UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(x)		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2010
For the fiscal year ended January 1, 2011
OR
( )		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

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, Providence, R.I. (Address of Principal Executive Offices)		~~02940-6687~~02903 (Zip Code)

Registrant’s ~~Telephone~~telephone ~~Number~~number, ~~Including~~including ~~Area~~area ~~Code~~code: (401) 621-4200

Securities registered pursuant to Section 12(b) of the Act:


		Name of Each Exchange on
Title of Class		Which Registered

$100,000,000 5.125% Notes due August 15, 2014		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $100.00 par value

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes No X No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (Not applicable).

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


Large accelerated filer	Accelerated filer	Non-accelerated filer X	Smaller reporting company

(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 No X

All of the shares of common stock of the registrant are owned by Textron Inc. and there was no voting or non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed fiscal quarter.

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

TABLE OF CONTENTS

	PART I.
	Item 1.	Business	3
	Item 1A.	Risk Factors	84
	Item 1B.	Unresolved Staff Comments	127
	Item 2.	Properties	127
	Item 3.	Legal Proceedings	127
	Item 4.	Submission of Matters to a Vote of Security Holders	13
	PART II.
	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	138
	Item 6.	Selected Financial Data	138
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	158
	Item 7A.	Quantitative and Qualitative Disclosure about Market Risk	3010
	Item 8.	Financial Statements and Supplementary Data	3113
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	6950
	Item 9A.	Controls and Procedures	6950
	Item 9B.	Other Information	6950
	PART III.
	Item 10.	Directors and Executive Officers of the Registrant	6950
	Item 11.	Executive Compensation	6950
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	6950
	Item 13.	Certain Relationships and Related Transactions	6950
	Item 14.	Principal Accounting Fees and Services	6951
	PART IV.
	Item 15.	Exhibits, Financial Statement Schedules	7051
EX-12 Computation of Ratio of Earnings to Fixed Charges
EX-12
EX-23 Consent of Independent Registered Public Accounting Firm
EX-23
EX-24 Power of Attorney dated as of February 25, 2010
EX-24
EX-31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
EX-31.1
EX-31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
EX-31.2
EX-32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
EX-32.1
EX-32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
EX-32.2

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PART I.


Item 1.	*Business*

General

Textron Financial Corporation (Textron Financial, TFC or the Company) is a ~~diversified~~ commercial finance ~~company~~business. In the fourth quarter of 2008, Textron Inc. (Textron) announced a plan to exit ~~all~~the non-captive portion of our commercial finance business, ~~other than the~~while retaining the captive portion ~~supporting~~of the ~~financing~~business ofthat supports customer purchases of products which Textron manufactures. ~~In the second quarter of~~The ~~2009,~~decision wewas ~~changed~~made ~~our~~to ~~management~~exit ~~structure~~this ~~for the captive~~ business toin ~~facilitate~~order ~~the management of its operations. Due~~ to address ~~this~~Textron’s ~~change,~~long-term weliquidity ~~consolidated~~position ~~the~~in ~~portion~~light of the ~~former Golf~~ ~~Finance~~disruption ~~segment that finances customer purchases of Textron manufactured golf~~ and ~~turf-care~~instability ~~equipment~~in ~~into~~ the ~~former Aviation~~capital ~~Finance segment, forming the new Captive Finance segment~~markets. InDuring ~~the fourth quarter of~~ 2009, ~~due to further changes~~ inwe ~~how~~transitioned ~~the~~to ~~performance~~operating of our business isin ~~measured~~two ~~and~~segments, the ~~consolidation~~Captive ofFinance ~~our~~segment, ~~management~~which ~~and~~is ~~operational~~our ~~structure,~~ongoing wefinance business ~~combined~~that ~~all~~supports ~~remaining~~customer ~~portions~~purchases of ~~our former operating segments~~Textron-manufactured ~~into~~products, aand ~~new~~the Non-~~captive~~Captive Finance segment, which ~~represents the business~~ we are ~~liquidating. All comparative segment information~~ ~~for~~continuing ~~prior periods has been recast~~ to ~~reflect this change~~liquidate.

We ~~will~~ continue to originate new customer relationships and finance ~~finance~~ receivables in the Captive Finance segment, which includes the Aviation and Golf Equipment product lines. The Aviation product line primarily provides loans, finance leases and operating leases to purchasers of new Cessna aircraft and Bell ~~Bell~~ helicopters. Financing continues to be provided to purchasers of used Cessna aircraft and Bell helicopters on a limited basis. The Golf Equipment product line primarily provides finance and operating leases to purchasers of new E-Z-GO ~~and~~golf ~~Jacobsen~~equipment ~~golf~~ and, to a lesser extent, Jacobsen turf-care equipment. The Captive Finance segment also continues to manage our portfolio of loans and leases secured by non-Textron manufactured aircraft.

The Non-captive Finance segment ~~now~~ includes the ~~Asset-Based~~Distribution ~~Lending, Distribution~~ Finance, Golf Mortgage, ~~Hotel,~~ Structured Capital, Timeshare and Other Liquidating product lines. ~~Asset-Based~~ ~~Lending has historically provided revolving credit facilities secured by receivables and inventory and related equipment and real estate term loans~~Historically, ~~and factoring programs across a broad range of manufacturing and service industries;~~ Distribution Finance has offered inventory finance programs for dealers of Textron manufactured products and for dealers of a variety of other household, housing, leisure, agricultural and technology ~~technology~~ products; Golf Mortgage has historically made mortgage loans for the acquisition and refinancing of golf courses and also ~~courses;~~includes the former Hotel product line, ~~was~~which ~~previously~~provided ~~a component of~~mortgage ~~our former Resort Finance segment and has historically provided mortgage~~ loans for the construction and refinancing of hotels; the ~~the~~ Timeshare product line has historically extended loans to developers of vacation interval resorts, secured principally by notes receivable and interval inventory; and Structured Capital has primarily engaged in long-term leases of large-ticket equipment and real estate, primarily with investment grade lessees.

Textron Financial’s financing activities are offered primarily in North America. However, we finance certain Textron products worldwide, principally Bell helicopters and Cessna aircraft. All of Textron Financial’s stock is owned by Textron, a global multi-industry company with operations in five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. At January 1, 2011 and January 2, 2010, 46% and 40% of Textron Financial’s total ~~managed~~ finance receivables ~~represent~~ represented finance receivables originated in support of Textron manufactured products, respectively. For further information on ~~Textron~~ Textron Financial’s relationship with Textron, see ~~“Relationship~~Note 3 ~~with~~to ~~Textron”~~the ~~below~~Consolidated Financial Statements in Item 8 of this Form 10-K.

For additional financial information regarding Textron Financial’s business segments, refer to Note 1815 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Competition

The commercial finance environment in which Textron Financial’s Captive Finance segment continues to operate has traditionally been extremely competitive. Textron Financial is subject to competition from various types of financing institutions, including banks, leasing companies, commercial finance companies and finance operations of equipment vendors. Competition within the commercial finance industry is primarily focused on price, term, structure and service. The Company may lose market share to the extent that it is unwilling to match competitors’ practices. To the extent that Textron Financial matches these practices, the Company may experience

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decreased margins, increased risk of credit losses or both. Many of Textron Financial’s competitors are large companies that have substantial capital, technological and marketing resources. In some instances, Textron Financial’s competitors have access to capital at lower costs than Textron Financial.

Relationship with Textron

General

Textron Financial derives all of its continuing business from financing the sale and lease of products manufactured and sold by Textron. Textron Financial paid Textron $0.6 billion in 2009, $1.0 billion in 2008 and $1.2 billion in 2007 for the sale of manufactured products to third parties that were financed by the Company. In addition, the Company paid Textron $13 million in 2009, $18 million in 2008 and $27 million in 2007 for the purchase of equipment on operating leases. Textron Financial recognized finance charge revenues from Textron and affiliates (net of payments or reimbursements for interest charged at more or less than market rates on Textron manufactured products) of $3 million in 2009, $2 million in 2008 and $4 million in 2007, and operating lease revenues of $20 million in 2009, $29 million in 2008 and $27 million in 2007.

Textron Financial and Textron utilize an intercompany account for the allocation of Textron overhead charges and for the settlement of captive finance receivables. For additional information regarding the relationship between Textron Financial and Textron, see Notes 4, 5 and 10 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Agreements with Textron

Textron Financial and Textron are parties to several agreements, which govern many areas of the Textron Financial-Textron relationship. The material agreements are described below:

Receivables Purchase Agreement

Under a Receivables Purchase Agreement with Textron, Textron Financial has recourse to Textron with respect to certain finance receivables and operating leases relating to products manufactured and sold by Textron. Finance receivables of $76 million at January 2, 2010 and $54 million at January 3, 2009, and operating leases of $140 million at January 2, 2010 and $152 million at January 3, 2009, were subject to recourse to Textron or due from Textron.

Support Agreement with Textron

Under a Support Agreement with Textron dated as of May 25, 1994, Textron is required to pay to Textron Financial, quarterly, a cash payment sufficient to provide that Textron Financial maintains fixed charge coverage of no less than 125%. In 2009 and 2008, Textron Financial’s fixed charge coverage ratio dropped below the required 125%. As a result, Textron made cash payments of $270 million and $625 million to Textron Financial in 2009 and 2008, respectively, and an additional payment of $75 million on January 12, 2010, which were reflected as capital contributions to maintain compliance with the fixed charge coverage ratio required by the Support Agreement and certain of Textron Financial’s credit agreements. Textron also has agreed to maintain Textron Financial’s consolidated shareholder’s equity at an amount not less than $200 million. Pursuant to the terms of the Support Agreement, Textron is required to maintain a controlling interest in Textron Financial. The Support Agreement also contains a third-party beneficiary provision entitling Textron Financial’s lenders to enforce its provisions against Textron.

Intercompany Loan Agreement

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respectively. These borrowings are reflected in Amounts due to Textron Inc. on Textron Financial’s Consolidated Balance Sheets.

Tax Sharing Agreement with Textron

Textron Financial’s revenues and expenses are included in the consolidated federal tax return of Textron. The Company files some of its state income tax returns on a separate basis. Under a Tax Sharing Agreement with Textron, Textron Financial is allocated federal tax benefits and charges on the basis of statutory U.S. tax rates applied to the Company’s taxable income or loss included in the consolidated returns. The benefits of general business credits, foreign tax credits and any other tax credits are utilized in computing current tax liability. Textron Financial is paid for tax benefits generated and utilized in Textron’s consolidated federal and unitary or combined state income tax returns, whether or not the Company would have been able to utilize those benefits on a separate tax return. Income tax assets or liabilities are settled on a quarterly basis. Textron has agreed to lend Textron Financial, on a junior subordinated interest-free basis, an amount equal to Textron’s deferred income tax liability attributable to the manufacturing profit not yet recognized for tax purposes on products manufactured by Textron and financed by Textron Financial. Borrowings under this arrangement are reflected in “Amounts due to Textron Inc.” on the Consolidated Balance Sheets in Item 8 of this Form 10-K.

Regulations

Textron Financial’s activities are subject, in certain instances, to supervision and regulation by state and federal governmental authorities. These activities also may be subject to various laws, including consumer finance laws in some instances, and judicial and administrative decisions imposing various requirements and restrictions, which, among other things:

• Regulate credit-granting activities; • Establish maximum interest rates, finance charges and other charges; • Require disclosures to customers; • Govern secured transactions; • Affect insurance brokerage activities; and • Set collection, foreclosure, repossession and claims handling procedures and other trade practices.

Although most states do not intensively regulate commercial finance activity, many states impose limitations on interest rates and other charges, and prohibit certain collection and recovery practices. They also may require licensing of certain business activities and specific disclosure of certain contract terms. The Company also may be subject to regulation in those foreign countries in which it has operations.

Existing statutes and regulations have not had a material adverse effect on the Company’s business. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations or their impact upon Textron Financial’s future business, financial condition, results of operations or prospects.

Employees

As of January 2, 2010, Textron Financial had 467 employees. The Company is not subject to any collective bargaining agreements.

Risk Management

Textron Financial’s business activities involve various elements of risk. The Company considers the principal types of risk to be:

• Credit risk; • Asset/liability risk (including interest rate and foreign exchange risk); and • Liquidity risk.

Proper management of these risks is essential. Accordingly, the Company has designed risk management systems and procedures to identify and quantify these risks. Textron Financial has established appropriate policies

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and set prudent limits in these areas. The Company’s management of these risks, and levels of compliance with its policies and limits, is continuously monitored by means of administrative and information systems.

Credit Risk Management

Textron Financial manages credit risk through:

• Underwriting procedures; • Centralized approval of individual transactions exceeding certain size limits; and • Active portfolio and account management.

The Company has developed underwriting procedures for the Captive Finance segment which assess a prospective customer’s ability to perform in accordance with financing terms. We have also developed workout and restructuring procedures for both the Captive and Non-captive segments. These procedures include:

• Analyzing business or property cash flows and collateral values; • Performing financial sensitivity analyses; and • Assessing potential exit strategies.

Textron Financial has developed a tiered credit approval system, which allows certain transaction types and sizes to be approved at the operating unit level. The delegation of credit authority is done under strict policy guidelines. Textron Financial’s operating units are also subject to annual internal audits by the Company and Textron.

