, the trust ~~had~~accumulated $1203 million of cash during the third quarter of 2009 from collections of finance receivables.2 This cash, combined with cash accumulated during the first eight days of October 2009, was utilized to repay $240 ~~billion~~million of the notes of third-party investors in October 2009. Due to required amortization and accumulation periods associated with the scheduled maturity of the remaining asset-backed notes, the trust’s revolving period ended in the third quarter of 2009. As of October 2009, due to a change in required cash distributions, the trust will be consolidated.

In ~~addition~~March to2009, ~~our~~the ~~retained~~FASB ~~interests,~~issued ~~the~~new ~~trust~~accounting ~~holds~~guidance regarding ~~$30 million~~the recognition and presentation of other-than-temporary impairments, ~~cash~~which we adopted in ~~reserve~~the ~~accounts~~second asquarter of ~~June 30,~~2009. ~~2009,~~This ~~which~~guidance ~~can~~amends bethe other-than-temporary impairment ~~used~~criteria byassociated ~~the~~with ~~trust~~marketable todebt ~~cover~~securities and ~~credit~~beneficial ~~losses~~interests in securitized financial assets. It ~~During~~requires ~~the~~that ~~first~~an ~~six~~entity ~~months~~evaluate offor ~~2009,~~and ~~$11 million~~record ~~of cash~~an ~~was~~other-than-temporary impairment ~~provided~~when toit ~~the~~concludes ~~trust,~~that ~~beyond~~it ~~the~~does ~~amount~~not ~~which~~intend ~~was~~to sell an ~~previously~~impaired ~~contractually~~security and does not believe it likely that it will be required, to ~~prevent~~sell the ~~early~~security before recovery of the amortized ~~amortization~~cost basis, regardless of athe ~~portion~~entity’s ofpositive intent and ability to hold the ~~trust~~asset ~~debt~~to maturity. AsOnce aan ~~result~~entity ofhas determined ~~the~~that an ~~cash~~other-than-temporary impairment ~~reserve~~has ~~accounts~~occurred, it is required to record the ~~Company~~credit loss component of the difference between the security’s amortized ~~maximum~~cost ~~loss~~basis ~~exposure~~and the estimated fair value in earnings, ~~related~~whereas to the ~~trust~~remaining difference is ~~$140 million,~~to ~~which~~be ~~represents~~recognized ~~the~~as a ~~sum~~component of ~~the~~Other ~~retained~~comprehensive ~~interest~~income and amortized over the remaining ~~cash~~life ~~reserves~~of the security.

In ~~March 2009,~~ the ~~FASB~~second ~~issued~~quarter ~~FASB~~of ~~Staff~~2009, ~~Position (“FSP”) No. 115-2 and FAS 124-2 “Recognition~~we ~~and~~determined ~~Presentation~~that ofour retained ~~Other-Than-Temporary Impairments”,~~interests ~~which we adopted~~ in the ~~second~~Distribution ~~quarter~~Finance ~~of 2009.~~securitization ~~The FSP amends the~~were other-than-~~temporary~~temporarily ~~impairment~~impaired ~~criteria associated with marketable debt securities~~ and ~~beneficial~~recorded ~~interests in securitized financial assets. It requires that~~ an ~~entity evaluate for and record an~~ other-than-temporary impairment ~~when~~charge ~~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~~$31 million. ~~amortized cost~~A ~~basis,~~summary ~~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~~impairments ~~has~~recognized ~~occurred,~~during ~~it is required to record~~ the ~~credit loss~~nine ~~component~~months ~~of the difference between the security’s~~ended ~~amortized~~September 30, ~~cost basis and the estimated fair value in earnings~~2009, ~~whereas~~ ~~the~~including ~~remaining~~those ~~difference is to be~~ recognized ~~as a~~under ~~component~~previous ofgenerally ~~Other~~accepted ~~comprehensive~~accounting ~~income~~principles ~~and~~is ~~amortized~~as ~~over the~~follows: ~~remaining life of the security.~~

In the second quarter of 2009, we determined that our retained interests in the Distribution Finance securitization were other-than-temporarily impaired and recorded a total other-than-temporary impairment charge of $31 million. Including other-than-temporary impairments recognized in the first quarter under previous generally accepted accounting principles, we have recorded the following charges for the six months ended June 30, 2009.


	Nine Months Ended
	September 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	)

	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	)

The amortized cost basis of our retained interests is $86 million at September 30, 2009, which represents our maximum loss exposure. The component of the other-than-temporary impairment recorded in earnings is primarily due to credit losses and the portion recognized in other comprehensive income is attributable to an increase in market discount rates.

~~The~~At ~~amortized cost basis of our retained interests, subsequent to the recognition of the net other-than-temporary impairment in earnings, is $123~~September ~~million at June~~ 30, 2009., ~~The component of~~ the ~~other-than-temporary impairment~~ ~~recorded~~key ineconomic ~~earnings~~assumptions isused ~~primarily due to credit~~in ~~losses~~measuring ~~and~~ the ~~portion~~retained ~~recognized~~interests inrelated ~~other comprehensive income is attributable~~ to anthe ~~increase in market discount rates. Since~~Distribution weFinance ~~have~~revolving ~~the~~securitization ~~intent~~ and ~~ability~~the topotential ~~hold these retained interests~~additional tolosses ~~maturity,~~based ~~changes~~on inthe ~~market~~sensitivity ~~discount~~of ~~rates~~these doassumptions ~~not affect our~~are ~~ultimate~~presented ~~realization of our investment~~below.

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.


	Assumptions at
	September 30,			25% Adverse			50% Adverse
	2009			Change			Change
	(Dollars in millions)
Expected credit losses (annual rate)		4.98	%	$	(8	)	$	(16	)
Monthly payment rate		12.5	%		(4	)		(7	)
Residual cash flows discount rate		10.1	%		(4	)		(8	)

	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	)

Net charge-offs as a percentage of distribution finance receivables were 3.81% and 1.94% for the six months ended June 30, 2009 and twelve months ended January 3, 2009, respectively. The 60+ days contractual delinquency percentage for distribution finance receivables were 5.74% and 2.08% at June 30, 2009 and January 3, 2009, respectively.

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Net charge-offs as a percentage of distribution finance receivables were 4.89% and 1.94% for the nine months ended September 30, 2009 and twelve months ended January 3, 2009, respectively. The 60+ days contractual delinquency percentage for distribution finance receivables were 6.36% and 2.08% at September 30, 2009 and January 3, 2009, respectively.


Note 13.	Income Taxes

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

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 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		(2.4.8	)		43(1.86	)		(12.4	)		118.70
Foreign tax rate differential		(60.69	)		15(6.26	)		(0.51	)		(6.13	)
Canadian dollar functional currency		—			0.21			—			0.1
Change in state valuation allowance		07.24			~~(83.8~~—	)		(01.38	)		(2015.13	)
Tax contingencies		1.2.5			73(4.82	)		1.68			2115.43
Tax credits		(01.70	)		(67.81	)		(0.8	)		(34.0	)
Change in status of foreign subsidiary		4(3.50	)		—			42.3			—
Other, net		0.35			(93.16	)		0.12			(20.4	)
Effective income tax rate		(3832.5	)%		6819.32	%		(32.02	)%		3632.64	%

~~The~~For the three months ended September 30, 2009, the difference between the statutory rate and the effective tax rate ~~for~~ ~~the three months ended June 30, 2009~~ is primarily attributable to athe ~~change~~benefit infor ~~management’s~~state ~~assessment~~taxes ofand ~~the~~a ~~realizability~~decrease ofin aestimate ~~deferred~~of ~~tax~~the ~~asset~~taxable inamount ~~one~~ of ~~the~~a distribution from the Company’s wholly-owned Canadian ~~subsidiaries and the benefit for state taxes~~subsidiary, ~~partially~~ offset by ana ~~increase~~change in ~~estimate~~ management’s assessment of the ~~taxable~~ amount of athe state ~~distribution~~deferred ~~from~~tax aasset ~~Canadian subsidiary~~that is realizable and interest on tax contingencies, the majority of which is associated with leveraged leases.

~~The~~For the nine months ended September 30, 2009, the difference between the statutory rate and the effective tax rate ~~for~~ ~~the~~is ~~six~~primarily ~~months~~attributable ~~ended~~to ~~June 30,~~the ~~2009~~benefit isfor ~~primarily~~state taxes, offset ~~attributable~~by to an increase in estimate of the taxable amount of a a distribution from athe ~~Canadian~~Company’s wholly-owned Canadian subsidiary, ~~and~~a ~~interest~~change onin ~~tax~~management’s assessment of the ~~contingencies,~~amount of the ~~majority~~state ofdeferred ~~which~~tax asset that is ~~associated~~realizable, ~~with~~and ~~leveraged~~tax ~~leases~~contingencies, ~~partially~~the ~~offset~~majority byof ~~the~~which ~~benefit~~is ~~for~~associated ~~state~~with ~~taxes~~leveraged ~~and tax credits~~leases.

~~The~~For ~~difference between~~ the ~~statutory and effective tax rate for the~~ three ~~and six~~ months ended ~~June~~September 30, 2008, ~~is primarily~~the ~~attributable~~difference tobetween athe ~~change~~statutory intax ~~management’s~~rate ~~assessment~~and of the effective tax ~~amount~~rate ofis ~~the~~primarily ~~state~~attributable ~~deferred~~to tax ~~asset~~credits, ~~that~~the iseffects ~~realizable,~~of ~~offset~~events byrelated to cross border financing, and interest on tax contingencies, the majority of which is associated with leveraged leases~~, and state tax expense~~.