Depending on transaction size and complexity, transactions outside of the segment’s authority require the approval of the Captive Finance segment President and Group Credit Officer. Transactions exceeding segment authority require one or more of the Executive Vice President and Chief Credit Officer, the President and Chief Executive Officer or Textron Financial’s Credit Committee depending on the size of the transaction, and in some cases approvals are required by Textron up to and including its Board of Directors. As of February 25, 2010, Textron Financial’s Credit Committee is comprised of its President and Chief Executive Officer, Executive Vice President and Chief Credit Officer, Executive Vice President and Chief Financial Officer, Executive Vice President, General Counsel and Secretary, Textron Assistant Treasurer, Executive Vice President Special Assets, the Distribution Finance product line President and the Timeshare product line President.

The Company controls the credit risk associated with its portfolio by limiting transaction sizes, as well as diversifying transactions by industry, geographic area, property type and borrower. Through these practices, Textron Financial identifies and limits exposure to unfavorable risks and seeks favorable financing opportunities. Management reviews receivable aging trends and watch list reports and conducts regular business reviews in order to monitor portfolio performance. Certain receivable transactions are originated with the intent of fully or partially selling them. This strategy provides an additional tool to manage credit risk.

Geographic Concentration

Textron Financial continuously monitors its portfolio to avoid any undue geographic concentration in any region of the U.S. or in any foreign country. At January 2, 2010, the largest concentration of domestic finance receivables was in the Southeastern U.S., representing 23% of Textron Financial’s managed finance receivable portfolio. At January 2, 2010, international finance receivables represented 30% of Textron Financial’s managed finance receivable portfolio. For additional information regarding Textron Financial’s concentrations, see Note 5 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Asset/Liability Risk Management

The Company continuously measures and quantifies interest rate risk and foreign exchange risk, in each case taking into account the effect of hedging activity. Textron Financial uses derivatives as an integral part of its asset/liability management program in order to reduce:

• Interest rate exposure arising from changes in interest rate indices; and • Foreign currency exposure arising from changes in exchange rates.

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The Company does not use derivative financial instruments for the purpose of generating earnings from changes in market conditions. Before entering into a derivative transaction, the Company determines that there is a high correlation between the change in value of, or the cash flows associated with, the hedged asset or liability and the value of, or the cash flows associated with, the derivative instrument. When Textron Financial executes a transaction, it designates the derivative to a specific asset, liability, or set of cash flows and as either a fair value or cash flow hedge. Textron Financial monitors the effectiveness of derivatives through a review of the amounts and maturities of assets, liabilities and derivative positions. The Company’s Chief Financial Officer and Textron’s Vice President and Assistant Treasurer regularly review this information, so that appropriate remedial action can be taken, as necessary.

Textron Financial carefully manages exposure to counterparty risk in connection with its derivatives. In general, the Company engages in transactions with counterparties having ratings of at least A by Standard & Poor’s Rating Service or A2 by Moody’s Investors Service. Total credit exposure is monitored by counterparty, and managed within prudent limits. At January 2, 2010, the Company’s largest single counterparty credit exposure was $19 million.

Interest Rate Risk Management

Textron Financial manages interest rate risk by monitoring the duration and interest rate sensitivities of its assets, and by incurring liabilities (either directly or synthetically with derivatives) having a similar duration and interest sensitivity profile. The Company’s internal policies limit the aggregate mismatch of floating-rate assets and liabilities to 10% of total assets. For additional information regarding Textron Financial’s interest rate risk, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity,” in Item 7 of this Form 10-K.

Foreign Exchange Risk Management

A portion of the finance assets owned by Textron Financial are located outside of North America. These finance receivables are generally in support of Textron’s overseas product sales and are predominantly denominated in U.S. Dollars. Textron Financial has foreign currency finance receivables primarily denominated in Canadian Dollars. In order to minimize the effect of fluctuations in foreign currency exchange rates on the Company’s financial results, Textron Financial borrows in these currencies and/or enters into forward exchange contracts and foreign currency interest rate exchange agreements in amounts sufficient to substantially hedge its foreign currency exposures.

Liquidity Risk Management

The Company requires cash to fund asset originations in support of the sales of Textron manufactured products and to meet debt obligations and other commitments. Textron Financial’s primary sources of funds are:

• Collection of existing finance receivables; • Committed bank lines of credit; • Sales of finance receivables classified as held for sale; • Syndication and securitization of finance receivables; • Other forms of secured financing; and • Intercompany borrowings from Textron.

On February 3, 2009, we drew down on the available balance of the $1.75 billion committed bank credit line due to the economic environment and the risks associated with the capital markets in general, including the difficulty in accessing sufficient commercial paper on a daily basis. Textron also drew down on the available balance of its $1.25 billion committed bank credit line. These borrowings were utilized to repay all commercial paper outstanding. The remaining cash, combined with the proceeds from liquidation, have been used to repay our maturing debt and securitization obligations. For additional information regarding Textron Financial’s liquidity risk management, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” in Item 7 of this Form 10-K.

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Available Information

The Company makes available free of charge on its Internet website (http://www.textronfinancial.com) its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

Forward-looking Information

Certain statements in this ~~Annual~~report ~~Report on Form 10-K~~ and other oral and written statements made by ~~Textron~~us ~~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~~within ~~as of~~ the ~~date~~meaning onof ~~which they are made, and we undertake no~~the ~~obligation~~Private toSecurities ~~update~~Litigation orReform ~~revise~~Act ~~any~~of ~~forward-looking statements~~1995. These ~~These~~ forward-looking statements ~~are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements~~, including the Risk Factors contained herein and 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~~may ~~products~~describe are sold or supplied and financed or where we hold finance receivables; (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; (e) increases in pension expenses and other postretirement 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 financingstrategies, ~~including securitizations~~goals, atoutlook 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~~non-historical ~~the captive finance business~~matters, ~~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; (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.

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project revenues, income, returns or other financial measures, often include words such as “believe,” “expect,” “anticipate,” “intend”, “plan,” “estimate,” “guidance”, “project”, “target”, “potential”, “will”, “should”, “could”, “likely” or “may” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. 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. In addition to those factors described herein under “Risk Factors”, among the factors that could cause actual results to differ materially from past and projected future results are the following:


	•	Changes in worldwide economic, political or regulatory conditions that impact interest and foreign exchange rates;

	•	The ability to maintain portfolio credit quality and to realize full value of finance receivables and of assets acquired upon foreclosure of finance receivables;

	•	The ability to control costs and successful implementation of various cost-reduction programs;

	•	Increases in pension expenses and employee medical benefits;

	•	The impact of changes in tax legislation;

	•	The ability to maintain certain minimum levels of financial performance as required by various debt covenants;

	•	Access to financing, including securitizations, at competitive rates;

	•	Access to equity in the form of retained earnings and capital contributions from Textron;

	•	Uncertainty in estimating contingent liabilities and establishing reserves to address such contingencies;

	•	Risks and uncertainties related to dispositions, including difficulties or unanticipated expenses in connection with the consummation of dispositions or the disruption of current plans and operations;

	•	The ability to successfully exit the non-captive portion of our business;

	•	Uncertainty in estimating the market value of our Finance receivables held for sale and our Allowance for losses on finance receivables held for investment;

	•	Bankruptcy or other financial problems at major customers that could cause disruptions or difficulty in collecting amounts owed by such customers;

	•	Legislative or regulatory actions impacting our operations; and

	•	Continued volatility in the economy resulting in a prolonged downturn in the markets in which we do business.


Item 1A.	*Risk Factors*

Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe ~~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.

We may not be able to continue to execute the liquidation of our Non-captive Finance segment at a favorable pace and level of recovery.

In the fourth quarter of 2008, we announced a plan to exit all of the commercial finance business other than that portion of the business supporting customer purchases of products manufactured by Textron. The exit plan is being implemented through a combination of orderly liquidation and selected sales. We cannot be certain that we will be able to continue to accomplish the orderly liquidation of our portfolio on a timely or successful basis or in a manner that will generate cash sufficient to service our debt. We may encounter delays and difficulties in effecting the continued orderly liquidation of our various receivable portfolios as a result of many factors, including the inability of our customers to find alternative financing, which could expose us to increased credit losses. We may have greater difficulty in selling the remaining receivables that have been designated for sale or transfer, assets that have been acquired upon foreclosure of receivables and/or other non-operating assets at the pricing that we

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the continued orderly liquidation of our various receivable portfolios as a result of many factors, including the inability of our customers to find alternative financing, which could expose us to increased credit losses. We may have greater difficulty in selling the remaining receivables that have been designated for sale or transfer, assets that have been acquired upon foreclosure of receivables and/or other non-operating assets at the pricing that we anticipate or in the time frame that we anticipate. We may be required to make additional mark-to-market or other adjustments against the assets that we intend to sell or to take additional reserves against assets that we intend to retain. We may change our current strategy based on either our performance and liquidity position or changes in external factors affecting the value and/or marketability of our assets, which could result in changes in the classification of assets we intend to hold for investment and additional mark-to-market adjustments. We may incur higher costs than anticipated as a result of this exit plan or be subject to claims made by third parties, and the exit plan may result in increased credit losses. We expect that our portfolio quality will continue to deteriorate as we proceed through the liquidation and ~~the mix of assets changes and~~ that our cash conversion ratio on liquidation will decrease as the asset mix changes; this deterioration could be more severe and the cash conversion ratio lower than we anticipate, resulting in ~~substantial~~greater ~~credit~~ losses. Significant delay or difficulty in executing the continued liquidation and/or substantial losses could result in the failure of our portfolio to generate the cash necessary to service our indebtedness, resulting in continuing or increased adverse effects on our financial condition and results of operations.

Difficult conditions in the financial markets have adversely affected ~~our~~the ~~business~~quality ~~and~~of ~~results~~our offinance ~~operations~~asset portfolios, and our losses may increase if we doare ~~not~~unable ~~expect~~to ~~these~~successfully collect our finance ~~conditions~~receivables toor ~~improve~~realize insufficient ~~the~~value ~~near future~~from collateral.

Our financial performance depends on the quality of loans, leases and other ~~finance~~ assets in our portfolio. Portfolio quality may be adversely affected by several factors, including finance ~~finance~~ receivable underwriting procedures, collateral quality, or geographic or industry concentrations, and the ~~ability~~effect of ~~our~~the ~~customers~~recent toeconomic ~~obtain~~downturn ~~alternative~~on ~~financing~~our ascustomers’ ~~we exit certain lines of business~~businesses, as well as the ~~recent~~broader deterioration of the financial markets. ~~Financial~~As ~~market conditions over the previous~~a ~~eighteen~~result ~~months~~of ~~have~~the ~~resulted~~tumultuous conditions in ~~significant~~the ~~writedowns of asset values by~~ financial ~~institutions, including government-sponsored~~markets ~~entities~~over ~~and~~the ~~major~~past ~~commercial~~two ~~and investment banks. These writedowns~~years, ~~initially~~many oflenders ~~mortgage-backed~~and ~~securities but~~institutional ~~spreading~~investors tohave ~~credit~~reduced ~~default swaps~~ and ~~other derivative securities~~, ~~have~~in ~~caused~~some ~~many~~cases, ~~financial~~ceased ~~institutions~~ to ~~seek~~provide ~~additional~~funding ~~capital,~~ to ~~merge~~borrowers. ~~with~~These ~~larger~~conditions ~~and~~have ~~stronger institutions,~~led ~~and,~~to inan ~~some~~increased level ~~cases,~~of tocommercial ~~fail.~~and ~~Many~~consumer ~~lenders~~delinquencies and defaults, ~~institutional~~lack ~~investors~~of ~~have~~consumer ~~reduced and~~confidence, inincreased ~~some~~market ~~cases~~volatility, ~~ceased~~ towidespread ~~provide~~reduction ~~funding~~of tobusiness ~~borrowers,~~activity ~~including~~and ~~other financial~~bankruptcy ~~institutions~~filings. ~~This~~Valuations ~~market~~of ~~turmoil~~the ~~and~~types ~~tightening~~ of ~~credit~~collateral ~~have~~securing our ~~led~~timeshare toand another ~~increased~~portfolios ~~level~~have ofbeen ~~commercial~~ and ~~consumer~~may continue to be ~~delinquencies~~adversely ~~and~~affected ~~defaults,~~by ~~lack~~increased of consumer ~~confidence~~delinquencies, the ~~increased~~reduction ~~market~~in ~~volatility~~business activity and ~~widespread~~bankruptcy ~~reduction of business~~proceedings ~~activity~~involving our borrowers. Valuations of the types of collateral securing our captive finance portfolio, particularly valuations of used aircraft, have decreased significantly over the past two years and may continue to decrease if weak economic conditions continue. Declining collateral values could result in greater delinquencies and foreclosures as customers elect to discontinue payments on loan balances which exceed asset values. Bankruptcy proceedings involving our borrowers may prevent or delay our ability to exercise our rights and remedies and realize the full value of our collateral. Our losses may increase if our ~~our~~ collateral cannot be realized or is liquidated at prices not sufficient to recover the full amount of our finance receivable portfolio. InIf ~~particular,~~these ~~declining~~negative ~~collateral~~market ~~values~~conditions inpersist ~~the~~or ~~portion~~worsen, ~~of our captive finance portfolio secured by non-Textron manufactured aircraft may result in increased losses as~~ we may ~~have~~ ~~greater~~experience ~~difficulty~~further ~~liquidating these assets. Further~~ deterioration ofin our ability to successfully collect our finance ~~receivable~~ ~~portfolio~~receivables ~~and~~or torealize sufficient ~~resolve~~value ~~problem~~from ~~accounts~~collateral which may adversely affect our cash flow, profitability and financial ~~condition.~~ ~~If these negative market conditions persist or worsen, we could experience continuing or increased adverse effects on our financial~~ condition ~~and results of operations~~.

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

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

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Failure to maintain investment grade credit ratings acceptable to investors may increase the cost of our funding and may adversely affect our access to the capital markets.

The major rating agencies regularly evaluate Textron and Textron Financial. ~~Late~~for inpurposes ~~2008~~of ~~and~~assigning ~~during~~credit ~~2009~~ratings. ~~our~~Our ~~long- and short-term~~ability ~~credit~~to ~~ratings~~access ~~were~~the ~~subject~~credit tomarkets, ~~several~~and ~~downgrades~~the ~~resulting~~cost inof these borrowings, ~~the~~is ~~ratings~~affected ~~disclosed~~by onthe ~~page 19~~strength inof ~~the~~our ~~“Liquidity~~credit ratings and current ~~Capital~~market ~~Resources” section~~conditions. Failure to maintain investment grade credit ratings that are acceptable to investors 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.

Our ability to fund our Captive Finance segment activities at economically competitive levels depends on our ability to borrow and the cost of borrowing in the credit markets.

Our ability to continue to offer customer financing for the products which Textron manufactures, and the long-term viability and profitability of the Captive Finance segment, is largely dependent on our ability to obtain funding, whether directly from third-party funding sources or through Textron, at a reasonable cost. This ability and cost, in turn, are dependent on our credit ratings as well as the credit ratings of Textron and are subject to credit market volatility. InIf ~~addition, because~~ we, asare aunable ~~non-bank finance company, do not have access~~ to ~~any of the various assistance programs being provided by the federal government to banking institutions, we may not be able to~~ continue to offer ~~customer financing at rates and terms~~ competitive ~~with those offered by banking institutions. If we are unable to continue to offer competitive~~ customer financing, it could adversely affect our results of operations, financial condition ~~condition~~ and our long-term viability.

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

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

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

Under a Support Agreement between Textron Financial and Textron, Textron may be required to make additional cash payments in the future to ensure that Textron Financial maintains a fixed charge coverage ratio of no less than 125% and consolidated shareholder’s equity of no less than $200 million. In the event that Textron is unable or unwilling to make additional cash payments to Textron Financial, it could result in an event of default under the terms of our debt agreements. Failure to comply with material provisions of the covenants in the credit facility, the indentures or any of our other debt agreements could have a material adverse effect on our liquidity and financial condition.

We may ~~-10-~~need to obtain financing in order to meet our debt obligations in the future; such financing may not be available to us on satisfactory terms, if at all.

We may periodically need to obtain financing in order to meet our debt obligations as they come due. Although we currently have access to the capital markets, we may not be able to refinance our credit facilities or maturing debt at the time that such financing is necessary at terms that are acceptable to us, or at all. If we cannot obtain adequate sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected.

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

We establish reserves to cover uncollectible finance receivables and fair market value writedowns on used aircraft and golf cars. These reserves are subject to adjustment from time to time depending on actual experience and/or current market conditions and are subject to many uncertainties, including bankruptcy or other financial problems at key customers, as well as changing market conditions. We use estimates and various assumptions in determining the fair value of certain of our assets, including finance receivables held-for-sale which do not have active, quoted market prices. We also use estimates and assumptions in determining our allowance for losses on finance receivables held for investment and in determining the residual values of leased equipment and the value of repossessed assets and properties and operating assets received in satisfaction of troubled finance receivables. It is difficult to determine the accuracy of these estimates and assumptions, and our actual experience may differ materially from these estimates and assumptions. A material difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, and financial condition.

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The soundness of our customers and business partners could affect our business and results of operations.

We are exposed to risks associated with the creditworthiness of our key customers and business partners, including developers, manufacturers and syndication partners, many of whom may be adversely affected by general economic and financial market conditions. These conditions could result in financial instability or other adverse effects at any of our customers or business partners. The consequences of such adverse effects could include customer delinquencies or bankruptcies and deterioration of collateral values. Any of these events may adversely affect our cash flow, profitability and financial condition.

The soundness of financial institutions could adversely affect us.

We have relationships with many financial institutions and, from time to time, we execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, financial institutions or the financial services industry generally, could result in losses or defaults by these institutions. In the event that the volatility of the financial markets adversely affects these financial institutions or counterparties, we or other parties to the transactions with us may be unable to complete transactions as intended, which could adversely affect our business and results of operations.

Our international business is subject to the risks of doing business in foreign countries.

Our international business exposes us to certain unique and potentially greater risks than our domestic business, and our exposure to such risks may increase if our international business continues to grow. Our international business is subject to U.S. and local government regulations and procurement policies and practices, which may change from time to time, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings or cash settlement challenges, as well as to varying currency, geopolitical and economic risks. These international risks may be especially significant with respect to sales of aerospace and defense products. We also are exposed to risks associated with using foreign representatives and consultants for international sales and operations and teaming with international suppliers in connection with international financial programs.

Currency and interest rate fluctuations, and our ability to hedge those transactions may adversely affect our results.

We are affected by changes in foreign exchange rates and interest rates. Changes in foreign exchange rates may adversely affect our income from international operations and the value realized on assets and liabilities denominated in non-functional currencies. Increases or decreases in interest rates may adversely affect interest margins due to variances between the interest rate profile of our receivable portfolio and our debt obligations. These variances can be attributed to a combination of interest rate and currency basis differences, asset/liability duration differences, and the portion of our receivable portfolio funded by equity. Changes in our credit ratings may also adversely affect interest rates on future borrowings, which would impact our profitability. In some instances, we enter into hedging instruments to mitigate fluctuations in foreign exchange rates and interest rates. If our hedging instruments are ineffective, these risks may not be adequately mitigated. Our hedging transactions rely on assumptions regarding portfolio mix, portfolio duration, and currency exposures. Changes in the assumptions supporting our hedging strategy may have a significant impact on our profitability, financial condition, or results of operations.

Changes in the regulatory environment in which we operate could have an adverse affect on our business and earnings.

We operate in the United States and certain other foreign markets, and we are subject to the supervision and regulation by governing bodies in those jurisdictions. Any noncompliance with the laws and regulations in those jurisdictions could result in the suspension or revocation of any licenses we hold or registrations at issue, as well as the imposition of civil or criminal penalties. Any inability to remain in compliance with applicable regulatory requirements could have a material adverse effect on our operations by limiting our access to capital, as well as

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negatively impacting our public standing. Additionally, no assurance can be provided that laws and regulations that are applicable to our current operations will not be amended or interpreted differently, that new laws and regulations will not be passed which materially change our current business practices or operations, or that we will not be prohibited by state laws or certain other foreign laws from raising interest rates above certain desired levels, any of which could adversely impact our business, financial condition or results of operations.

We are subject to legal proceedings and other claims.

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings, claims and counter-claims relating to commercial and financial transactions (including claims which may be brought due to our decision to exit our Non-captive Finance segment); lack of compliance with applicable laws and regulations; disputes with syndication partners; loan servicing contracts; employment disputes; and environmental, safety and health matters. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations. However, litigation is inherently unpredictable, and we could incur judgments or enter into settlements for current or future claims that could adversely affect our financial position or our results of operations in any particular period.

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

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


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

Textron Financial leases office space from a Textron affiliate for its corporate headquarters at 40 Westminster Street, Providence, Rhode Island 02903. The Company leases other offices throughout ~~North~~the ~~America~~U. S. For additional information regarding Textron Financial’s lease obligations, see Note 1613 to the Consolidated Financial Statements in Item 8 of this Form 10-K.


Item 3.	*Legal Proceedings*

On February 9, 2010 an amended complaint to a purported shareholder class action lawsuit by the City of Roseville Employees’ Retirement System was filed in the United States District Court in Rhode Island against TFC and three of its present and former officers. The original complaint, filed on August 13, 2009, contained claims only against Textron, its Chairman and former Chief Executive Officer and its former Chief Financial Officer. The suit alleges that the defendants violated the federal securities laws by making material misrepresentations or omissions related to Cessna and Textron Financial. The complaint seeks unspecified compensatory damages. Automotive Industries Pension Trust Fund has been appointed lead plaintiff in the case. On April 6, 2010, the court entered a stipulation agreed to by the parties in which plaintiffs voluntarily dismissed, without prejudice, certain causes of action in the amended complaint. On April 9, 2010, all defendants moved to dismiss the remaining counts of the amended complaint, and that motion is still pending. Textron Financial believes that this lawsuit is without merit and intends to defend it vigorously.

We are also subject to actual and threatened legal proceedings and other claims against Textron Financial ~~believes~~and ~~that~~its ~~this~~subsidiaries arising ~~lawsuit~~out isof ~~without~~the ~~merit~~conduct of our business. These proceedings include claims and ~~intends~~counterclaims relating to ~~defend~~commercial itand financial ~~vigorously~~transactions; lack of compliance with applicable laws and regulations; disputes with syndication partners; loan servicing contracts; employment disputes; and environmental, safety and health matters. Some of these suits and proceedings seek compensatory, treble or punitive damages, fines or penalties in substantial amounts or remediation of environmental contamination. 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, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

~~We are also subject to actual and threatened legal proceedings~~ ~~and other claims against Textron Financial and its subsidiaries~~-7- arising out of the conduct of our business. These proceedings include claims and counterclaims relating to commercial and financial transactions; lack of compliance with applicable laws and regulations; disputes with syndication partners; loan servicing contracts; employment disputes; and environmental, safety and health

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matters. Some of these suits and proceedings seek compensatory, treble or punitive damages, fines or penalties in substantial amounts or remediation of environmental contamination. 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, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Omitted per Instruction I of Form 10-K.

PART II.


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*

The common stock of Textron Financial is owned entirely by Textron and, therefore, there is no trading of Textron Financial’s stock. Dividends of $~~358~~514 million, $~~151~~358 million and $~~144~~151 million were declared and paid in ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively. For additional information regarding restrictions as to dividend availability, see Note 107 to the Consolidated Financial Statements in Item 8 of this Form 10-K.


Item 6.	*Selected Financial Data*

~~The~~Omitted ~~following~~per ~~should be read in conjunction with Textron Financial’s Consolidated Financial Statements in Item~~Instruction 8I of ~~this~~ Form 10-K:.

	For the Years Ended (1)
	2009			2008			2007			2006			2005
	(Dollars in millions)
Results of Operations
Finance charges	$	434		$	558		$	671		$	652		$	464
Portfolio (losses) gains		(162	)		(5	)		15			(8	)		1
Gains on early extinguishment of debt		55			—			—			—			—
Securitization (losses) gains		(28	)		42			62			42			49
Segment (loss) income		(292	)		(50	)		222			210			171
Special charges		13			489			—			—			—
Net (loss) income		(203	)		(461	)		145			152			111
Balance Sheet Data
Total finance receivables held for investment	$	6,024		$	6,915		$	8,603		$	8,310		$	6,763
Finance receivables held for sale		819			1,658			—			—			—
Allowance for losses on finance receivables held for investment		339			191			89			93			96
Total assets		7,324			9,344			9,383			9,000			7,441
Debt		5,488			7,388			7,311			6,862			5,420
Deferred income taxes		137			337			472			497			461
Shareholder’s equity		804			1,079			1,138			1,142			1,050
Debt to Shareholder’s equity		6.83	x		6.85	x		6.42	x		6.01	x		5.16	x

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	For the Years Ended (1)
	2009			2008			2007			2006			2005
	(Dollars in millions)
SELECTED DATA AND RATIOS
Profitability
Portfolio yield		6.03	%		6.86	%		8.51	%		9.11	%		7.91	%
Net interest margin as a percentage of average net investment (2)		2.46	%		4.74	%		5.66	%		5.81	%		6.40	%
Return on average equity (3)		(20.72	)%		(44.26	)%		13.28	%		14.13	%		11.17	%
Return on average assets (4)		(2.32	)%		(4.82	)%		1.60	%		1.84	%		1.58	%
Selling and administrative expenses as a percentage of average managed and serviced finance receivables (5)		2.10	%		1.68	%		1.71	%		1.84	%		2.01	%
Credit Quality
60+ days contractual delinquency as a percentage of finance receivables held for investment (6)		9.51	%		2.59	%		0.43	%		0.77	%		0.79	%
Nonaccrual finance receivables as a percentage of finance receivables held for investment		17.26	%		4.01	%		0.92	%		0.90	%		1.31	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		5.63	%		2.76	%		1.03	%		1.11	%		1.43	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		32.6	%		68.9	%		111.7	%		123.1	%		108.6	%
Net charge-offs as a percentage of average finance receivables (7)		1.82	%		1.00	%		0.45	%		0.38	%		0.51	%

(1)		Textron Financial’s year-end dates conform with Textron’s year-end, which falls on the nearest Saturday to December 31.
(2)		Represents revenues earned, including portfolio gains and losses, less interest expense on borrowings and operating lease depreciation as a percentage of average net investment. Average net investment includes owned finance receivables plus operating leases, less deferred taxes on leveraged leases.
(3)		Return on average equity excludes the cumulative effect of change in accounting principle.
(4)		Return on average assets excludes the cumulative effect of change in accounting principle.
(5)		Average managed and serviced finance receivables include owned finance receivables, finance receivables serviced under securitizations, participations and third-party portfolio servicing agreements.
(6)		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 held for investment.
(7)		Average finance receivables include both finance receivables held for investment and finance receivables held for sale.