~~During~~For the ~~third~~nine ~~quarter~~months ofended September 30, 2008, the ~~Company received an offer~~ ~~from~~difference between the ~~Internal~~statutory ~~Revenue Service (“IRS”) to participate in a settlement initiative related to its challenge of~~ tax ~~deductions~~rate ~~taken~~and by the ~~Company~~effective ~~related to certain~~tax ~~leveraged~~rate ~~lease~~is ~~transactions~~primarily ~~with~~attributable ato ~~total initial investment of approximately $209 million and one finance lease transaction with~~ a ~~current~~change ~~investment~~in ~~balance of $36 million. Based on the terms of the settlement initiative and~~ management’s ~~decision to accept the offer to~~ ~~participate,~~assessment ~~we revised our estimate~~ of ~~this~~the ~~tax~~amount ~~contingency. Final resolution~~ of the ~~settlement~~state ~~initiative~~deferred ~~will~~tax ~~also~~asset ~~result~~that is inrealizable and the ~~acceleration~~effects of ~~cash~~events ~~payments~~related to ~~the~~cross ~~IRS. At~~border ~~June 30~~financing, ~~2009,~~offset ~~$103 million~~by ofstate ~~federal~~taxes ~~deferred~~and ~~tax liabilities~~interest ~~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~~contingencies, ~~2009. The~~the majority of ~~such~~which ~~cash~~is ~~payments~~associated ~~are expected to occur over a period of years in connection~~ with ~~the conclusion of IRS~~ ~~examinations~~leveraged ~~of the relevant tax years~~leases.


Note 14.	Contingencies

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.

1923

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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.


Note 15.	Financial Information about Operating Segments

The Company operates in six segments aggregated based on similar product types or industries: Asset-Based Lending, Captive Finance, Distribution Finance, Golf Mortgage Finance, Resort Finance and Structured Capital. In addition, the Company maintains a Corporate and Other segment that includes other liquidating portfolios, ~~and~~ unallocated Corporate expenses and the impact of recurring charges to both the held for investment and held for sale valuation allowances on the Consolidated Statements of Operations.

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~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Revenues:
Captive Finance	$	4237		$	5856		$	95132		$	~~120~~176
Resort Finance		2421			3132			5273			6698
Golf Mortgage Finance		106			2019			2228			4261
Asset-Based Lending		85			1718			2025			3755
Structured Capital		(818	)		(97	)		(1028	)		—7
Distribution Finance		~~(16~~—	)		6049			4			~~125~~174
Corporate and Other		2620			—3			2545			14
Total revenues	$	8671		$	~~177~~184		$	~~208~~279		$	~~391~~575
(Loss) income before special charges, income taxes and noncontrolling interest:(1)(2)
Segment (loss) income:(1)(2)
Captive Finance	$	(19	)	$	1814		$	(4463	)	$	3650
Resort Finance		(7—	)		1511			(21	)		3041
Golf Mortgage Finance		(714	)		(8—	)		(1630	)		—
Asset-Based Lending		41			41			910			(87	)
Structured Capital		(4415	)		~~(11~~4	)		(4964	)		(62	)
Distribution Finance		(3927	)		(313	)		(5279	)		9(4	)
Corporate and Other		1310			(21	)		818			(65	)
(Loss) income before special charges, income taxes and noncontrolling interest	$	(99	)	$	13		$	(165	)	$	55
Segment (loss) income	$	(64	)	$	18		$	(229	)	$	73
Special charges		51			—			89			—
(Loss) income before income taxes and noncontrolling interest	$	(~~104~~65	)	$	1318		$	(~~173~~238	)	$	5573

2024

TEXTRON FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

	June 30,		January 3,
	September 30,		January 3,
	2009		2009
	(In millions)
Finance assets:(3)
Captive Finance	$	3,~~462~~236	$	3,668
Resort Finance		1,~~644~~623		1,727
Golf Mortgage Finance		1,~~085~~029		1,173
Distribution Finance		~~1,060~~955		1,389
Structured Capital		~~556~~529		603
Asset-Based Lending		~~275~~240		649
Corporate and Other		6248		90
Total finance assets	$	87,~~144~~660	$	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 $69 million and $1726 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~~nine months ended ~~June~~September 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 $1615 million and $3247 million for the three and ~~six~~nine months ended ~~June~~September 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).

2125


Item 1A.	*Risk Factors*

Our business, financial condition and results of operations are subject to various risks, including the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 and those additional and updated risk factors discussed in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009, all of 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 most 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.


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 $5.4.8 billion of managed finance receivables within our $87.68 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~~three 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 segment that finances customer purchases of E-Z-GO golf cars and Jacobsen turf-care equipment.

We achieved $23.20 billion of managed finance receivable reductions during the first ~~six~~nine months of 2009. ~~Reductions~~These ~~were~~managed ~~achieved~~finance receivable reductions occurred in all six of our operating segments, but were primarily driven by a $1.37 billion (3852%) reduction in Distribution Finance, ~~and~~ a $~~373~~409 million (5863%) reduction in ~~Asset~~ Asset-Based Lending. ~~The~~and a $201 million (17%) reduction in Golf Mortgage Finance. These reductions resulted from the combination of scheduled finance receivable collections, discounted payoffs of loans, sales of assets, repossession of collateral and charge-offs. The Distribution Finance receivable reduction includes a $~~274~~418 million ~~or 47~~(71%) ~~reduction~~decrease in marine floorplan finance receivables. These collections were aided by discount programs which encouraged borrowers to liquidate inventory and resulted in $2240 million of our Portfolio losses for the first ~~six~~ nine months of the year. The reduction in ~~Asset~~ 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 $~~229~~289 million of the managed finance receivable reduction. However, we also generated $~~194~~201 million from the collection or sale of these assets and other investments during the first nine ~~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.~~

AsOur ~~a result of the December downsizing plan,~~ $23.90 billion of ~~the~~reduction in managed ~~liquidating~~finance receivables ~~were designated for sale~~ oralso ~~transfer,~~included ~~of which about~~ $~~1.2~~425 ~~billion~~million ~~were~~of ~~securitized receivables~~liquidations ~~and~~in ~~$1.7 billion~~the ~~were owned assets classified~~Captive asportfolio ~~held~~primarily ~~for~~as ~~sale.~~a ~~During~~result ~~the first six months, the balance~~ of ~~these~~ ~~managed receivables was~~ reduced byloan ~~approximately $1.1 billion~~and ~~to $1.8 billion. Approximately~~lease ~~$600 million of this balance is currently securitized and $1~~originations.~~2 billion~~ ~~are owned assets.~~ The ~~$109 million~~reduction ~~sale of Asset Based Lending receivables represents the only significant sale~~ in ~~excess~~originations ofresulted ~~$50 million~~from ~~during the first~~lower ~~six~~Cessna ~~months~~Aircraft ofCompany ~~the year~~sales, ~~however~~no welonger ~~have~~originating ~~sold several other~~non-captive ~~individual~~aircraft loans and ~~small~~leases ~~groups~~and ofthe ~~loans~~agreement ~~and~~signed ~~continue~~by toTextron ~~see~~in ~~interest~~the insecond ~~many~~quarter of ~~the~~2009 ~~portfolios~~with ~~classified~~a assubsidiary ~~held~~of ~~for~~The ~~sale.~~PNC ~~Following~~Financial anServices ~~effort~~Group to ~~market~~become ~~the~~a ~~portfolios~~provider ~~held~~of financing for ~~sale in~~a ~~the~~portion ~~first six months~~ of ~~2009, and~~ the ~~progress~~sales ~~made in~~of ~~liquidating~~E-Z-GO ~~our portfolios, we decided that we will be able to~~golf ~~maximize~~cars. ~~the~~In ~~economic~~July, ~~value~~2009, of a ~~portion~~newly offormed, ~~the~~wholly-owned finance ~~receivables~~subsidiary ~~held~~of ~~for~~Textron ~~sale~~entered ~~through~~into ~~orderly~~a ~~liquidation~~$500 million ~~rather~~credit ~~than~~facility ~~selling~~with the ~~portfolios.~~Export-Import ~~Accordingly,~~Bank ~~since~~of wethe ~~now~~United ~~intend~~States. toThis ~~hold~~facility aprovides ~~portion~~funding offor ~~these~~the ~~finance~~financing ~~receivables~~of ~~for~~sales ~~the~~of ~~foreseeable~~Cessna ~~future,~~Aircraft weCompany ~~have~~and ~~reclassified~~Bell ~~$719 million,~~Helicopter ~~net~~products ~~of a~~to ~~$178~~non-U.S. ~~million~~buyers and ~~valuation~~is ~~allowance,~~expected ~~from~~to ~~the~~reduce ~~held~~our ~~for~~originations ~~sale~~in future periods. We ~~classification~~will continue to ~~held~~service ~~for~~loans ~~investment~~and ~~during~~finance ~~the~~leases ~~first~~as ~~six~~servicer ~~months~~for ofthe ~~2009.~~new ~~The~~Textron ~~total~~finance ~~change~~subsidiary inand ~~the~~have ~~fair~~provided ~~value~~a ~~of these~~full ~~reclassified~~guarantee ~~finance~~of ~~receivables~~the ~~and~~debt ~~the~~obligations under this facility.