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Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Overview

On December 22, 2008, due to 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 exit plan currently applies to the managed finance receivables of our Non-captive Finance segment, which represent $4.1 billion of our $6.9 billion managed finance receivable portfolio and does not include finance receivables that are likely to be liquidated in our Captive Finance segment. The exit plan will be implemented utilizing a combination of orderly liquidation and selected sales and is expected, depending on market conditions, to be substantially complete over the next two to three years. The Captive Finance segment supports the financing of customer purchases of products manufactured by Textron by providing financing directly to Textron customers as well as arranging financing through third-party financial institutions and originating and servicing finance receivables on behalf of other Textron finance subsidiaries.

We are in the business of originating and servicing commercial finance receivables in the Captive Finance segment and servicing our existing portfolios in other commercial markets. The principal factors that influence our earnings are the credit quality, quantity and mix of finance assets across product lines and industries, fees earned related to these finance assets and services and the cost of borrowed funds utilized to invest in these assets. For finance receivables, net interest margin equals the difference between revenue earned on finance receivables, including fee income, gains and losses on disposal of finance receivables and impairment losses, and the cost of borrowed funds. For operating leases, net interest margin equals revenue earned on operating leases, less depreciation expense and the cost of borrowed funds. On certain types of finance receivables, interest rates earned are fixed at the time the contracts are originated, while other types are based on floating-rates that are generally tied to changes in the prime rate offered by major banks or the London Interbank Offered Rate (LIBOR). Rental charges on operating leases may be fixed at the time the contracts are originated or based on floating-rates that are generally tied to changes in LIBOR.

We have traditionally borrowed funds at various maturities at both fixed and floating interest rates, based primarily on LIBOR, to match the interest sensitivities and maturities of our finance receivables. During 2009, our borrowing has been substantially limited to amounts available under our $1.75 billion committed bank credit line, intercompany loans from Textron and the issuance of debt secured by specific finance receivables.

Our business performance is assessed on an owned, managed and a serviced basis. The owned basis includes only the finance receivables owned and reported on the Consolidated Balance Sheets. The managed basis includes owned finance receivables and finance receivables sold in securitizations where we have retained credit risk to the extent of our subordinated interest. The serviced basis includes managed finance receivables and serviced-only finance receivables, which generally consist of participation interests sold to third-party financial institutions without retained credit risk, finance receivables originated and serviced on behalf of other finance subsidiaries of Textron and receivables subject to servicing agreements with third-party financial institutions. We evaluate finance receivable credit risk and leverage on a managed, as well as an owned basis. We do not have a retained financial interest or credit risk in the performance of the serviced portfolio and, therefore, performance of these portfolios is limited to the difference between servicing fees received and the cost of servicing.

Key Business Initiatives and Trends

We achieved $3.9 billion of managed finance receivable reductions during 2009 as compared to the minimum liquidation target of $2.6 billion announced in December 2008. These managed finance receivable reductions occurred in both of our segments and all nine of our product lines, but were primarily driven by Non-captive reductions, including $2.3 billion (68%) in Distribution Finance, $479 million (74%) in Asset-Based Lending and $244 million (21%) in Golf Mortgage. These reductions resulted from the combination of scheduled finance receivable collections, sales, discounted payoffs, repossession of collateral, charge-offs and impairment charges recorded as Portfolio Losses in our Consolidated Statements of Operations. Finance receivable reductions in the Distribution Finance product line were aided by discount programs which encouraged borrowers to liquidate

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inventory and resulted in $43 million of our Portfolio losses. Repossession, foreclosure or the maturity of leveraged leases with residual values represented $337 million of the managed finance receivable reduction. However, we also generated $236 million from the collection or sale of these assets and other investments during 2009. We expect to liquidate approximately $1.6 billion of additional managed finance receivables, net of originations, in 2010, a portion of which we expect will be liquidations in the Captive Finance segment.

Our $3.9 billion reduction in managed finance receivables also included $633 million of liquidations in the Captive portfolio primarily as a result of reduced loan and lease originations. The reduction in originations resulted from lower Cessna Aircraft Company sales, no longer originating non-captive aircraft loans and leases, the agreement signed by Textron in the second quarter of 2009 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 and the impact of aircraft loans originated on behalf of a finance subsidiary of Textron. This subsidiary entered into a $500 million credit facility with the Export-Import Bank of the United States to provide funding for the financing of sales of Cessna Aircraft Company and Bell Helicopter products to non-U.S. buyers. We originated and service $182 million of finance receivables for this entity as of January 2, 2010. Continued use of this credit facility is expected to reduce our originations in future periods.

Managed finance receivable balances and percentages by product line are presented in the following table:

	January 2,				January 3,
	2010				2009
	(Dollars in millions)
Captive Finance
Aviation	$	2,353	34	%	$	2,795	26	%
Golf Equipment		417	6	%		608	6	%
Non-captive Finance
Timeshare		1,285	19	%		1,374	12	%
Distribution Finance		1,076	16	%		3,379	31	%
Golf Mortgage		933	14	%		1,177	11	%
Structured Capital		349	5	%		508	5	%
Hotel		199	3	%		185	2	%
Asset-Based Lending		170	2	%		649	6	%
Other Liquidating		91	1	%		146	1	%
Total managed finance receivables	$	6,873	100	%	$	10,821	100	%

As of January 2, 2010, $819 million of owned finance receivables are designated for sale as compared to $1.7 billion as of January 3, 2009. Finance receivable sales accounted for $728 million of the reduction including $399 million in the Distribution Finance product line and $127 million in the Asset-Based Lending product line. We received proceeds approximating our carrying value for each of these transactions. The remaining $819 million finance receivables held for sale are primarily comprised of assets in the Distribution Finance, Golf Mortgage and Asset-Based Lending product lines, but also include $84 million of finance receivables in the Golf Equipment product line within the Captive Finance segment. In January 2010, we completed an additional sale of Distribution Finance receivables, which achieved a finance receivable reduction of approximately $200 million and generated proceeds in excess of our carrying value.

We continually assess the manner in which we will be able to maximize the economic value of our finance receivable portfolio, while still achieving our cash collection goals. This analysis can result in the reclassification of finance receivables previously classified as held for sale to held for investment. In addition, this analysis can result in the classification of additional assets as held for sale. Following efforts to market the portfolio and progress made through orderly liquidation in 2009, we reclassified certain portfolios from held for sale to held for investment. We also reclassified other portfolios from held for investment to held for sale as a result of unanticipated purchase inquiries. 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. This activity resulted in net

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reclassifications from finance receivables held for sale to finance receivables held for investment of $457 million in 2009.

We measure the progress of our exit plan related to the Non-captive Finance segment, in part, based on the percentage of managed finance receivable and other finance asset reductions converted to cash. During 2009, the Non-captive Finance segment achieved a 95% cash conversion ratio. This performance was primarily driven by the accelerated pace of liquidations in the Distribution Finance product line. Distribution Finance receivables typically have short durations associated with the sales pace of dealer inventory, and this natural liquidation pattern was accelerated by asset sales, discounted payoff programs and the transfer of borrowers with revolving credit lines to new lenders. We expect this ratio to decline over the duration of our exit plan due to the change in mix from shorter term assets in the Distribution Finance and Asset-Based Lending product lines to longer term assets in our Timeshare, Golf Mortgage and Structured Finance product lines and the existence of a higher concentration of nonaccrual finance receivables.

Portfolio quality statistics weakened significantly during 2009 as we executed our liquidation plan under difficult economic conditions. Nonaccrual finance receivables increased to $1,040 million as of January 2, 2010 from $277 million as of January 3, 2009 and 60+ day delinquent finance receivables increased to $569 million as of January 2, 2010 from $178 million as of January 3, 2009. This deterioration was most significant in the Timeshare and Aviation product lines. The notes receivable portfolios of our borrowers in the Timeshare product line were impacted by general economic conditions, including unemployment and the lack of liquidity available to finance operations, and borrowers in the Aviation product line were impacted by general economic conditions and a significant deterioration in used aircraft values. As a result of this continued trend, the Allowance for losses on finance receivables held for investment has increased $148 million or 77% as compared to January 3, 2009. We expect the rate of increase in nonaccrual finance receivables and delinquency to slow in future periods as general economic conditions begin to stabilize.

Financial Condition

Liquidity and Capital Resources

In light of our plan to exit the Non-captive Finance business, we expect to substantially rely on cash from finance receivable collections to fund maturing debt obligations. ~~Under~~During ~~the exit plan~~2010, we ~~originally expected to liquidate at least~~ liquidated $2.6 billion of managed finance receivables, net of of originations,. These managed finance receivable reductions occurred in ~~2009,~~both of our segments and ~~expected~~all toof ~~use~~our ~~approximately~~product lines, but were primarily driven by Non-captive Finance reductions, including $~~2.0~~956 ~~billion~~million ofin ~~proceeds~~Distribution ~~from~~Finance, $408 million ~~liquidations~~in toTimeshare ~~pay~~and ~~maturing~~$239 million in Golf ~~securitized~~Mortgage. ~~off-balance~~These ~~sheet~~reductions ~~debt.~~resulted ~~During~~from ~~2009~~the combination of scheduled finance receivable collections, wesales, ~~liquidated~~discounted ~~$3.9 billion~~payoffs, repossession of ~~managed~~collateral, ~~finance~~charge-offs ~~receivables~~and impairment charges recorded as Portfolio losses, net of gains, in our ~~originations,~~Consolidated ~~and~~Statements ~~used~~of $2Operations.0 Finance receivable reductions in the Distribution Finance product line included sales of $375 ~~billion~~million of ~~liquidation~~finance ~~proceeds~~receivables. In addition, tothe ~~pay~~reduction ~~securitized~~in ~~debt,~~finance ~~which~~receivables ~~was~~included ~~off-balance~~$795 million of ~~sheet~~liquidations atin the Captive Finance segment primarily as a ~~beginning~~result of ~~the~~reduced ~~year.~~loan Weand ~~expect~~lease tooriginations ~~reduce~~and ~~managed~~a ~~finance~~sale of ~~receivables~~$84 million byof ~~approximately~~finance $1receivables.~~6 billion,~~ ~~net~~The originations of the ~~originations,~~Captive inFinance ~~2010~~segment exclude finance receivables serviced on behalf of other finance subsidiaries of Textron.

In ~~addition~~order to ~~cash~~meet ~~from~~our ~~finance~~capital ~~receivable~~needs, ~~collections~~we could access either secured or unsecured debt markets. During 2010, we ~~also~~issued ~~utilize~~$166 million of securitized on-balance sheet debt supporting our ~~committed~~aviation ~~bank~~finance ~~credit~~business. ~~lines~~In ~~and~~addition, ~~borrow~~we ~~available~~have borrowed available cash from Textron ~~when~~during 2010 through an intercompany borrowing arrangement as it ishas been in the collective economic interest of Textron Financial and Textron to do so. InWe ~~the~~decreased ~~first~~our ~~quarter~~outstanding ofintercompany ~~2009,~~loan balance wewith ~~borrowed~~Textron ~~the~~to $~~1.74~~242 ~~billion~~million ~~available~~at ~~balance~~January 1, of2011 ~~the~~from $~~1.75~~447 ~~billion~~million ~~committed~~at ~~bank~~January 2, ~~credit line~~2010. AIn ~~portion~~addition, ofduring ~~these~~2010, ~~borrowings~~we ~~were~~repaid ~~utilized to repay the~~ $~~743~~1,730 million of ~~commercial~~ ~~paper~~long-term ~~outstanding as of January 3~~debt, ~~2009. The~~ ~~remaining~~$225 million ~~cash~~of ~~was~~securitized ~~utilized~~on-balance tosheet ~~repay~~debt ~~portions~~and $300 million of our ~~maturing term~~bank ~~debt. Amounts borrowed under the~~ credit ~~facilities are due in April 2012~~line.

InWe ~~2009~~measure ~~and~~the ~~2008,~~progress ~~Textron~~of ~~agreed~~our exit plan related to ~~lend~~the Non-captive ~~Textron~~Finance ~~Financial~~segment, ~~with~~in part, based on the percentage of ~~interest,~~finance ~~amounts~~receivable toand ~~pay~~other ~~down~~finance ~~maturing~~asset ~~debt~~reductions converted to cash. AsDuring of2010, the Non-captive Finance segment achieved a 93% cash conversion ratio as compared to 95% for the year ended January 2, 2010. ~~and~~This ~~January~~performance during 2010 was primarily driven by sales of $375 3,million ~~2009,~~of ~~the~~finance ~~Company~~receivables ~~had~~in anthe ~~outstanding~~Distribution ~~balance~~Finance ~~due~~product line at prices equivalent to ~~Textron~~or greater ofthan ~~$447 million~~our carrying value and the liquidation of $~~133~~408 million of Timeshare finance receivables at a 95% cash conversion ratio. We expect this ratio to continue to decline over the duration of our exit plan due to the change in mix from shorter term assets in the Distribution Finance product line to longer term assets in our Timeshare, ~~respectively~~Golf Mortgage and Structured Finance product lines and the existence of a higher concentration of nonaccrual finance receivables.

~~Due~~Under toa ~~the~~Support ~~progress~~Agreement ~~made~~between ~~reducing~~Textron ~~our~~Financial ~~managed~~and ~~finance~~Textron, ~~receivables~~Textron ~~and~~is ~~the~~required ~~availability~~to ofensure ~~cash~~that ~~from~~Textron ~~the~~Financial ~~credit line,~~maintains wefixed ~~extinguished,~~charge ~~through~~coverage ~~open market repurchases, $655 million~~ of ~~our~~no ~~debt~~less ~~securities~~than ~~prior~~125% toand ~~maturity~~consolidated ~~during~~shareholder’s ~~2009,~~equity ~~resulting~~of inno ~~gains~~less ofthan $47200 million. ~~During the~~In ~~fourth~~2010 ~~quarter~~and 2009, Textron ~~Inc.~~Financial’s ~~and~~fixed ~~Textron~~charge ~~Financial Corporation~~coverage ~~completed~~ratio ~~separate~~dropped ~~cash~~below ~~tender~~the ~~offers~~required ~~for~~125%. upAs to a result, Textron made cash payments of $~~650~~308 million ~~aggregate~~and ~~principal~~$270 million ~~amount of five separate~~to ~~series~~Textron ofFinancial ~~outstanding~~in ~~debt~~2010 ~~securities~~and ~~with~~2009, ~~maturity~~respectively, ~~dates~~and additional ~~ranging~~payments ~~from~~of ~~November~~$63 million ~~2009~~on toJanuary 11, ~~June~~2011 ~~2012.~~related ~~As a result, we~~to ~~extinguished~~2010, and $~~319~~75 million ofon ~~our~~January 12, ~~debt~~2010 ~~securities~~related ~~with~~to ~~maturity dates ranging from~~ 2009. toThese ~~2011~~cash ~~and~~payments ~~recognized~~were areflected ~~gain~~as capital oncontributions ~~these early extinguishments of $8 million.~~to

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~~The~~maintain ~~following~~compliance ~~table~~with ~~summarizes~~the ~~our~~fixed ~~contractual~~charge ~~payments~~coverage ~~and~~ratio ~~receipts,~~required ~~including~~by ~~all~~the ~~managed~~Support ~~finance~~Agreement ~~receivables~~ and ~~both~~certain ~~on- and off-balance sheet funding sources as~~ of ~~January 2,~~Textron ~~2010,~~Financial’s ~~for~~credit ~~the specified periods:~~agreements.

	Payments / Receipts Due by Period
	Less
	than 1		1-2		2-3			3-4		4-5		More than
	year		Years		Years			Years		Years		5 years		Total
	(In millions)
Payments due:
Multi-year credit facilities	$	—	$	—	$	1,740		$	—	$	—	$	—	$	1,740
Term debt		1,635		419		52			578		111		53		2,848
Securitized on-balance sheet debt		85		69		85			76		68		176		559
Subordinated debt		—		—		—			—		—		300		300
Securitized off-balance sheet debt		—		—		—			—		—		31		31
Interest payments on debt		105		70		55			39		31		77		377
Operating lease rental payments		5		4		1			1		1		—		12
Total payments due		1,830		562		1,933			694		211		637		5,867
Cash and contractual receipts:
Finance receivable receipts - held for investment		1,617		1,251		850			661		350		1,376		6,105
Finance receivable receipts - held for sale		260		249		197			121		76		20		923
Securitized off-balance sheet finance receivable and cash receipts		—		—		—			—		—		31		31
Interest receipts on finance receivables		361		261		189			135		96		149		1,191
Operating lease rental receipts		26		22		18			11		9		14		100
Total contractual receipts		2,264		1,783		1,254			928		531		1,590		8,350
Cash		144		—		—			—		—		—		144
Total cash and contractual receipts		2,408		1,783		1,254			928		531		1,590		8,494
Net cash and contractual receipts (payments)	$	578	$	1,221	$	(679	)	$	234	$	320	$	953	$	2,627
Cumulative net cash and contractual receipts	$	578	$	1,799	$	1,120		$	1,354	$	1,674	$	2,627

This liquidity profile is an indicator of our ability to repay outstanding funding obligations, assuming contractual collection of finance receivables and absent access to new sources of liquidity or origination of additional finance receivables. This profile excludes cash which may be generated by the disposal of Other assets and cash which may be used to pay future income taxes, Accrued interest and other liabilities or Amounts due to Textron Inc.

Finance receivable receipts are based on contractual cash flows. These amounts could differ due to sales, prepayments, charge-offs and other factors, including the inability of borrowers to repay the balance of the loan at the contractual maturity date. Finance receivable receipts on the held for sale portfolio represent the contractual balance of the finance receivables and therefore exclude the potential negative impact from selling the portfolio at the estimated fair value. Interest payments and receipts in the table above reflect the current contractual interest rate on the related debt and finance receivables. They do not include anticipated changes in market interest rates or the ability of the borrower to pay, which could have an impact on the interest rate according to the terms of the related debt or finance receivable contract.

At January 2, 2010, Textron Financial had unused commitments of $350 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,

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including manufacturers and dealers in the Distribution Finance product line, which do not contractually obligate us 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.

During the third quarter of 2009, a 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 this subsidiary, which is consolidated by Textron, and has provided a full guarantee of the debt obligations under this facility. Serviced finance receivables were $182 million and the outstanding balance of the guaranteed debt was $179 million at January 2, 2010.

In April 2009, Textron signed a 3-year agreement with a subsidiary of The PNC Financial Services Group to become a preferred 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.

The major rating agencies regularly evaluate us and our parent company. Both our long- and short-term credit ratings were downgraded during 2009. In connection with these rating actions, the rating agencies 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. In February 2010, Moody’s affirmed our rating and adjusted our outlook to stable. Moody’s cited better than expected progress to date in the liquidation of our non-captive assets. Our current credit ratings prevent us from efficiently 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:

			Standard &
	Fitch Ratings	Moody’s	Poor’s
Long-term ratings	BB+	Baa3	BB+
Short-term ratings	B	P3	B
Outlook	Negative	Stable	Developing

The cash flows from operations are summarized below:

	2009			2008			2007
Operating activities	$	199		$	167		$	262
Investing activities		2,335			(64	)		(281	)
Financing activities		(2,420	)		(146	)		29

Cash provided by operating activities increased during 2009 as compared to 2008 primarily due to the timing of payments of income taxes and accrued interest and other liabilities, partially offset by a decrease in interest margin from lower average finance receivables. The decrease in cash provided by operating activities for 2008 was primarily due to the timing of payments of income taxes and accrued interest and other liabilities.

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Cash flows provided by investing activities increased during 2009 by $2.4 billion as compared to 2008. This was primarily due to a decrease in finance receivable originations of $8.3 billion resulting from our decision to exit the Non-captive Finance segment, partially offset by a $6.4 billion decrease in finance receivable collections and an increase in proceeds from receivable sales and disposition of other assets of $293 million. Cash flows used in investing activities decreased during 2008 primarily due to a decrease in finance receivable originations, net of collections as a result of our exit plan.

Cash flows used by financing activities increased $2.3 billion during 2009 as a result of the decrease in managed finance receivables, which reduced the need to raise cash from financing activities. The decrease in cash flows provided by financing activities in 2008 is primarily due to the reduction in managed finance receivable growth as compared to 2007 and to a lesser extent the liquidation of certain portfolios.

Because the finance business involves the purchase and carrying of finance receivables, a relatively high ratio of borrowings to net worth is customary. Debt as a percentage of total capitalization was 81% at January 2, 2010 and 86% at January 3, 2009. Our ratio of earnings to fixed charges was (0.89)x in 2009, (0.74)x in 2008 and 1.56x in 2007.

In 2009, Textron Financial declared and paid $358 million of dividends to Textron, compared with $151 million of dividends declared and paid in 2008. The payment of these dividends represents a return of Textron’s investment consistent with maintaining our targeted leverage ratio. Textron contributed capital of $279 million to Textron Financial in 2009 compared with $634 million in 2008. Cash contributions of $625 million in 2008, $270 million in 2009 and an additional payment of $75 million on January 12, 2010, were made to maintain compliance with the fixed charge coverage and leverage ratios as more fully described in Note 4 to the Consolidated Financial Statements in Item 8 of this Form 10-K. Textron also contributed capital of $9 million to Textron Financial in 2009 and 2008 for Textron’s dividend on the preferred stock of Textron Funding Corporation.

Off-Balance Sheet Arrangements

During 2009, we had one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust was a master trust that purchased inventory finance receivables from the Company and issued asset-backed notes to investors. $1.4 billion of the outstanding notes issued by the Distribution Finance securitization trust were repaid through finance receivable collections. During the fourth quarter of 2009, a change in the pace of finance receivable collections triggered a corresponding change in required cash distributions, which provided us the ability to repurchase the finance receivables resulting in the consolidation of the securitization trust on our balance sheet. As a result, the finance receivables held by the securitization trust were recorded at their fair value of $720 million, $635 million of debt issued by the securitization trust was recorded on our balance sheet and $85 million of retained interests were removed from the balance sheets. Textron Financial then made a capital contribution to the trust sufficient to repay its $635 million of outstanding debt; following the repayment, the remaining receivables were legally conveyed to Textron Financial and the trust was dissolved.

Interest Rate Sensitivity

Textron Financial’s mix of fixed- and floating-rate debt is continuously monitored by management and is adjusted, as necessary, based on evaluations of internal and external factors. Management’s strategy of matching floating-rate assets with floating-rate liabilities limits Textron Financial’s risk to changes in interest rates. This strategy includes the use of interest rate exchange agreements. At January 2, 2010, floating-rate liabilities in excess of floating-rate assets were $0.6 billion after considering interest rate exchange agreements and the treatment of $1.4 billion of floating-rate loans with index rate floors as fixed-rate loans. These loans have index rates that are, on average, 219 basis points above the applicable index rate (predominately the Prime rate). The Company has benefited from these interest rate floor agreements in the recent low rate environment. However, in a rising rate environment, this benefit will dissipate until the Prime rate exceeds the floor rates embedded in these agreements.

We believe that our asset/liability management policy provides adequate protection against interest rate risks. Changes in interest rates, however, could have an adverse effect on our interest margin. Variable-rate finance receivables are tied to changes in the prime rate offered by major U.S. and Canadian banks and typically have index

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resets on a monthly basis. Variable-rate debt is generally tied to changes in LIBOR and variable-rate term debt typically has index resets on a quarterly basis. As a consequence, changes in short-term borrowing costs do not always coincide with changes in variable-rate receivable yields. Historically, this basis difference has been stable, but was increasingly volatile during 2008, prompting the modification of the terms of many of our loan agreements to be based on LIBOR. We do not hedge this basis risk between different variable-rate indices and reset frequencies, as we believe the cost is disproportionately high in comparison to the magnitude of the risk over long periods of time. A 100 basis point increase in LIBOR with no corresponding change in the prime rate would result in a $14 million decrease in net income or cash flows for the following twelve-month period assuming no originations or maturities of LIBOR-based assets or liabilities.

We assess our exposure to interest rate changes using an analysis that measures the potential loss in net income, over a twelve-month period, resulting from a hypothetical change in all interest rates of 100 basis points across all maturities occurring at the outset of the measurement period (sometimes referred to as a “shock test”). The analysis also assumes that prospective receivable additions will be match-funded, existing portfolios will not prepay and contractual maturities of both debt and assets will result in increases or reductions in intercompany borrowing from Textron. This shock test model, when applied to our asset and liability position at January 2, 2010, indicates that an increase in interest rates of 100 basis points would have a negative $1 million impact on net income or cash flows for the following twelve-month period, respectively.

Financial Risk Management

Textron Financial’s results are affected by changes in U.S. and, to a lesser extent, foreign interest rates. As part of managing this risk, we enter into interest rate exchange agreements. The objective of entering into such agreements is not to speculate for profit, but generally to convert variable-rate debt into fixed-rate debt and vice versa. The overall objective of our interest rate risk management is to achieve match-funding objectives. These agreements do not involve a high degree of complexity or risk. The fair values of interest rate exchange agreements are recorded in either Other assets or Accrued interest and other liabilities on the Consolidated Balance Sheets. We do not trade in interest rate exchange agreements or enter into leveraged interest rate exchange agreements. The net effect of the interest rate exchange agreements designated as hedges of debt decreased interest expense by $56 million in 2009 and $25 million in 2008, and increased interest expense by $25 million in 2007.

We manage our foreign currency exposure by funding foreign currency denominated assets with liabilities in the same currency or by entering into foreign currency exchange agreements to convert foreign currency denominated assets, liabilities and cash flows into functional currency denominated assets, liabilities and cash flows. In addition, as part of managing our foreign currency exposure, we may enter into foreign currency forward exchange contracts. The objective of such agreements is to manage any remaining foreign currency exposures to changes in currency rates. The notional amounts outstanding for these agreements were $531 million and $536 million at January 2, 2010 and January 3, 2009, respectively. The fair values of these agreements are recorded in either Other assets or Accrued interest and other liabilities on the Company’s Consolidated Balance Sheets. As we hedge all substantial non-functional currency exposures within each of our subsidiaries, future changes in foreign currency rates would not have a significant impact on each subsidiary’s functional currency earnings.

As a result of our exit plan, 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 notional amounts of these foreign currency forward exchange contracts were $71 million at January 2, 2010 and $139 million at January 3, 2009.

Critical Accounting Policies

Allowance for Losses on Finance Receivables Held for Investment

We evaluate our allowance for losses on finance receivables held for investment based on a combination of factors. For homogeneous loan pools, we examine current delinquencies, the characteristics of the existing

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accounts, historical loss experience, the value of the underlying collateral and general economic conditions and trends and the potential impact of the lack of liquidity available to our borrowers and their customers as a result of our decision to exit portions of our commercial finance business. We estimate losses will range from 0.75% to 10.0% of finance receivables held for investment depending on the specific homogeneous loan pool. For larger balance commercial loans, we consider borrower specific information, industry trends and estimated discounted cash flows, as well as the factors described above for homogeneous loan pools.