As a result of the plan to reduce finance receivables, 22$2.9 billion of the managed liquidating receivables were designated for sale or transfer in December 2008, of which $1.2 billion were securitized finance receivables and $1.7 billion were owned assets classified as held for sale. As of September 30, 2009, $1.4 billion of managed finance receivables are designated for sale, of which $429 million are securitized receivables and approximately $1.0 billion are owned assets classified as held for sale. The $109 million sale of Asset-Based Lending receivables represents the


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

~~remaining~~only significant sale in excess of $~~613~~50 million during the first nine months of ~~finance~~the ~~receivables~~year, ~~that~~however ~~continue~~we have sold several toother beindividual ~~classified~~and assmall ~~held~~groups ~~for~~of ~~sale~~loans atand ~~June 30,~~continue ~~2009~~to ~~was~~see ~~$12 million~~interest in many of the portfolios classified as held for sale.

~~Portfolio~~Following ~~quality~~an ~~statistics~~effort ~~weakened~~to ~~during~~market the ~~first~~portfolios ~~six months of 2009. Nonaccrual finance receivables increased to $683 million (10.04% as a percentage of finance receivables~~ held for ~~investment)~~sale ~~as of June 30, 2009 from~~in ~~$277 million~~the ~~(4.01%~~first assix amonths ~~percentage~~ of ~~finance receivables held for investment) as of January 3~~2009, ~~2009~~ and ~~60+~~the ~~day delinquency~~progress asmade ~~a percentage of finance receivables held for~~in ~~investment~~liquidating ~~increased~~our ~~to 6.62% as of June 30~~portfolios, ~~2009~~we ~~from 2.59%~~decided asthat ofwe ~~January 3,~~will ~~2009.~~be ~~This~~able ~~deterioration was most~~to ~~significant~~maximize in the ~~Resort~~economic ~~Finance~~value ~~and~~of ~~Aviation~~a ~~Finance portfolios.~~portion Weof ~~expect~~ the ~~percentages of nonaccrual~~ finance receivables ~~and~~held ~~delinquency~~for tosale ~~continue~~through toorderly ~~deteriorate~~liquidation inrather ~~subsequent~~than ~~quarters~~selling asthe aportfolios. ~~result of continued difficult general economic conditions~~Accordingly, ~~the~~since ~~lack~~we ofintended ~~liquidity for borrowers in many~~to ofhold ~~our~~a ~~industries~~portion ~~and the continued implementation~~ of ~~our~~these ~~plan to downsize our non-captive commercial~~ finance ~~portfolios. We expect nonaccrual finance~~ receivables tofor ~~liquidate~~the ~~more slowly~~foreseeable ~~than~~future, ~~our~~we ~~performing~~reclassified ~~finance~~$719 million, ~~receivables.~~net ~~As a result~~ of ~~this~~a ~~continued~~$178 million ~~trend~~valuation allowance, ~~Allowance~~from ~~for~~the ~~losses~~held onfor ~~finance receivables~~sale classification to held for investment ~~increased~~in ~~$93 million~~the assecond ~~compared~~quarter toof ~~January 3,~~ 2009.

Portfolio quality statistics weakened during the first nine months of 2009. Nonaccrual finance receivables increased to $838 million (13.98% as a percentage of finance receivables held for investment) as of September 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 7.38% as of September 30, 2009 from 2.59% as of January 3, 2009. This deterioration was most significant in Resort Finance and the aircraft portfolio within Captive Finance. 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 the industries represented in our portfolios and the continued implementation of our plan to downsize our non-captive commercial finance portfolios. We expect the percentage of nonaccrual finance receivables and delinquency to increase more substantially than the absolute dollars of nonaccrual and delinquent accounts since we expect nonaccrual finance receivables to liquidate more slowly than our performing finance receivables. As a result of this continued trend, the Allowance for losses on finance receivables held for investment has increased $111 million as compared to January 3, 2009.

We measure the success of our exit plan based on the percentage of finance receivable and other finance asset reductions converted to cash. This ratio measures the portion of liquidations derived through cash collection and excludes the portion derived from charge-offs, discounted payoffs, losses on sale and impairment charges. During the first nine months of 2009, we have achieved a 94% cash conversion ratio. We expect this ratio to decline over the duration of our exit plan due to the slower pace of liquidations associated with nonaccrual finance receivables.

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 ongoing reduced availability of ~~traditional~~our 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~~27 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)*

~~The~~to ~~following~~use ~~table~~approximately ~~summarizes~~$2.0 billion ~~Textron~~of ~~Financial’s~~proceeds from ~~contractual~~liquidations ~~payments~~to ~~and~~pay ~~receipts~~maturing securitized off-balance sheet debt. During the first nine months of 2009, ~~including~~we ~~all~~liquidated $3.0 billion of managed finance receivables, net of ~~receivables~~originations, and ~~both~~used ~~on-~~approximately ~~and~~$1.2 billion of liquidation proceeds to pay securitized off-balance sheet ~~funding sources~~debt. asWe ofnow ~~June~~expect to reduce managed finance receivables by at least $3.4 30billion, ~~2009,~~net ~~for~~of ~~the~~originations, ~~specified~~in ~~periods:~~2009.

	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

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 is being utilized to repay portions of our maturing term debt. 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.

~~This~~Due ~~liquidity~~to ~~profile,~~the ~~combined~~progress ~~with~~made ~~the~~reducing ~~excess~~our ~~cash~~managed ~~generated~~finance byreceivables ~~our~~and ~~borrowing under~~ the ~~committed~~availability ~~credit facility, is an indicator~~ of ~~our~~cash ~~ability~~from tothe ~~repay~~credit ~~outstanding funding~~line, ~~obligations,~~we ~~assuming~~extinguished ~~contractual~~through ~~collection~~open ofmarket ~~finance~~transactions ~~receivables,~~$595 million ~~absent access to new sources~~ of ~~liquidity~~our ~~or origination~~medium ofterm ~~additional~~notes ~~finance~~prior ~~receivables.~~to ~~This profile~~maturity ~~excludes~~during ~~cash~~the ~~which~~nine ~~may~~month beperiod ~~generated~~ended bySeptember 30, ~~the disposal of~~2009, ~~operating~~resulting ~~lease residual assets and Other assets~~ in ~~addition~~gains ~~to cash~~of ~~which~~$48 million ~~may~~for bethe ~~used~~nine tomonth ~~pay future income taxes and Accrued interest and other liabilities~~period.

~~Securitized~~On ~~on-balance~~September 14, ~~sheet~~2009, ~~and~~Textron ~~securitized off-balance sheet debt payments are based on the contractual receipts of the underlying finance receivables~~Inc. ~~These payments do not represent contractual obligations of the Company~~ and weTextron ~~do not provide~~Financial ~~legal~~Corporation ~~recourse~~announced toseparate ~~investors~~cash ~~that~~tender ~~purchase~~offers ~~interests~~for inup ~~Textron~~to ~~Financial’s~~$650 million ~~securitizations~~aggregate ~~beyond~~principal ~~the~~amount ~~credit~~of ~~enhancement inherent~~five ~~in the retained subordinate interests. Finance~~separate ~~receivable~~series ~~receipts~~of ~~are~~outstanding ~~based~~debt onsecurities ~~contractual~~with ~~cash~~maturity ~~flows. These~~dates ~~amounts~~ranging ~~could~~from ~~differ~~November ~~due~~2009 to ~~sales,~~June ~~prepayments,~~2012. ~~charge-offs~~On ~~and~~October 13, ~~other factors~~2009, ~~including~~Textron ~~the~~Financial ~~inability~~Corporation ~~of borrowers to repay the~~extinguished ~~balance~~$319 million of ~~the~~its ~~loan~~medium-term atnotes ~~the~~with ~~contractual~~ maturity ~~date. Finance~~dates ~~receivable~~ranging ~~receipts~~from on2009 ~~the~~to ~~held~~2011 ~~for~~and ~~sale~~recognized ~~portfolio~~a ~~represent~~gain ~~the~~on these early ~~contractual~~extinguishments ~~balance~~ of ~~the~~$8 million. ~~finance~~We ~~receivables~~intend ~~and~~to ~~therefore~~continually ~~exclude~~evaluate ~~the~~opportunities ~~potential~~to ~~negative~~strategically ~~impact~~repurchase ~~from selling the portfolio~~our atoutstanding ~~the~~debt ~~estimated~~if ~~fair~~it ~~value.~~is ~~Securitized~~in ~~off-balance~~our ~~sheet finance~~economic ~~receivable~~interest, ~~and~~depending ~~cash receipts include $112 million~~on ofour cash ~~collections~~needs ~~accumulated~~and inmarket ~~the Distribution Finance~~conditions. ~~revolving securitization trust collection account which was utilized to payoff maturing~~

2428


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

~~securitized~~The ~~off-balance~~following ~~sheet~~table ~~debt~~summarizes inTextron ~~July 2009. Interest~~Financial’s contractual payments and receipts, inincluding ~~the~~all ~~table~~managed ~~above reflect the current~~finance ~~interest~~receivables ~~rate~~and ~~paid~~both ~~or received~~ on- ~~the related debt~~ and ~~finance receivables.~~off-balance ~~They~~sheet dofunding ~~not include anticipated changes in either~~sources ~~market~~as ~~interest~~of ~~rates~~September 30, ~~or changes in borrower performance~~2009, ~~which could~~for ~~have an impact on~~ the ~~interest~~specified ~~rate according to the terms~~periods: ~~of the related debt or finance receivable contract.~~

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.