Provision for losses on finance receivables held for investment are charged to income, in amounts sufficient to maintain the allowance for losses on finance receivables held for investment at a level considered adequate to cover losses inherent in the owned finance receivable held for investment portfolio, based on management’s evaluation and analysis of this portfolio. While management believes that its consideration of the factors and assumptions referred to above results in an accurate evaluation of existing losses in the portfolio based on prior trends and experience, changes in the assumptions or trends within reasonable historical volatility may have a material impact on our allowance for losses on finance receivables held for investment. The allowance for losses on finance receivables held for investment currently represents 5.63% of total finance receivables held for investment. During the last five years, net charge-offs as a percentage of finance receivables held for investment have ranged from 0.38% to 1.82%.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying tax rates expected to be in effect for the year in which we expect the differences will reverse or settle. Based on the evaluation of available evidence, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that it is more likely than not that we will realize these benefits.

We periodically assess the likelihood that we will be able to recover our deferred tax assets and reflect any changes in our estimates in a valuation allowance, with a corresponding adjustment to earnings or other comprehensive income (loss), as appropriate. In assessing the need for a valuation allowance, we look to the future reversal of existing taxable temporary differences, taxable income in carryback years, the feasibility of tax planning strategies and estimated future taxable income. The valuation allowance can be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record an estimate of the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions for which it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized. As future results may include favorable or unfavorable adjustments to our estimates due to closure of income tax examinations, new regulatory or judicial pronouncements, or other relevant events, our effective tax rate may fluctuate significantly on a quarterly and annual basis.

Fair Value of Financial Instruments

Fair values of financial instruments are based upon estimates at the balance sheet date of the price that would be received in an orderly transaction between market participants. We use quoted market prices and observable inputs when available. However, these inputs are often not available in the markets for many of our assets. In these cases management typically performs discounted cash flow analyses using our best estimates of key assumptions such as credit losses, prepayment speeds and discount rates based on both historical experience and our interpretation of how comparable market data in more active markets should be utilized. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented may differ from amounts Textron Financial could realize or settle currently.

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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 and strategies, 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 determine that finance receivables classified as held for sale will not be sold and we have the intent and ability to hold the finance receivables for the foreseeable future, until maturity or payoff, they are reclassified as Finance receivables held for investment at the lower of cost or fair value at that time. Changes in the classification of which finance receivables are held for sale could result in the creation of additional valuation allowances based on the difference between the fair value of finance receivables and the current carrying value as reflected in Note 12 to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Results of Operations

Revenues

Revenues decreased $~~363~~153 million in ~~2009~~2010 as compared to ~~2008~~2009 ~~and $152 million in 2008 as compared to 2007,~~ primarily due to the following:

	2009			2008
	2010
	vs. 2008			vs. 2007
	vs. 2009
	(In millions)
Increase in portfolio losses	$	(157	)	$	(20	)
Lower average finance receivables of $2.0 billion	$	(114	)
Lower market interest rates		(92	)		(163	)
Lower gains on debt extinguishment		(54	)
Lower securitization gains, net of impairments		(70	)		(20	)
Impact of variable-rate receivable interest rate floors		(26	)
Lower average finance receivables of $1.1 billion and higher average finance receivables of $258 million, respectively		(64	)		21
Decrease in servicing and investment income related to securitizations		(24	)
Suspended earnings on nonaccrual finance receivables		(37	)		(9	)
Lower accretion of valuation allowance		(16	)
Lower other income		(3615	)		(8	)
(Decrease) increase in servicing and investment income related to securitizations		(27	)		9
Suspended earnings on nonaccrual finance receivables		(10	)
Gains on debt extinguishment		55			—
Lower portfolio losses, net of gains		81
Accretion of valuation allowance		29			—
Lower securitization losses, net of gains		28
Benefit from variable-rate receivables interest rate floors		21			24

Loss ~~-23-~~before Income Taxes and Noncontrolling Interest

Loss before income taxes and noncontrolling interest increased $36 million in 2010 as compared to 2009 primarily due to the following:


	2010
	vs. 2009
	(In millions)
Lower average finance receivables of $2.0 billion	$	(59	)
Lower gains on debt extinguishment		(54	)
Impact of variable-rate receivable interest rate floors		(26	)
Decrease in servicing and investment income related to securitizations		(24	)
Lower accretion of valuation allowance		(16	)
Lower other income		(15	)
Interest expense rate impact		(14	)
Suspended earnings on nonaccrual finance receivables		(10	)
Decrease in the provision for loan losses		123
Lower portfolio losses, net of gains		81
Lower operating and administrative expenses		41
Lower securitization losses, net of gains		28
Increase in special charges		(89	)

The provision for loan losses decreased during 2010 as compared to 2009 primarily due to a decrease in accounts identified as nonaccrual during the period and less of a decline in aircraft collateral values as compared to 2009. During 2009, nonaccrual finance receivables increased from $277 million to $1.0 billion and in 2010 nonaccrual finance receivables decreased to $850 million.

Portfolio losses, net of gains decreased during 2010 as compared to 2009 primarily as a result of lower impairment charges in the Structured Capital product line ($40 million), a $21 million decrease in discounts taken on the sale or early termination of finance receivable assets associated with the liquidation of Distribution Finance receivables and $23 million of gains on the sale of two Distribution finance receivable portfolios in the first and third quarters of 2010. These decreases were partially offset by an $11 million increase in impairment charges on owned aircraft that are subject to operating leases or have been repossessed.

-9-

Operating and administrative expenses decreased during 2010 as ~~(Loss)~~compared to 2009 as a result of our plan to exit the non-captive ~~Income~~finance ~~before~~business, ~~Income~~primarily ~~Taxes~~due to lower salaries and ~~Noncontrolling~~benefits expense ~~Interest~~associated with the reduction in workforce. This decrease was partially offset by higher net expenses related to operating golf course assets.

~~Loss~~The ~~before~~increase ~~income~~in ~~taxes~~special ~~and~~charges ~~noncontrolling~~during ~~interest~~2010 ~~decreased~~as compared to 2009 includes a $~~234~~91 million innon-cash ~~2009~~pre-tax ascharge ~~compared~~to reclassify the subsidiary’s cumulative currency translation adjustment account within Other comprehensive loss to ~~2008~~the Consolidated ~~and~~Statements ~~income~~of ~~before~~Operations in connection with the ~~income~~substantial ~~taxes~~liquidation ~~and~~of ~~noncontrolling~~one ~~interest~~of ~~decreased~~the Company’s wholly-owned Canadian subsidiaries. The reclassification of this amount resulted in a $~~761~~74 million inafter-tax ~~2008~~charge asthat ~~compared~~did not tohave ~~2007,~~an ~~primarily~~impact ~~due~~on ~~to the~~Shareholder’s ~~following:~~equity.

	2009			2008
	vs. 2008			vs. 2007
	(In millions)
Increase in portfolio losses	$	(157	)	$	(20	)
Lower securitization gains, net of impairments		(70	)		(20	)
Suspended earnings on nonaccrual finance receivables		(37	)		(9	)
Lower other income		(36	)		(8	)
Lower average finance receivables of $1.1 billion and higher average finance receivables of $258 million, respectively		(29	)		9
Increase in the provision for loan losses		(31	)		(201	)
(Decrease) increase in servicing and investment income related to securitizations		(27	)		9
Gains on debt extinguishment		55			—
Accretion of valuation allowance		29			—
Lower (higher) borrowing costs relative to market rates		26			(51	)
Benefit from variable-rate receivables interest rate floors		21			24
Valuation allowance on finance receivables held for sale		293			(293	)
Goodwill impairment		169			(169	)
Restructuring charges		14			(27	)


Item 7A.	*Quantitative and Qualitative Disclosure about Market Risk*

~~Portfolio losses recognized during 2009 include discounts taken~~ ~~on the sale or early termination of finance assets, including~~Risk ~~discounts associated with the liquidation of Distribution~~Management Finance and Golf Mortgage finance receivables of $60 million and $25 million in higher impairment charges associated with repossessed aircraft. In addition, we recognized impairment charges of $53 million during 2009 related to automobile manufacturing equipment and investments in real estate associated with matured leveraged leases. The increase in portfolio losses in 2008 as compared to 2007 was mostly the result of a gain on the sale of a leveraged lease investment in 2007.

~~The~~Textron ~~reduction~~Financial’s inbusiness ~~other~~activities ~~income~~involve ~~during 2009 includes increases to~~various ~~the~~elements ~~held~~of ~~for~~risk. ~~sale~~The ~~valuation~~Company ~~allowance~~considers ofthe ~~$14 million~~principal totypes of ~~reflect~~risk ~~the estimated cost~~ to ~~exit certain portfolios.~~be:

~~Accretion~~• ofCredit ~~valuation~~risk; ~~allowance~~• ~~represents~~Asset/liability ~~the~~risk ~~recognition~~(including of interest ~~earnings in excess of a loan’s contractual~~ rate ~~as a~~and ~~result~~foreign ofexchange ~~the~~risk); ~~discount~~and ~~rate~~• ~~utilized~~Liquidity ~~to record the loan at fair value in previous periods~~risk. 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~~Proper ~~increase~~management ~~in provision for loan losses during 2009, as compared to 2008, was primarily the result~~ of ~~increases~~these inrisks ~~the Captive~~is ~~Finance~~essential. ~~portfolio ($89 million)~~Accordingly, ~~partially offset by a $58 million reduction in provision for loan losses in~~ the ~~Non-captive Finance portfolio. The increase related to the~~ ~~Captive~~Company ~~Finance~~has ~~portfolio~~designed ~~reflects~~risk anmanagement ~~increase~~systems ~~in both the rate~~ and ~~severity~~procedures ~~of defaults as a result of weaker general economic~~to ~~conditions~~identify and ~~declining~~quantify ~~aircraft~~these ~~values~~risks. ~~This~~Textron ~~increase~~Financial ~~was~~has ~~partially~~established ~~offset~~appropriate bypolicies ~~lower~~and ~~provision~~set ~~for~~prudent ~~loan~~limits ~~losses~~ in ~~the~~these ~~Non-captive~~areas. ~~Distribution~~The ~~Finance~~Company’s ~~portfolio~~management ~~($73 million) due to the liquidation~~ of ~~68%~~these ofrisks, ~~the~~and ~~Distribution Finance~~levels ~~managed~~of ~~portfolio~~compliance inwith ~~2009.~~its ~~Despite~~policies ~~the~~and ~~reduction~~limits, inis ~~provision~~continuously ~~for~~monitored ~~loan losses in the Non-captive Finance portfolio, the allowance for loan losses increased~~ by ~~$65 million.~~means ~~This increase~~of ~~reflects~~administrative higher provision for loan losses resulting from a significant increase in nonaccrual finance receivables in the Timeshare portfolio. The increase in the Timeshare portfolio reflects increased defaults in our borrowers’ timeshare note portfolios and ~~the~~information ~~lack of liquidity available to borrowers in this industry~~systems.

~~We strengthened the allowance for loan losses significantly~~ ~~during 2008 in response to weakening general market conditions,~~Credit ~~declining~~Risk ~~collateral values and the lack of liquidity available~~Management ~~to our borrowers and their~~

Textron Financial manages credit risk through: ~~-24-~~


	•	Underwriting procedures;
	•	Centralized approval of individual transactions exceeding certain size limits; and
	•	Active portfolio and account management.


	•	Analyzing business or property cash flows and collateral values;
	•	Performing financial sensitivity analyses; and
	•	Assessing potential exit strategies.

Depending on transaction size and complexity, transactions outside of the segment’s authority require the approval of the Captive Finance segment President and Group Credit Officer. Transactions exceeding segment authority require one or more of the Executive Vice President and Chief Credit Officer, the President and Chief Executive Officer or Textron Financial’s Credit Committee depending on the size of the transaction, and in some cases approvals are required by Textron up to and including its Board of Directors. As of March 1, 2011, Textron Financial’s Credit Committee is comprised of its President and Chief Executive Officer, Executive Vice President and Chief Credit Officer, Executive Vice President and Chief Risk Officer, Executive Vice President and Chief

-10-

~~customers.~~Financial WeOfficer, ~~also~~Executive ~~increased~~Vice ~~our~~President, ~~estimate~~General ofCounsel ~~credit losses as a~~and ~~result~~Secretary, ofTextron’s ~~our~~Assistant ~~decision~~Treasurer, ~~to exit portions of our commercial~~Corporate finance business in the fourth quarter. The increase in provision for loan losses during 2008 was primarily driven by an acute increase in defaults in the distribution finance marine and recreational vehicles portfolios ($81 million)Finance, ~~an increase in~~ the ~~reserve~~Distribution ~~rate~~Finance ~~for~~product ~~the~~line ~~Timeshare~~President ~~portfolio ($21 million), a $19 million reserve established for one account in the Golf Mortgage portfolio~~ and ~~a $16 million reserve established for one account in~~ the ~~Asset-Based~~Timeshare ~~Lending~~product ~~portfolio~~line President.

The ~~decrease~~Company incontrols ~~borrowing~~the ~~costs~~credit ~~relative~~risk toassociated ~~the~~with ~~target Federal~~its ~~Funds~~portfolio ~~rate~~by inlimiting ~~2009~~transaction issizes, ~~primarily~~as ~~attributable~~well toas ~~the replacement~~diversifying oftransactions ~~maturing~~by ~~and~~industry, ~~extinguished~~geographic ~~term~~area, ~~debt~~property ~~and~~type ~~commercial paper with~~and ~~borrowing~~borrower. ~~under~~Through ~~our~~these ~~committed~~practices, ~~credit~~Textron ~~facility~~Financial ~~at favorable~~identifies ~~borrowing~~and ~~spreads~~limits exposure to ~~LIBOR.~~unfavorable ~~The~~risks ~~decrease~~and ~~was~~seeks ~~also attributable~~favorable tofinancing ~~the~~opportunities. ~~return~~Management ofreviews ~~the~~receivable ~~historical relationship between LIBOR and~~aging ~~the~~trends ~~target~~and ~~Federal~~watch ~~Funds~~list ~~rate~~reports ~~from~~and ~~the~~conducts ~~elevated~~regular ~~spread that~~business ~~existed~~reviews ~~during~~in ~~2008~~order to monitor portfolio performance.

~~Borrowing costs increased in 2008 relative to the target Federal~~ ~~Funds rate as credit market volatility significantly impacted~~Geographic ~~the historical relationships between market indices. The~~Concentration increase was primarily driven by an increase in the spread between LIBOR and the target Federal Funds rate and from increased borrowing spreads on issuances of commercial paper in comparison with 2007. These increases were partially offset by increased receivable pricing as a result of variable-rate receivables with interest rate floors.

AsTextron aFinancial ~~result~~continuously ofmonitors ~~the~~its ~~plan~~portfolio to ~~exit certain portions of our~~avoid ~~commercial~~any ~~finance~~undue ~~business~~geographic concentration in ~~the~~any ~~fourth~~region ~~quarter~~ of ~~2008, we~~the ~~designated approximately $1~~U.7S. ~~billion~~or ofin ~~our~~any ~~owned~~foreign ~~finance receivables~~country. asAt ~~held~~both ~~for~~January 1, 2011 ~~sale.~~and ~~The~~January 2, ~~balance~~2010, of the ~~available~~largest ~~for~~concentration of ~~sale~~domestic finance receivables atwas in the ~~end~~Southeastern ~~of 2008 reflected a~~U.S., ~~$293 million~~representing ~~pre-tax~~24% ~~mark-to-market~~and ~~adjustment,~~23% ~~net~~ of ~~existing~~ ~~allowance~~Textron ~~for~~Financial’s ~~loan~~finance receivable ~~losses~~portfolio, ~~required~~respectively. toAt ~~adjust~~January 1, ~~the~~2011 and ~~previous~~January 2, ~~carrying~~2010, ~~value~~international ~~of the~~ finance receivables ~~to fair~~ ~~value.~~represented In28% ~~addition,~~and we30% ~~recorded~~of aTextron ~~non-cash~~Financial’s ~~pre-tax impairment~~finance ~~charge~~receivable inportfolio, ~~the~~respectively. ~~fourth~~For ~~quarter~~additional ofinformation regarding ~~2008~~Textron ofFinancial’s ~~$169 million~~concentrations, tosee ~~eliminate~~Note 4 to the ~~entire~~Consolidated ~~balance~~Financial Statements in Item 8 of ~~goodwill~~this Form 10-K.

~~Under the restructuring program established in the fourth~~ ~~quarter of 2008, we recorded a restructuring charge of~~Asset/Liability ~~$27 million~~Risk ~~which included $11 million of non-cash~~Management asset impairments, $1 million of contract termination costs and $15 million of estimated employee severance costs. During 2009, we incurred additional restructuring charges of $13 million, including $12 million of employee severance and pension curtailment costs and $1 million of contract termination costs. We expect restructuring charges over the remaining two to three years of our exit plan, which will primarily relate to employee severance, to be within a range from $10 million to $20 million.

The Company continuously measures and quantifies interest rate ~~Income~~risk and foreign exchange risk, in each case taking into account ~~Taxes~~the effect of hedging activity. Textron Financial uses derivatives as an integral part of its asset/liability management program in order to reduce:

A• ~~reconciliation~~Interest ofrate ~~the~~exposure ~~federal~~arising ~~statutory~~from ~~income~~changes ~~tax~~in interest rate toindices; ~~the effective~~and ~~income~~• ~~tax~~Foreign ~~rate~~currency isexposure ~~provided~~arising ~~below:~~ from changes in exchange rates.

	2009			2008			2007
Federal statutory income tax rate		(35.0	)%		(35.0	)%		35.0	%
Increase (decrease) in taxes resulting from:
State income taxes		(2.3	)		(0.8	)		1.0
Non-U.S. tax rate differential		0.6			3.7			(3.3	)
Change in state valuation allowance		1.0			(1.4	)		0.3
Tax contingencies		2.0			2.5			4.0
Tax credits		(0.9	)		(0.7	)		(1.1	)
Goodwill impairment		—			9.8			—
Change in status of foreign subsidiary		1.9			7.6			—
Other, net		(0.1	)		(0.1	)		(1.0	)
Effective income tax rate		(32.8	)%		(14.4	)%		34.9	%

The Company does not use derivative financial instruments for the purpose of generating earnings from changes in market conditions. Before entering into a derivative transaction, the Company determines that there is a high correlation between the change in value of, or the cash flows associated with, the hedged asset or liability and the value of, or the cash flows associated with, the derivative instrument. When Textron Financial executes a transaction, it designates the derivative to a specific asset, liability, or set of cash flows. Textron Financial monitors the effectiveness of derivatives through a review of the amounts and maturities of assets, liabilities and derivative positions. The Company’s Chief Financial Officer and Textron’s Assistant Treasurer, Corporate Finance regularly review this information so that appropriate remedial action can be taken, as necessary.

~~For~~Textron ~~the~~Financial ~~year~~carefully ~~ended~~manages ~~January 2,~~exposure ~~2010,~~to ~~the difference between~~counterparty ~~the~~risk ~~statutory~~in ~~tax~~connection ~~rate~~with ~~and~~its ~~the~~derivatives. ~~effective~~In ~~tax rate is primarily attributable to interest on tax contingencies~~general, the ~~majority of~~Company ~~which~~engages isin ~~associated~~transactions with ~~leveraged~~counterparties ~~leases,~~having anratings ~~increase~~of ~~in the~~at ~~estimate~~least ofA ~~the~~by ~~taxable~~Standard & ~~amount~~Poor’s ofRating aService ~~distribution~~or ~~from the~~A2 ~~Company~~by Moody’s ~~wholly-owned~~Investors ~~Canadian~~Service. ~~subsidiary~~Total ~~and~~credit aexposure ~~change in~~is ~~management’s~~monitored ~~assessment~~by ofcounterparty, ~~the~~and ~~amount~~managed ofwithin ~~the~~prudent ~~state~~limits. ~~deferred~~At ~~tax~~January 1, ~~asset that is realizable~~2011, ~~partially~~the ~~offset~~Company’s bylargest ~~the benefit~~single ~~for~~counterparty ~~state~~credit ~~taxes~~exposure was $10 million.

Interest ~~-25-~~Rate Risk Management

Foreign Exchange Risk Management

-11-

~~For~~financial ~~the year ended January 3~~results, ~~2009,~~we ~~the~~enter ~~difference~~into ~~between the~~forward ~~statutory~~exchange ~~tax~~contracts ~~rate~~ and ~~the effective tax rate is primarily~~ ~~attributable~~foreign tocurrency aninterest ~~impairment~~rate ofexchange ~~goodwill~~agreements ~~that is not deductible for tax purposes, the provision of taxes on the earnings of a Canadian subsidiary~~ in ~~which we can no longer assert that we are~~amounts ~~permanently~~sufficient ~~invested,~~to ~~interest~~substantially onhedge ~~tax~~our ~~contingencies,~~foreign ~~the majority~~currency ~~of which is associated with leveraged leases, and the effects of events related to cross border financing~~exposures.

~~For the year ended December 29, 2007, the difference~~ ~~between the statutory tax rate and the effective tax rate is~~Liquidity ~~primarily~~Risk ~~attributable to interest on tax contingencies, the~~Management ~~majority of which is associated with leveraged leases, and an increase in state taxes, partially offset by the effects of events related to cross border financing and tax credits.~~

The Company requires cash to fund asset originations in support ~~Credit~~of the sales of Textron manufactured products and to meet debt ~~Quality~~obligations and other commitments. Textron Financial’s primary sources of funds are:

~~Nonaccrual Finance~~• ~~Receivables~~ Collection of existing finance receivables; • Committed bank lines of credit; • Sales of finance receivables classified as held for sale; • Syndication and securitization of finance receivables; • Other forms of secured financing; • Unsecured term loans; and • Intercompany borrowings from Textron.

~~We classify finance receivables as nonaccrual and suspend the~~ ~~recognition of earnings when accounts are contractually~~Interest ~~delinquent~~Rate ~~by more than three months, unless collection of~~Sensitivity 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~~Textron ~~finance~~Financial’s ~~receivables,~~mix ~~Repossessed~~of ~~assets~~fixed- and floating-rate debt is ~~properties~~continuously ~~and~~monitored ~~Operating~~by ~~assets~~management ~~received~~and inis ~~satisfaction~~adjusted, ofas ~~troubled~~necessary, ~~finance~~based ~~receivables~~on ~~are~~evaluations ~~presented~~of ~~separately~~internal asand ~~opposed~~external tofactors. ~~combining~~Management’s ~~these~~strategy asof ~~nonperforming~~matching floating-rate assets ~~due~~with tofloating-rate ~~their~~liabilities limits Textron ~~increasing~~Financial’s ~~significance~~risk ~~and~~to ~~inherent~~changes ~~differences~~in interest rates. ~~Nonaccrual~~This ~~finance~~strategy ~~receivables~~includes ~~are~~the ~~carried~~use atof ~~their~~interest ~~amortized~~rate ~~cost~~exchange agreements. At January 1, ~~net~~2011, floating-rate liabilities in excess of ~~the~~floating-rate ~~allowance~~assets ~~for~~were ~~losses,~~$591 million ~~while~~after ~~repossessed~~considering interest ~~assets~~rate exchange agreements and the treatment of ~~properties~~$640 million ~~and~~of ~~operating~~floating-rate ~~assets~~loans ~~received~~with inindex ~~satisfaction~~rate offloors ~~troubled~~as ~~finance~~fixed-rate ~~receivables~~loans. ~~are~~These ~~both~~loans ~~initially~~have ~~recorded~~index atrates ~~the~~that are, on ~~lower~~average, of198 basis ~~their~~points ~~previous~~above ~~carrying~~the ~~value~~applicable orindex ~~net realizable value.~~rate In(predominately ~~addition,~~the ~~operating~~Prime ~~assets~~rate). ~~received~~The inCompany ~~satisfaction~~has ofbenefited from ~~troubled~~these ~~finance~~interest ~~receivables~~rate ~~are~~floor ~~assets~~agreements wein ~~intend~~the torecent ~~operate~~low ~~for~~rate environment. However, in a ~~substantial~~rising ~~period~~rate ofenvironment, ~~time and/or~~this ~~make~~benefit ~~substantial~~will ~~improvements~~dissipate tountil ~~prior~~the toPrime ~~sale~~rate exceeds the floor rates embedded in these agreements.

~~Finance~~We ~~receivables~~assess ~~classified~~our asexposure ~~held~~to ~~for~~interest ~~sale~~rate ~~are~~changes ~~reflected~~using atan ~~fair~~analysis ~~value~~that ~~and~~measures ~~are~~the ~~excluded~~potential loss in net income, over a twelve-month period, resulting from a hypothetical change in all interest rates of 100 basis points across all maturities occurring at the ~~portfolio~~outset ~~statistics~~of the measurement period (sometimes ~~presented~~referred ~~below~~to as a “shock test”). The ~~following~~analysis ~~table~~also assumes ~~summarizes~~that ~~nonaccrual~~prospective receivable additions will be ~~finance~~match-funded, ~~receivables~~existing portfolios will not prepay and contractual ~~the~~maturities ~~related~~of ~~percentage~~both debt and assets will result in increases or reductions in intercompany borrowing from Textron. This shock test model, when applied to our asset and liability position at January 1, 2011, indicates that an increase in interest rates of ~~finance~~100 basis points would have a negative ~~receivables~~$2 million ~~held~~impact on net income and cash flows for ~~investment~~the following bytwelve-month ~~product~~period, ~~line:~~respectively.

	January 2,				January 3,
	2010				2009
	(Dollars in millions)
Captive Finance
Aviation	$	286	12.17	%	$	17	0.62	%
Golf Equipment		16	4.84	%		18	2.96	%
Non-captive Finance
Timeshare		378	29.41	%		75	5.69	%
Golf Mortgage		178	25.16	%		107	12.11	%
Distribution Finance		88	14.71	%		43	9.09	%
Hotel		76	38.04	%		—	—
Structured Capital		5	1.48	%		—	—
Other Liquidating		13	13.99	%		17	11.81	%
Total nonaccrual finance receivables	$	1,040	17.26	%	$	277	4.01	%

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The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers in the Timeshare product line, weaker general economic conditions and depressed aircraft values. The increase in Timeshare includes one $203 million account, of which $120 million is collateralized by notes receivable and $83 million is collateralized by several resort properties.We believe that the percentage of nonaccrual finance receivables generally will remain high as we execute our liquidation plan under current economic conditions. The liquidation plan is also likely to result in a slower pace of liquidations for nonaccrual finance receivables.