	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
Term debt		2,389		886		53			578		131		54		4,091
Securitized on-balance sheet debt		57		61		85			62		60		118		443
Subordinated debt		—		—		—			—		—		300		300
Securitized off-balance sheet debt		879		3		—			—		—		31		913
Interest payments on debt		115		69		53			36		28		67		368
Operating lease rental payments		4		4		2			1		1		—		12

Total payments due		3,444		1,023		1,933			677		220		570		7,867

Cash and contractual receipts:
Finance receivable receipts — held for investment		1,227		1,219		1,008			733		401		1,491		6,079
Finance receivable receipts — held for sale		418		297		160			173		51		27		1,126
Securitized off-balance sheet finance receivable and cash receipts		982		3		—			—		—		31		1,016
Interest receipts on finance receivables		406		299		212			151		109		186		1,363
Operating lease rental receipts		25		20		16			10		6		14		91

Total contractual receipts		3,058		1,838		1,396			1,067		567		1,749		9,675
Cash		616		—		—			—		—		—		616

Total cash and contractual receipts		3,674		1,838		1,396			1,067		567		1,749		10,291

Net cash and contractual receipts (payments)	$	230	$	815	$	(537	)	$	390	$	347	$	1,179	$	2,424

Cumulative net cash and contractual receipts	$	230	$	1,045	$	508		$	898	$	1,245	$	2,424

InThis ~~addition to the~~ liquidity ~~sources~~profile, ~~contained~~combined inwith the ~~table above,~~excess ~~management~~cash ~~continues to pursue multiple avenues for~~generated ~~improving~~by our ~~liquidity~~borrowing ~~profile.~~under ~~These~~the ~~avenues~~committed ~~include additional~~credit ~~financing secured by finance receivables~~facility, ~~sales~~is ofan ~~portfolios~~indicator ~~classified as held for sale, transfers~~ of ~~existing funding~~our ~~obligations~~ability to ~~new~~repay ~~financing~~outstanding ~~providers and loans from~~funding ~~government~~obligations, ~~agencies~~assuming ~~specializing~~contractual incollection ~~assistance with the financing~~ of ~~the foreign sale of products manufactured in the~~finance ~~United~~receivables ~~States~~ and ~~Canada.~~absent ~~The~~access ~~successful~~to ~~execution~~new sources of ~~these financing~~liquidity ~~solutions would mitigate the inherent risks associated~~or ~~with~~origination ~~collecting~~of ~~our~~additional ~~managed~~ finance ~~receivable~~receivables. ~~portfolio~~This inprofile ~~accordance~~excludes ~~with~~cash ~~its~~which ~~contractual~~may ~~maturity~~be ingenerated ~~the~~by ~~current economic environment and aid in~~ the ~~financing~~disposal of ~~Textron manufactured~~ ~~products~~operating inlease ~~the~~residual ~~future.~~assets ~~Depending on the success of these initiatives~~ and ~~changes~~Other assets in ~~external~~addition ~~factors affecting the~~to ~~marketability~~cash ~~and~~which ~~value~~may ofbe ~~our~~used ~~assets,~~to wepay ~~may~~future ~~also~~income ~~consider~~taxes ~~the~~and Accrued ~~sale~~interest ofand ~~assets~~other ~~currently classified as held for investment~~liabilities.

OnFinance ~~July 14,~~receivable ~~2009,~~receipts aare ~~newly~~based ~~formed,~~on ~~wholly-owned~~contractual ~~finance~~cash flows. ~~subsidiary~~These ofamounts ~~Textron~~could ~~entered~~differ ~~into~~due ato ~~$500 million~~sales, ~~revolving~~prepayments, ~~credit~~charge-offs ~~facility~~and ~~with~~other ~~the~~factors, ~~Export-Import~~including ~~Bank of~~ the ~~United~~inability of ~~States.~~borrowers ~~The~~to ~~revolving~~repay ~~period~~the balance of the ~~facility~~loan ~~expires~~at inthe ~~December~~contractual ~~2010~~maturity date. ~~This~~Finance ~~facility~~receivable ~~will~~receipts ~~provide~~on ~~funding~~the held for sale portfolio represent the ~~financing~~contractual ~~of sales~~balance of ~~Cessna~~the ~~Aircraft~~finance receivables ~~Company~~ and ~~Bell~~therefore ~~Helicopter~~exclude ~~products~~the topotential negative impact ~~non-U~~from selling the portfolio at the estimated fair value.~~S. buyers.~~ Interest ~~TFC~~payments ~~will~~and ~~originate~~receipts ~~and~~in ~~service~~the ~~loans~~table ~~and~~above ~~finance~~reflect ~~leases~~the oncurrent ~~behalf~~interest ofrate ~~the~~paid ~~new~~or ~~Textron~~received ~~finance~~on ~~subsidiary~~the ~~and~~related ~~provide~~debt aand ~~full~~finance ~~guarantee~~receivables. ofThey ~~the~~do ~~debt~~not ~~obligations~~include ~~under~~anticipated ~~this~~changes ~~facility.~~in either market


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

interest rates or changes in borrower performance, which could have an impact on the interest rate according to the terms of the related debt or finance receivable contract.

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. Securitized off-balance sheet finance receivable and cash receipts include $203 million of cash collections accumulated in the Distribution Finance revolving securitization trust which was utilized to pay securitized off-balance sheet debt in October 2009. Due to required amortization and accumulation periods associated with the scheduled maturity of the remaining asset-backed notes, the trust’s revolving period ended in the third quarter of 2009. As of October 2009, due to a change in required cash distributions, the trust will be consolidated.

At September 30, 2009, Textron Financial had unused commitments of $515 million to fund new and existing customers under committed revolving lines of credit, construction loans and equipment loans and leases. The revolving line of credit 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.

In addition to the liquidity sources contained in the table above, management continues to pursue 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. The successful execution of these liquidity 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 Captive Finance segment.

In June 2009, we signed an agreement with TCF Inventory Finance, Inc. to transfer the rights to financing programs with two large manufacturers of 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.

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)*

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

Cash flows from operations are summarized below:

	Six Months Ended
		Nine Months Ended
	June 30,				June 30,
		September 30,					September 30,
	~~2009~~	2009			~~2008~~		2008
	~~(In millions)~~	(In millions)
Operating activities	$	72$	136		$	83	$	154
Investing activities		~~1,043~~	1,470			~~(134~~	)	(225	)
Financing activities		~~(616~~	)(1,016	)		46		148

Cash ~~flows~~ provided by ~~investing~~operating activities ~~during~~remained ~~the first six~~relatively ~~months~~unchanged ofdespite ~~2009~~a ~~increased by~~ $~~1.2~~209 ~~billion~~million asreduction in net income as compared to the first ~~six~~nine months of 2008. ~~This~~as ~~was primarily due to~~ a ~~$4.1 billion~~ ~~decrease~~result ~~in finance receivable originations resulting from our decision to exit portions~~ of ~~our commercial~~the ~~finance business, partially offset by a~~ $~~2.8~~113 ~~billion decrease~~million ~~in finance receivable collections~~ and $~~433~~105 million increase in non-cash ofportfolio ~~lower~~losses ~~proceeds~~and ~~from~~loss ~~receivable sales~~provision, ~~including securitizations~~respectively.

Cash flows provided by ~~financing~~investing activities ~~decreased $662 million~~during in the first nine ~~six~~ months of 2009, increased by $1.7 billion as compared to the first ~~six~~nine months of 2008. asThis awas ~~result~~primarily ofdue ~~the~~to a $6.4 billion decrease in ~~managed~~ finance ~~receivables,~~receivable ~~which reduced the need to raise~~originations ~~cash~~resulting from ~~financing~~our ~~activities,~~decision ~~partially~~to ~~offset~~exit byportions ~~the~~of our commercial ~~$505 million~~finance ~~increase~~business, inpartially ~~cash~~offset ~~held~~ by ~~the~~a ~~Company as~~$4.7 billion ~~compared~~decrease toin ~~January 3,~~finance ~~2009.~~receivable Wecollections ~~also~~and ~~generated~~ $21494 million ~~of cash during the first quarter of 2009 from~~ ~~the sale~~ of alower ~~51%~~proceeds ~~residual~~from ~~interest~~receivable ~~in the Aviation Finance securitization trust to Textron~~sales, ~~which is reflected as a~~including ~~Noncontrolling interest on our Consolidated Balance Sheets~~securitizations.

~~Because~~Cash ~~the~~flows ~~finance~~provided ~~business~~by ~~involves~~financing ~~the~~activities ~~purchase and carrying~~decreased of$1.2 billion ~~receivables,~~in athe ~~relatively~~first ~~high~~nine ~~ratio~~months of ~~borrowings~~2009, toas ~~net~~compared ~~worth~~to isthe ~~customary.~~first ~~Debt~~nine months of 2008 as a ~~percentage~~result of ~~total~~the ~~capitalization~~decrease in ~~was~~managed ~~89%~~finance ~~at June 30~~receivables, ~~2009~~which ~~compared~~reduced tothe ~~86%~~need atto ~~January 3,~~raise ~~2009.~~cash ~~Textron~~from ~~Financial’s~~financing ~~ratio~~activities, ofpartially ~~earnings~~offset toby ~~fixed~~the ~~charges~~$600 million ~~was~~increase ~~(0.80)x~~in ~~for~~cash held by the ~~six~~Company ~~months~~as compared ~~ended~~to ~~June~~January 303, 2009. We also generated ~~compared~~$21 million toof ~~1.35x~~cash ~~for~~during the ~~corresponding~~first ~~period~~quarter inof ~~2008.~~2009 ~~Textron~~from ~~made~~the ~~cash~~sale ~~payments~~ of ~~$88 million~~a ~~and~~51% ~~$109 million~~residual ~~on April 14,~~interest ~~2009~~in ~~and~~the ~~July 10,~~Aviation ~~2009, respectively, to~~Finance ~~maintain~~securitization ~~compliance~~trust ~~with~~to ~~the~~Textron, ~~fixed~~which ~~charge~~is ~~coverage~~reflected ~~ratio~~as a ~~required~~Noncontrolling byinterest ~~the~~on ~~Support~~our ~~Agreement~~Consolidated ~~and~~Balance ~~Textron Financial’s credit facility~~Sheets.

~~During~~Because the ~~first~~finance ~~six~~business ~~months~~involves the purchase and carrying of ~~2009~~receivables, ~~Textron~~a ~~Financial~~relatively ~~declared~~high ratio of borrowings to net ~~and~~worth ~~paid~~is ~~dividends~~customary. toDebt ~~Textron~~as a percentage of ~~$189~~total capitalization was 88% at September ~~million~~30, 2009 compared to 86% at ~~dividends~~January 3, ~~declared~~2009. ~~and~~Textron ~~paid~~Financial’s ratio of ~~$147 million during the~~earnings ~~corresponding~~to ~~period~~fixed ofcharges ~~2008~~was (0.84)x ~~The~~for ~~payment~~the ofnine ~~these~~months ~~dividends~~ended ~~represents~~September 30, a2009 ~~return~~compared ofto ~~Textron’s~~1.32x ~~investment~~for ~~consistent~~the ~~with~~corresponding ~~maintaining~~period ~~our~~in ~~targeted leverage ratio~~2008. Textron ~~also contributed~~made ~~capital~~cash payments of $588 million ~~to Textron Financial in~~, ~~both~~$109 million ~~the~~and ~~first~~$73 million ~~six~~on ~~months~~April 14, of2009, July 10, 2009 and ~~2008~~October 9, ~~which~~2009, ~~consisted~~respectively, ofto ~~Textron’s~~maintain ~~dividend~~compliance onwith ~~preferred~~the ~~stock~~fixed ~~owned~~charge bycoverage ~~Textron~~ratio of ~~Funding~~1.25x ~~Corporation,~~required ~~which~~by isthe aSupport ~~wholly-owned~~Agreement ~~subsidiary~~and ofTextron ~~Textron~~ Financial’s credit facility.

During the first nine months of 2009, Textron Financial declared and paid dividends to Textron of $291 million compared to dividends declared and paid of $149 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 $7 million to Textron Financial in both the first nine 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.


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

Off-Balance Sheet Arrangements

As of ~~June~~September 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~~978 ~~billion~~million of notes outstanding as of ~~June~~September 30, 2009., Weof ~~own~~which $~~141~~103 million ~~of these notes,~~represent ~~representing~~ our remaining retained interests. During the ~~six~~ nine months ended ~~June~~ September 30, 2009, we recognized a $26 million other-than-temporary impairment charge. ~~and~~In aconnection with the maturity of the notes, the trust accumulated $13203 million ~~unrealized~~of ~~loss~~cash induring ~~Other~~the ~~comprehensive income~~third onquarter ~~our~~of ~~retained~~2009 ~~interests~~from incollections ~~this~~of ~~trust~~finance receivables. InThis cash, ~~connection~~combined with cash accumulated during the first eight days ~~maturity~~ of October, was utilized to repay $~~149~~240 million of the notes of third-party investors in ~~July~~October 2009,. Due to required ~~including~~amortization ~~$44 million~~and ~~retained~~accumulation ~~seller~~periods ~~certificates~~associated ~~owned~~with bythe scheduled maturity of the ~~Company~~remaining asset-backed notes, the trust’s ~~accumulated~~revolving ~~$112 million~~period ended in the third quarter of 2009. ~~cash~~As a result, we can no longer fund new finance receivables ~~during~~by selling them to the ~~second~~trust. ~~quarter~~As of October 2009, ~~from~~due ~~collections~~to ofa change ~~finance~~in required cash distributions, the trust will be ~~receivables~~consolidated.

Critical 26Accounting Policies

Finance Receivables Held for Sale

Finance receivables are classified as held for sale based on a determination that there is no longer the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, or there is no longer the ability to hold the finance receivables until maturity. Our decision to classify certain finance receivables as held for sale is based on a number of factors, including, but not limited to contractual duration, type of collateral, credit strength of the borrowers, the existence of continued contractual commitments and the perceived marketability of the finance receivables. On an ongoing basis, these factors, combined with our overall liquidation strategy, determine which finance receivables we have the positive intent to hold for the foreseeable future and which finance receivables we will hold for sale. Our current strategy is based on an evaluation of both our performance and liquidity position and changes in external factors affecting the value and/or marketability of our finance receivables. A change in this strategy could result in a change in the classification of our finance receivables. As a result of the significant influence of economic and liquidity conditions on our business plans, strategies and liquidity position, and the rapid changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable future” represents a time period of six to nine months. We also believe that unanticipated changes in both internal and external factors affecting our financial performance, liquidity position or the value and/or marketability of our finance receivables could result in a modification of this assessment.

Finance receivables held for sale are carried at the lower of cost or fair value. At the time of transfer to held for sale classification, a valuation allowance is created for any shortfall between the carrying value, net of all deferred fees and costs and fair value. In addition, any allowance for loan losses previously allocated to these finance receivables is reclassified to the valuation allowance account, which is netted within finance receivables held for sale on the Consolidated Balance Sheets. This valuation allowance is adjusted quarterly through earnings for any changes in the fair value of the finance receivables below the carrying value. Fair value changes can occur based on market interest rates, market liquidity and changes in the credit quality of the borrower and value of underlying loan collateral. If we subsequently determine assets classified as held for sale will not be sold and we have the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, and the ability to hold to maturity, they are reclassified as Finance receivables held for investment with an initial carrying value equivalent to fair value.


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

Results of Operations

Revenues

Revenues decreased $91113 million and $~~183~~296 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, primarily due to the following:

	~~Three Months~~	Three Months			~~Six Months~~		Nine Months
	~~Ended~~	Ended			~~Ended~~		Ended
	~~2009 vs. 2008~~	2009 vs. 2008			~~2009 vs. 2008~~		2009 vs. 2008
	~~(In millions)~~	(In millions)
Portfolio losses	$	~~(47~~$	)(53	)	$	~~(62~~	)$	(115	)
Lower market interest rates		~~(23~~	)(20	)		~~(62~~	)	(82	)
Lower securitization gains		~~(20~~	)(16	)		~~(41~~	)	(57	)
Lower other income		~~(17~~	)(26	)		~~(28~~	)	(54	)
Increased impairments of retained interests in securitizations		(20	)			(26	)
Decrease (increase) in impairments of retained interests in securitizations			5					(21	)
Lower average finance receivables of $588 million and $488 million, respectively		(10	)			(17	)
Lower average finance receivables of $1.2 billion and $734 million, respectively			(21	)				(38	)
Gains on debt extinguishment		37				39
Suspended earnings on nonaccrual finance receivables			(8	)				(26	)
Benefit from variable-rate receivable interest rate floors		12				28
Gains on debt extinguishment			9					48
Benefit from variable-rate receivable interest rate floors			4					26
Accretion of valuation allowance			16					16

(Loss) Income before ~~Special Charges,~~ Income Taxes and Noncontrolling Interest

~~Income~~(Loss) income before ~~special charges,~~ income taxes and noncontrolling interest ~~interest~~ decreased $~~112~~83 million and $~~220~~311 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, primarily due to the following:

	~~Three Months~~	Three Months			~~Six Months~~		Nine Months
	~~Ended~~	Ended			~~Ended~~		Ended
	~~2009 vs. 2008~~	2009 vs. 2008			~~2009 vs. 2008~~		2009 vs. 2008
	~~(In millions)~~	(In millions)
Increase in provision for losses	$	(47	)		$	(96	)
Portfolio losses		$	(53	)			$	(115	)
Portfolio losses		(47	)			(62	)
Increase in provision for losses			(9	)				(105	)
Lower securitization gains		~~(20~~	)(16	)		~~(41~~	)	(57	)
Lower other income		~~(17~~	)(26	)		~~(28~~	)	(54	)
Increased impairments of retained interests in securitizations		(20	)			(26	)
Suspended earnings on nonaccrual finance receivables			(8	)				(26	)
Revenue impact of lower average finance receivables of $588 million and $488 million, respectively		(10	)			(17	)
Decrease (increase) in impairments of retained interests in securitizations			5					(21	)
Gains on debt extinguishment		37				39
Lower average finance receivables of $1.2 billion and $734 million, respectively			(10	)				(17	)
Benefit from variable-rate receivable interest rate floors		12				28
Special charges			(1	)				(9	)
Gains on debt extinguishment			9					48
Benefit from variable-rate receivable interest rate floors			4					26
Accretion of valuation allowance			16					16

~~The~~Portfolio ~~increase~~losses ininclude ~~provision~~discounts ~~for~~taken ~~losses~~on ~~for~~ the ~~three~~sale ~~and~~or ~~six~~early ~~months~~termination ~~ended~~of ~~June 30~~finance assets, ~~2009~~including asdiscounts ~~compared to the corresponding~~associated ~~period~~with ~~of 2008 was primarily~~ the ~~result~~liquidation of ~~increases~~Distribution inFinance ~~the~~and Golf Mortgage ~~Captive~~Finance ~~finance~~receivables ~~portfolio~~ ($2326 million and $5758 million, respectively) ~~related~~and toimpairment acharges ~~significant increase~~associated inwith ~~delinquent accounts and declining aircraft values,~~repossessed ~~and~~aircraft ~~the Resort finance portfolio~~ ($215 million and $5021 million, respectively) for ~~reflecting~~ the ~~lack~~three ofand ~~liquidity available~~nine tomonth ~~borrowers~~periods inof ~~this industry~~2009. In addition, ~~a specific~~we ~~reserve~~recognized ~~was~~impairment ~~established~~charges ~~during the second quarter~~ of ~~2009 on one automobile manufacturer lease within the Structured Finance portfolio (~~$3219 million). ~~These~~in ~~increases~~the ~~were partially~~third ~~offset~~quarter byof ~~specific~~2009 ~~reserving~~related ~~actions~~to ~~taken~~real onestate ~~two~~received ~~accounts during~~at the ~~three~~maturity of ~~and~~a ~~six~~leveraged ~~months~~lease ~~ended~~in ~~June 30,~~ 2008 ~~($12 million and $27 million, respectively)~~.

~~Portfolio~~The ~~losses~~reduction ~~include~~in ~~discounts~~other ~~taken~~income onincludes ~~the~~increases ~~sale~~to orthe ~~early~~held for ~~termination~~sale ofvaluation ~~finance~~allowance ~~assets~~ ($304 million and $3216 million, respectively) ~~for~~to ~~the~~reflect ~~three and six months ended of 2009, including discounts associated with~~ the ~~liquidation~~ ofestimated ~~distribution~~cost ~~finance~~to ~~and~~exit ~~golf mortgage~~certain ~~receivables~~portfolios and ~~impairment~~a ~~charges~~decrease ~~associated~~in ~~with~~servicing ~~repossessed aircraft ($13 million~~ and ~~$16 million, respectively)~~ ~~for the three and six months ended June 30, 2009. Lower~~

2733


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

~~other~~investment income ~~also~~related ~~includes an increase~~ to ~~the~~securitizations ~~held for sale valuation allowance~~ ($119 million and $1216 million, respectively) for the three and ~~six~~nine ~~months ended of 2009, to~~month ~~reflect~~periods ~~changes~~of ~~in fair value~~2009.

Accretion of valuation allowance represents the recognition of interest earnings in excess of a loan’s contractual rate as a result of the discount rate utilized to record the loan at fair value in previous periods. These interest earnings are recognized over the remaining life of the portfolio to the extent the valuation allowance is not expected to be utilized to absorb losses associated with sales, discounted payoffs or credit losses.

The increases in provision for loan losses for the three and nine month periods were primarily the result of increases in the captive finance portfolio ($22 million and $79 million, respectively) and the resort finance portfolio ($7 million and $57 million, respectively). The increase related to captive finance reflects an increase in both the rate and severity of defaults as a result of weaker general economic conditions and weaker aircraft values. The increase in resort finance reflects increased defaults in our borrowers’ timeshare note portfolios and the lack of liquidity available to borrowers in this industry. In addition, a specific reserve was established during the second quarter on one automobile manufacturer lease within the structured capital portfolio ($32 million), which was reduced by $5 million in the third quarter of 2009. These increases were partially offset by lower provision for losses in the distribution finance portfolio ($16 million and $40 million) and specific reserving actions taken on two accounts in 2008 ($5 million and $32 million, respectively).

Income Taxes

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

	~~Three Months Ended~~	Three Months Ended							~~Six Months Ended~~			Nine Months Ended
	June 30,				June 30,				June 30,				June 30,
		September 30,					September 30,					September 30,				September 30,
	~~2009~~	2009			~~2008~~		2008		~~2009~~			2009	~~2008~~			2008
Federal statutory income tax rate		~~(35.0~~	)%(35.0	)%		~~35.0~~	%	35.0	%	~~(35.0~~	)%		(35.0	~~35.0~~)%	%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		~~(2.4~~	)(4.8	)		~~43.8~~		(1.6	)	~~(1.4~~	)		(2.4	~~11.7~~)			8.0
Foreign tax rate differential		~~(6.6~~	)0.9			~~15.2~~		(6.6	)	~~(0.5~~	)		(0.1	~~(6.1~~)	)		(6.3	)
Canadian dollar functional currency		—	—			~~0.2~~		0.1		—			—	~~0.1~~			0.1
Change in state valuation allowance		~~0.2~~	7.4			~~(83.8~~	)	—		~~(0.3~~	)		1.8	~~(20.1~~	)		(15.3	)
Tax contingencies		~~1.2~~	2.5			~~73.8~~		(4.2	)	~~1.6~~			1.8	~~21.4~~			15.3
Tax credits		~~(0.7~~	)(1.0	)		~~(6.8~~	)	(7.1	)	~~(0.8~~	)		(0.8	~~(3.0~~)	)		(4.0	)
Change in status of foreign subsidiary		~~4.5~~	(3.0	)		—		—		~~4.3~~			2.3	—			—
Other, net		~~0.3~~	0.5			~~(9.1~~	)	3.6		~~0.1~~			0.2	~~(2.4~~	)		(0.4	)
Effective income tax rate		~~(38.5~~	)%(32.5	)%		~~68.3~~	%	19.2	%	~~(32.0~~	)%		(32.2	~~36.6~~)%	%		32.4	%

~~The~~For the three months ended September 30, 2009, the difference between the statutory rate and the effective tax rate ~~for~~ ~~the three months ended June 30, 2009~~ is primarily attributable to athe ~~change~~benefit infor ~~management’s~~state ~~assessment~~taxes ofand ~~the~~a ~~realizability~~decrease ofin athe ~~deferred~~estimate ~~tax~~of ~~asset~~the intaxable ~~one~~amount of ~~the~~a distribution from the Company’s wholly-owned Canadian ~~subsidiaries and the benefit for state taxes~~subsidiary, ~~partially~~ offset by ana ~~increase~~change in ~~estimate~~ management’s assessment of the ~~taxable~~ amount of athe state ~~distribution~~deferred ~~from~~tax aasset ~~Canadian subsidiary~~that is realizable and interest on tax contingencies, the majority of which is associated with leveraged leases.

~~The~~For the nine months ended September 30, 2009, the difference between the statutory rate and the effective tax rate ~~for~~ ~~the~~is ~~six~~primarily ~~months~~attributable ~~ended~~to ~~June 30,~~the ~~2009~~benefit isfor ~~primarily~~state taxes, offset ~~attributable~~by to an increase in the estimate of the taxable amount of a a distribution from athe ~~Canadian~~Company’s wholly-owned Canadian subsidiary, ~~and~~a ~~interest~~change onin ~~tax~~management’s assessment of the ~~contingencies,~~amount of the ~~majority~~state ofdeferred ~~which~~tax asset that is ~~associated~~realizable, ~~with~~and ~~leveraged~~tax ~~leases~~contingencies, ~~partially~~the ~~offset~~majority byof ~~the~~which ~~benefit~~is ~~for~~associated ~~state~~with ~~taxes~~leveraged ~~and tax credits~~leases.

~~The difference between the statutory and effective tax rate for~~ ~~the three and six months ended June 30, 2008 is primarily~~34 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.


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

For the three months ended September 30, 2008, the difference between the statutory tax rate and the effective tax rate is primarily attributable to tax credits, the effects of events related to cross border financing, and interest on tax contingencies, the majority of which is associated with leveraged leases.

For the nine months ended September 30, 2008, the difference between the statutory tax rate and the effective tax rate is primarily attributable to a change in management’s assessment of the amount of the state deferred tax asset that is realizable and the effects of events related to cross border financing, offset by state taxes and interest on tax contingencies, the majority of which is associated with leveraged leases.

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.

Nonaccrual finance receivables, ~~repossessed~~Repossessed assets and properties and ~~operating~~Operating assets received in satisfaction of troubled finance receivables are presented separately as opposed to combining these as nonperforming assets due to their increasing significance and inherent differences. Nonaccrual finance receivables are carried at their amortized cost, net of the allowance for losses, while repossessed assets 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.

Finance receivables classified as held for sale are reflected at 28fair value and are excluded from the portfolio statistics presented below. The following table summarizes nonaccrual finance receivables and the related percentages of each segment’s finance receivables held for investment.


	September 30,				January 3,
	2009				2009
	(Dollars in millions)
Resort Finance	$	449	29.12	%	$	78	4.96	%
Captive Finance		155	5.35	%		35	1.03	%
Distribution Finance		89	24.13	%		43	9.02	%
Golf Mortgage Finance		104	14.23	%		107	12.11	%
Structured Capital		32	8.20	%		—	—
Corporate and Other		9	25.51	%		14	20.46	%

Total nonaccrual finance receivables	$	838	13.98	%	$	277	4.01	%

The increase in nonaccrual finance receivables at September 30, 2009, compared to January 3, 2009, is primarily attributable to the lack of liquidity available to borrowers in the Resort Finance segment and to weaker general economic conditions and weaker aircraft values in the Captive Finance segment. The increase in Resort Finance included one $212 million account, which is primarily collateralized by timeshare notes receivable and several resort properties. The increase in nonaccrual finance receivables and the allowance for losses on impaired nonaccrual finance receivables in the Structured Capital segment is due to a $32 million automobile manufacturer lease. Nonaccrual finance receivables by collateral type are summarized in Note 6. Finance Receivables Held for Investment.


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

~~receivables~~We ~~are~~believe ~~assets~~that wethe ~~intend~~percentage toof ~~operate~~nonaccrual ~~for~~finance ~~a substantial~~receivables ~~period~~generally ofwill ~~time~~continue to increase as we execute our ~~and/or~~liquidation ~~make~~plan under the current economic conditions. We ~~substantial~~expect ~~improvements~~nonaccrual tofinance ~~prior~~receivables to ~~sale~~liquidate more slowly than our performing finance receivables.

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~~	Three Months Ended							~~Six Months Ended~~			Nine Months Ended
	June 30,				June 30,				June 30,				June 30,
		September 30,					September 30,					September 30,				September 30,
	~~2009~~	2009			~~2008~~		2008		~~2009~~			2009	~~2008~~			2008
	~~(In millions)~~	(In millions)
Allowance for losses on finance receivables beginning of period	$	~~220~~$	284		$	~~105~~	$	126	$	~~191~~		$	$191	89		$	89
Provision for losses		87	43			40		34		~~163~~			206	67			101
Less net charge-offs:
Distribution Finance		11	9			14		20		23			32	23			43
Asset-Based Lending		—	—			4		1		—			—	4			5
Captive Finance		9	7			1		—		17			24	4			4
Golf Mortgage Finance		1	1			—		1		22			23	—			1
Resort Finance		2	5			—		—		4			9	(1	)		(1	)
Corporate and Other		—	1			—		1		4			5	—			1
Total net charge-offs		23	23			19		23		70			93	30			53
Allowance for losses on finance receivables end of period	$	284			$	126			$	284			$	126
Transfer to valuation allowance on finance receivables held for sale			(2	)				—					(2	)			—
Net charge-offs as a percentage of average finance receivables held for investment		1.33	%			0.89	%			2.03	%			0.68	%
Allowance for losses on finance receivables end of period		$	302				$	137				$	302			$	137
Net charge-offs as a percentage of average finance receivables held for investment			1.43	%				1.05	%				1.92	%			0.81	%


	September 30,			January 3,
	2009			2009
	(Dollars in millions)
Nonaccrual finance receivables as a percentage of finance receivables held for investment		13.98	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		5.04	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		36.0	%		68.9	%
60+ days contractual delinquency as a percentage of finance receivables held for investment		7.38	%		2.59	%
60+ days contractual delinquency	$	440		$	178

Operating assets received in satisfaction of troubled finance receivables	$	168		$	84
Repossessed assets and properties		74			70


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

estate associated with leveraged leases which matured during 2009. We intend to operate and improve the performance of these properties prior to their eventual disposition.

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.

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 and investments in real estate associated with leveraged leases which matured during the first six months of 2009. 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:

	June 30,				January 3,
	September 30,				January 3,
	2009				2009
	(Dollars in millions)
Captive Finance	$	32,~~195~~978	3738	%	$	3,403	31	%
Distribution Finance		21,~~085~~633	2421	%		3,379	31	%
Resort Finance		1,~~568~~549	1820	%		1,636	15	%
Golf Mortgage Finance		~~1,039~~976	12	%		1,177	11	%
Structured Capital		~~405~~396	5	%		508	5	%
Asset-Based Lending		~~275~~240	3	%		649	6	%
Corporate and Other		4634	1	%		69	1	%
Total managed finance receivables	$	87,~~613~~806	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.

Operating Results by Segment

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

30Captive Finance


	Three Months Ended					Nine Months Ended
	September 30,			September 30,		September 30,			September 30,
	2009			2008		2009			2008
				(In millions)
Revenues	$	37		$	56	$	132		$	176
Segment (loss) income	$	(19	)	$	14	$	(63	)	$	50

Revenues decreased $19 million and $44 million for the three and nine months ended September 30, 2009 as compared to 2008, respectively, primarily due to an increase in portfolio losses ($6 million and $22 million, respectively), lower securitization gains ($2 million and $10 million, respectively) and a decrease in servicing and investment income related to securitizations ($2 million and $6 million, respectively). Portfolio losses primarily include impairments recorded on repossessed assets as a result of weaker aircraft values.

Segment income decreased $33 million and $113 million for the three and nine months ended September 30, 2009 as compared to 2008, respectively, primarily due to higher loss provision ($22 million and $79 million, respectively) and an increase in portfolio losses ($6 million and $22 million, respectively). Provision for losses increased primarily as a result of an increase in the rate utilized to establish the provision for losses ($12 million and $45 million, respectively) and specific reserving actions ($11 million and $24 million, respectively) reflecting an increase in both the rate and severity of defaults as a result of weaker general economic conditions and weaker aircraft values.


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

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

	Three Months Ended					~~Six~~Nine Months Ended
	June 30,			June 30,		June 30,			June 30,
	September 30,			September 30,		September 30,			September 30,
	2009			2008		2009			2008
	~~(In millions)~~			(In millions)
Revenues	$	2421		$	3132	$	5273		$	6698
Segment (loss) income	$	(7	)	$	15	$	(21	)	$	30
Segment income (loss)	$	—		$	11	$	(21	)	$	41

Revenues decreased $711 million and $1425 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to to 2008, respectively, primarily due to the decrease in market interest rates ($76 million and $1824 million, respectively) and an increase in suspended earnings on nonaccrual finance receivables ($7 million and $15 million, respectively). These decreases were partially offset by a benefit from variable-rate receivable interest rate floors of $1 million and $7 million for the three and nine months ended September 30, 2009 as compared to 2008, respectively.

Segment income decreased $2211 million and $5162 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, mostly due to an increase in provision for losses ($217 million and $5057 million, respectively) reflecting the establishment of loss reserves due to the lack of liquidity available to borrowers in this industry and continued weakness in our borrowers’ loan portfolios.

Golf Mortgage Finance

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	~~(In millions)~~			(In millions)
Revenues	$	106		$	2019		$	2228		$	4261
Segment loss	$	(714	)	$	(8—	)	$	(1630	)	$	—

Revenues decreased $1013 million and $2033 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to to 2008, respectively, primarily due to ana ~~increase~~decrease in ~~portfolio~~market ~~losses~~interest rates ($3 million and $612 million, respectively), ~~a decrease~~an increase in ~~market~~portfolio ~~interest~~losses ~~rates~~ ($35 million ~~and~~ and $911 million, respectively) and lower ~~securitization~~finance ~~gains of~~charges ($2 million ~~for~~and ~~both~~$4 million, ~~periods~~respectively) associated with lower average finance receivables of $139 million and $80 million, respectively.

The ~~decrease~~increase of $114 million in segment loss for the three months ended ~~June~~September 30, 2009 as compared to 2008 is ~~primarily~~ primarily due to higher portfolio losses ($35 million) and ~~lower~~ lower interest margin, excluding other income ($35 million), ~~partially~~and ~~offset~~a byhigher ~~lower~~ provision for losses ($103 million). ~~mostly~~The increase ~~attributable~~in tosegment aloss of $1230 million for the nine months ~~specific~~ended ~~reserve~~September 30, ~~established~~2009 ~~for~~as ~~one~~compared ~~account~~to in 2008. ~~The~~principally reflects an increase in ~~segment~~portfolio ~~loss~~losses of ($1611 million) ~~for~~and lower ~~the~~interest ~~six~~margin, ~~months ended~~excluding ~~June~~other income ($11 ~~30,~~million).

Loss provision remained relatively unchanged for the three and 31nine months ended September 30, 2009 as compared to 2008 as the impact of a specific reserve related to one account in 2008 was substantially offset by the establishment of specific reserves related to several loans in 2009.

Asset-Based Lending


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2009		2008		2009		2008
			(In millions)
Revenues	$	5	$	18	$	25	$	55
Segment income (loss)	$	1	$	1	$	10	$	(7	)


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

Revenues decreased $13 million and $30 million for the three and nine months ended September 30, 2009 as compared to 2008, ~~principally~~primarily ~~reflects~~due anto ~~increase~~lower ~~in portfolio~~average ~~losses~~finance (receivables of $6605 million) and ~~lower~~$410 million, ~~pure~~respectively, ~~interest~~as a ~~margin~~result ~~percentage~~of ~~($6 million)~~the continued liquidation of the portfolio.

Segment income was unchanged for the three months ended ~~Asset-Based~~September 30, 2009 and increased $17 million for the ~~Lending~~nine months ended September 30, 2009 as compared to 2008. The increase in segment income for the nine months ended June 30, 2009 was primarily due to lower provision for losses mostly the result of a $16 million specific reserving action taken for one account during 2008.

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2009		2008		2009		2008
	(In millions)
Revenues	$	8	$	17	$	20	$	37
Segment income (loss)	$	4	$	4	$	9	$	(8	)

Revenues decreased $9 million and $17 million for the three and six months ended June 30, 2009 as compared to 2008, primarily due to lower average finance receivables of $439 million and $312 million, respectively, as a result of the continued liquidation of the portfolio.

Segment income was unchanged for the three months ended June 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.

Structured Capital

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Revenues	$	(818	)	$	(97	)	$	(1028	)	$	—7
Segment loss	$	(44	)	$	(11	)	$	(49	)	$	(6	)
Segment (loss) income	$	(15	)	$	4		$	(64	)	$	(2	)

~~The~~Revenues ~~decrease~~decreased in$25 million ~~revenues~~and of $1035 million for the three ~~six~~and nine months ended ~~June~~September 30, 2009 ~~was~~as compared to 2008, primarily due to higher portfolio losses ~~losses~~ ($1420 million), ~~partially~~and ~~offset~~$34 million). byThese aportfolio ~~reduction in~~losses ~~leveraged~~were ~~lease~~mostly ~~earnings~~the ~~resulting~~result ~~from~~of ~~the~~impairment ~~adoption~~charges of $19 million ~~FSP 13-2~~recognized during the third quarter of 2009 related to real estate received at the maturity of a leveraged lease in 2008 ~~($9 million)~~.

Segment loss increased $3319 million and $4366 million for the three ~~months~~ and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, primarily due to higher portfolio losses ($20 million and $34 million). In addition, provision for losses increased during the nine months ended September 30, 2009 as compared to 2008 as a result of a $32 million specific reserve established for one automobile manufacturer lease during the second quarter of 2009. This reserve was reduced by $5 million in the third quarter of 2009.

Distribution Finance

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
	(In millions)
Revenues	$	~~(16~~—	)	$	6049		$	4		$	~~125~~174
Segment (loss) income	$	(39	)	$	(3	)	$	(52	)	$	9
Segment loss	$	(27	)	$	(13	)	$	(79	)	$	(4	)

3239


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

Revenues decreased $7649 million and $~~121~~170 million for the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, primarily due to the following:

	Three Months			Six Months
	Three Months Ended			Nine Months Ended
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)
Lower securitization gains	$	(1514	)	$	(3145	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Portfolio losses		(18	)		(42	)
Portfolio losses		(24	)		(24	)
Lower average finance receivables of $640 million and $643 million, respectively		(11	)		(35	)
Lower average finance receivables of $525 million and $644 million, respectively		(5	)		(12	)
Decrease (increase) in impairments of retained interests in securitizations		5			(21	)
Lower market interest rates		(54	)		(1321	)
Lower other income		(6	)		(7	)
Decrease in servicing and investment income related to securitizations		(7	)		(10	)
Benefit from variable-rate receivable interest rate floors		8			19
Suspended earnings on nonaccrual finance receivables		—			(5	)
Benefit from variable-rate receivable interest rate floors		2			15

Portfolio losses include $2218 million and $40 million of discounts recorded on the early termination of marine finance assets during the three and nine months ended ~~June~~September 30, 2009, respectively.

Segment ~~income~~loss ~~decreased~~increased $3614 million and $6175 million for ~~for~~ the three and ~~six~~nine months ended ~~June~~September 30, 2009 as compared to 2008, respectively, primarily due to the following:

	Three Months			Six Months
	Three Months Ended			Nine Months Ended
	Ended			Ended
	2009 vs. 2008			2009 vs. 2008
	(In millions)
Lower securitization gains	$	(1514	)	$	(3145	)
Increased impairments of retained interests in securitizations		(20	)		(26	)
Portfolio losses		(18	)		(42	)
Portfolio losses		(24	)		(24	)
Decrease (increase) in impairments of retained interests in securitizations		5			(21	)
Revenue impact of lower average finance receivables of $525 million and $644 million, respectively		(5	)		(12	)
Lower average finance receivables of $640 million and $643 million, respectively		(6	)		(18	)
Lower other income		(6	)		(7	)
Decrease in servicing and investment income related to securitizations		(7	)		(10	)
Provision for losses		19			24
Acceleration of amortization of deferred loan origination cost		—			(8	)
Benefit from variable-rate receivable interest rate floors		8			19
Suspended earnings on nonaccrual finance receivables		—			(5	)
Lower selling and administrative expenses		10			18
Provision for losses		16			40
Lower selling and administrative expenses		10			28
Benefit from variable-rate receivable interest rate floors		2			15

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

	Three Months Ended					~~Six~~Nine Months Ended
	June 30,		June 30,			June 30,		June 30,
	September 30,		September 30,			September 30,		September 30,
	2009		2008			2009		2008
	~~(In millions)~~		(In millions)
Revenues	$	2620	$	—3		$	2545	$	14
Segment income (loss)	$	1310	$	(21	)	$	818	$	(65	)

~~Revenues increased $26 million and $24 million for the~~ ~~three months and six months ended June 30, 2009 as compared~~40 to 2008, respectively, primarily due to gains on early debt extinguishment ($37 million and $39 million, respectively), partially offset by lower other income ($11 million and $15 million, respectively). Lower other income includes an increase to the held for sale valuation allowance ($11 million and $12 million, respectively) for the three and six months ended of 2009, to reflect changes in fair value.


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

~~Segment~~Revenues ~~income~~ increased $1517 million and $1441 million for the three ~~months~~ and ~~six~~nine months ended ~~June~~September 30, 2009 as compared ~~compared~~ to 2008, respectively, primarily due to gains on early debt ~~debt~~ extinguishment ($379 million and $3948 million, respectively) and aaccretion ~~change~~of inthe ~~unallocated~~valuation ~~interest~~allowance ~~expense~~of ($716 million ~~and~~during ~~$20 million,~~the ~~respectively)~~third quarter of 2009, partially offset by ~~lower~~increases ~~other~~in ~~income~~the valuation allowance for assets held for sale ($114 million and $1516 million, respectively). Accretion ~~and~~of athe ~~change~~valuation allowance represents the recognition of interest earnings in ~~unallocated~~excess of a loan’s contractual rate ~~selling~~as ~~and~~a ~~administrative~~result ~~expenses~~of ~~($19 million~~the ~~and~~discount rate utilized to record the loan at ~~$30 million,~~fair ~~respectively)~~value in previous periods. ~~Selling~~These ~~and~~interest ~~administrative~~earnings ~~and~~are ~~interest~~recognized ~~expense~~over ~~allocation~~the ~~methodologies~~remaining ~~are~~life ~~more~~of ~~fully~~the portfolio to the ~~described~~extent inthe ~~Note 15.~~valuation ~~Financial~~allowance ~~Information~~is ~~about~~not ~~Operating~~expected to be utilized to ~~Segments~~absorb losses associated with sales, discounted payoffs or credit losses.

Segment income increased $9 million and $23 million for the three and nine months ended September 30, 2009 as compared to 2008, respectively, primarily due to gains on early debt extinguishment ($9 million and $48 million, respectively), accretion of the valuation allowance of $16 million during the third quarter of 2009 and an increase in interest expense allocated to our segments ($8 million and $28 million, respectively). These increases were partially offset by increases in the valuation allowance for assets held for sale ($4 million and $16 million, respectively) and the impact of not allocating corporate selling and administrative expenses ($16 million and $46 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~~Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
Net interest margin as a percentage of average net investment(1)		21.1387	%		45.9123	%		2.6340	%		5.3531	%
Return on average equity		(2516.2539	)%		15.6051	%		(2221.9919	)%		6.4616	%
Return on average assets		(21.8295	)%		0.1759	%		(2.5335	)%		0.7268	%
Selling and administrative expenses as a percentage of average managed and serviced finance receivables(2)		2.0233	%		1.5380	%		12.9204	%		1.6268	%
Operating efficiency ratio(3)		~~129~~163.36	%		4852.03	%		~~101~~116.98	%		4547.89	%
Net charge-offs as a percentage of average finance receivables held for investment		1.3343	%		01.8905	%		21.0392	%		0.6881	%

	June 30,			January 3,
	September 30,			January 3,
	2009			2009
60+ days contractual delinquency as a percentage of finance receivables held for investment(4)		67.6238	%		2.59	%
Nonaccrual finance receivables as a percentage of finance receivables held for investment		1013.0498	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		45.1804	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		4136.60	%		68.9	%
Total debt to tangible equity(5)		7.50	x		6.52x
Total debt to equity		7.73	x		6.85	x

(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~~41


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.


(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. Finance receivables 60+ days contractually delinquent were $440 million and $178 million as of September 30, 2009 and January 3, 2009, respectively.

~~Also in June 2009, the FASB issued SFAS No. 167~~ ~~“Amendments to FASB Interpretation No. 46(R)”.~~Recent ~~This~~Accounting ~~standard changed the approach to determining the primary~~Pronouncements 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.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166 “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”. This standard eliminates the concept of a qualifying special purpose entity (“QSPE”) and its exclusion 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 will result in the consolidation of any remaining off-balance sheet securitization trusts, which include securitized finance receivables and the related debt. The adoption of this standard will not have a material impact on our financial position, results of operations or liquidity.

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. We are currently assessing the impact the adoption of this standard may have on our financial position, results of operations or liquidity.

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 in our Annual Report on Form 10-K for the year ended January 3, 2009, those additional and updated risk factors discussed in our Quarterly Report on Form 10-Q 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 bank 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 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)*

at major customers that could cause disruptions or difficulty in collecting amounts owed by such customers; (p) legislative or regulatory actions impacting our operations; (q) difficult conditions in the financial markets which may adversely impact our ability to obtain financing for our new finance receivable originations and, with respect to businesses which we are exiting, our customers’ ability to obtain alternative financing negatively impacting their ability to repay amounts owed to us; and (r) continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business.


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 ~~June~~September 30, 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

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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: ~~July~~ 31October 30, 2009

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