-26-

Allowance for Losses on Finance Receivables Held for Investment and Selected Portfolio Statistics

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

	2009			2008			2007
	(Dollars in millions)
Allowance for losses on finance receivables held for investment beginning of period	$	191		$	89		$	93
Provision for losses		265			234			33
Less net charge-offs:
Captive Finance
Aviation		26			5			2
Golf Equipment		7			4			2
Non-captive Finance
Distribution Finance		40			69			19
Golf Mortgage		28			2			1
Hotel		4			—			—
Timeshare		3			(1	)		(2	)
Asset-Based Lending		—			7			7
Other Liquidating		7			—			8
Total net charge-offs		115			86			37
Transfer to valuation allowance on finance receivables held for sale		(2	)		(44	)		—
Foreign currency translation		—			(2	)		—
Allowance for losses on finance receivables held for investment end of period	$	339		$	191		$	89
Net charge-offs as a percentage of average finance receivables held for investment		1.82	%		1.00	%		0.45	%

	January 2,			January 3,
	2010			2009
	(Dollars in millions)
Nonaccrual finance receivables as a percentage of finance receivables held for investment		17.26	%		4.01	%
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		5.63	%		2.76	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		32.6	%		68.9	%
60+ days contractual delinquency as a percentage of finance receivables held for investment		9.51	%		2.59	%
60+ days contractual delinquency	$	569		$	178
Repossessed assets and properties	$	119		$	70
Operating assets received in satisfaction of troubled finance receivables	$	112		$	84

The ratio of allowance for losses to nonaccrual finance receivables held for investment decreased primarily as a result of nonaccrual Non-captive Timeshare and Captive Aviation accounts for which specific reserves were either not established due to sufficient collateral values and other considerations, or established at a percentage of the outstanding balance based on the expectation of partial recovery. This reflects our best estimate of loss based on a detailed review of our workout strategy and estimates of collateral value.

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 to us from the borrower during 2009. We intend to operate and improve the performance of these properties prior to their eventual disposition.

-27-

Portfolio (Losses) Gains

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. Portfolio (losses) gains of our business segments by product line are presented in the following table:

	2009			2008			2007
	(In millions)
Captive Finance
Aviation	$	(28	)	$	(3	)	$	(1	)
Golf Equipment		(2	)		—			—
Non-captive Finance
Timeshare		(3	)		—			—
Golf Mortgage		(17	)		(5	)		1
Distribution Finance		(43	)		—			(1	)
Structured Capital		(62	)		5			19
Other Liquidating		(7	)		(2	)		(3	)
Total portfolio (losses) gains	$	(162	)	$	(5	)	$	15

Operating Results by Segment

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

Captive Finance

	2009			2008		2007
	(In millions)
Revenues	$	170		$	222	$	225
Segment (loss) income	$	(95	)	$	28	$	55

Captive finance revenues decreased $52 million during 2009 as compared to 2008 and $3 million during 2008 as compared to 2007, primarily due to the following:

	2009			2008
	vs. 2008			vs. 2007
	(In millions)
Higher average finance receivables of $495 million and $356 million, respectively	$	34		$	30
Increase in portfolio losses		(27	)		(2	)
Lower market interest rates		(27	)		(32	)
Other pricing (decrease) increase		(14	)		4
Lower securitization gains, net of impairments		(10	)		—
Suspended earnings on nonaccrual finance receivables		(5	)		—

-28-

Segment income decreased $123 million in 2009 as compared to 2008 and decreased $27 million in 2008 as compared to 2007, primarily due to the following:

	2009			2008
	vs. 2008			vs. 2007
	(In millions)
Increase in the provision for loan losses	$	(89	)	$	(24	)
Increase in portfolio losses		(27	)		(2	)
Other pricing (decrease) increase		(14	)		4
Lower securitization gains, net of impairments		(10	)		—
Suspended earnings on nonaccrual finance receivables		(5	)		—
Higher borrowing costs relative to market rates		(1	)		(6	)
Higher average finance receivables of $495 million and $356 million, respectively		15			13

Portfolio losses primarily include impairments recorded on repossessed assets as a result of weaker aircraft values.

Provision for losses increased in 2009 primarily as a result of an increase in the rate utilized to establish the provision for losses for the Captive Aviation portfolio ($44 million) and specific reserving actions ($45 million) reflecting an increase in both the rate and severity of defaults as a result of weaker general economic conditions and weaker aircraft values. Provision for losses increased in 2008 mostly as a result of an increase in the reserve rate utilized to establish the provision for losses as weakening general economic conditions and lower collateral values affected the Captive Aviation portfolio.

The decrease in finance receivable pricing in 2009 was primarily the result of a decrease in LIBOR relative to the target Federal Funds rate. A significant portion of the Captive Finance receivable portfolio has interest rates indexed to LIBOR.

Non-captive Finance

	2009			2008			2007
	(In millions)
Revenues	$	190		$	501		$	650
Segment (loss) income	$	(197	)	$	(78	)	$	167

Non-captive finance revenues decreased $311 million in 2009 as compared to 2008 and $149 million in 2008 as compared to 2007, primarily due to the following:

	2009			2008
	vs. 2008			vs. 2007
	(In millions)
Increase in portfolio losses	$	(130	)	$	(18	)
Lower average finance receivables of $1.6 billion and $98 million, respectively		(98	)		(9	)
Lower market interest rates		(65	)		(131	)
Lower securitization gains, net of impairments		(60	)		(20	)
Suspended earnings on nonaccrual finance receivables		(32	)		(9	)
(Decrease) increase in servicing and investment income related to securitizations		(21	)		7
(Decrease) increase in other income		(28	)		—
Increases in valuation allowance for assets held for sale		(14	)		—
Gains on debt extinguishment		55			—
Other pricing increase (decrease)		31			(1	)
Accretion of valuation allowance		29			—
Benefit from variable-rate receivables interest rate floors		21			24

-29-

Segment loss increased $119 million in 2009 as compared to 2008 and segment income decreased $245 million in 2008 as compared to 2007, primarily due to the following:

	2009			2008
	vs. 2008			vs. 2007
	(In millions)
Increase in portfolio losses	$	(130	)	$	(18	)
Lower securitization gains, net of impairments		(60	)		(20	)
Lower average finance receivables of $1.6 billion and $98 million, respectively		(44	)		(4	)
Suspended earnings on nonaccrual finance receivables		(32	)		(9	)
(Decrease) increase in other income		(28	)		—
Increases in valuation allowance for assets held for sale		(14	)		—
(Decrease) increase in servicing and investment income related to securitizations		(21	)		7
Decrease (increase) in the provision for loan losses		58			(177	)
Gains on debt extinguishment		55			—
Other pricing increase (decrease)		31			(1	)
Accretion of valuation allowance		29			—
Lower (higher) borrowing costs relative to market rates		27			(45	)
Benefit from variable-rate receivables interest rate floors		21			24

Portfolio losses recognized during 2009 include discounts taken on the sale or early termination of finance assets, including discounts associated with the liquidation of Distribution Finance and Golf Mortgage finance receivables of $60 million. In addition, we recognized impairment charges of $53 million during 2009 related to automobile manufacturing equipment and investments in real estate associated with matured leveraged leases. The increase in portfolio losses in 2008 as compared to 2007 was mostly the result of a gain on the sale of a leveraged lease investment in 2007.

The decrease in securitization gains, net of impairments, was primarily due to the decrease in origination and sales of Distribution Finance receivables to the Distribution Finance revolving securitization, which was ultimately terminated during the fourth quarter of 2009.

Item 7A. Quantitative and Qualitative Disclosure 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 this Form 10-K.

-30-


Item 8.	*Financial Statements and Supplementary Data*

REPORT OF MANAGEMENT

Management is responsible for the integrity and objectivity of the financial data presented in this Annual Report on Form 10-K. The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based on management’s best estimates and judgments. Management is also responsible for establishing and maintaining adequate internal control over financial reporting for Textron Financial Corporation, as such term is defined in Exchange Act Rules 13a-15(f). With the participation of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, we have concluded that Textron Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of January 21, ~~2010~~2011.

The independent registered public accounting firm, Ernst & Young LLP, has audited the Consolidated Financial Statements of Textron Financial Corporation and has issued an attestation report on our internal control over financial reporting as of January 21, ~~2010~~2011, as stated in its reports, which are included herein.

We conduct our business in accordance with the standards outlined in the Textron Business Conduct Guidelines, which is communicated to all employees. Honesty, integrity and high ethical standards are the core values of how we conduct business. Textron Financial Corporation prepares and carries out an annual Compliance Plan to ensure these values and standards are maintained. Our internal control structure is designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded and that transactions are properly executed and recorded. The internal control structure includes, among other things, established policies and procedures, an internal audit function, and the selection and training of qualified personnel. Textron Financial Corporation’s management is responsible for implementing effective internal control systems and monitoring their effectiveness, as well as developing and executing an annual internal control plan.

/s/ Warren R. Lyons

Warren R. Lyons

President and Chief Executive Officer

~~February~~March 251, ~~2010~~2011

/s/ Thomas J. Cullen

Thomas J. Cullen

Executive Vice President and

Chief Financial Officer

~~February~~March 251, ~~2010~~2011

-3113-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Textron Financial Corporation

We have audited Textron Financial Corporation’s internal control over financial reporting as of January 21, ~~2010~~2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Textron Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Textron Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of January 21, ~~2010~~2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Textron Financial Corporation as of January 21, ~~2010~~2011 and January 32, ~~2009~~2010, and the related Consolidated Statements of Operations, Cash Flows and Changes in Equity for each of the three years in the period ended January 21, ~~2010~~2011 of Textron Financial Corporation and our report dated ~~February~~March 251, ~~2010~~2011 expressed an unqualified opinion thereon.

Boston, Massachusetts

~~February~~March 251, ~~2010~~2011

-3214-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Textron Financial Corporation

We have audited the accompanying Consolidated Balance Sheets of Textron Financial Corporation as of January 21, ~~2010~~2011 and January 32, ~~2009~~2010, and the related Consolidated Statements of Operations, Cash Flows and Changes in Equity for each of the three years in the period ended January 21, ~~2010~~2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Textron Financial Corporation at January 21, ~~2010~~2011 and January 32, ~~2009~~2010 and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 21, ~~2010~~2011, in conformity with U.S. generally accepted accounting principles.

InWe ~~2007~~also have audited, in accordance with the ~~Company~~standards ~~changed~~of the Public ~~manner~~Company inAccounting ~~which~~Oversight itBoard ~~accounts~~(United ~~for~~States), ~~income~~Textron ~~tax~~Financial ~~uncertainties~~Corporation’s ~~and~~internal ~~changes~~control ~~(or~~over financial ~~projected~~reporting ~~changes)~~as of January 1, 2011, based on criteria established in Internal Control-Integrated Framework issued by the ~~timing~~Committee of ~~cash~~Sponsoring ~~flows~~Organizations ~~relating~~of tothe Treadway ~~income~~Commission ~~taxes~~and ~~generated~~our byreport dated March 1, 2011 ~~leveraged~~expressed ~~lease~~an ~~transactions~~unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Textron Financial Corporation’s internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.

Boston, Massachusetts

~~February~~March 251, ~~2010~~2011

-3315-

CONSOLIDATED STATEMENTS OF OPERATIONS

For each of the three years in the period ended January 21, ~~2010~~2011:

	2009			2008			2007
	2010			2009			2008
	(In millions)
Finance charges	$	~~434~~268		$	~~558~~434		$	~~671~~558
Portfolio (losses) gains		(162	)		(5	)		15
Portfolio losses, net of gains		(81	)		(162	)		(5	)
Gains on early extinguishment of debt		55			—			—
Rental revenues on operating leases		27			30			34
Rental revenues on operating leases		30			34			34
Gains on early extinguishment of debt		1			55			—
Securitization (losses) gains:
Total other-than-temporary impairments		~~(39~~—	)		(2139	)		(321	)
Portion of other-than-temporary impairments recognized in Other comprehensive income, before income taxes		13			—			—
Portion of other-than-temporary impairments recognized in Other comprehensive loss, before income taxes		—			13			—
Net other-than-temporary impairment recognized in securitization (losses) gains		(26	)		(21	)		(3	)
Net other-than-temporary impairments recognized in securitization (losses) gains		—			(26	)		(21	)
Other securitization (losses) gains		(2—	)		63(2	)		6563
Total securitization (losses) gains		~~(28~~—	)		42(28	)		6242
Other income		31			94			93
Other (loss) income		(8	)		31			94
Total revenues		~~360~~207			~~723~~360			~~875~~723
Interest expense		~~159~~118			~~307~~159			~~397~~307
Depreciation of equipment on operating leases		1817			18			18
Net interest margin		~~183~~72			~~398~~183			~~460~~398
Provision for losses		265			234			33
Operating and administrative expenses		169			210			214
Selling and administrative expenses		210			214			205
Provision for losses		142			265			234
Restructuring charges		13			27			—
Special charges		102			13			489
Valuation allowance on finance receivables held for sale		—			293			—
Loss before income taxes and noncontrolling interest		(341	)		(305	)		(539	)
Goodwill impairment		—			169			—
Income tax benefit		(111	)		(100	)		(78	)
(Loss) income before income taxes and noncontrolling interest		(305	)		(539	)		222
Net loss before noncontrolling interest		(230	)		(205	)		(461	)
Income tax (benefit) expense		(100	)		(78	)		77
Noncontrolling interest, net of income taxes		—			(2	)		—
(Loss) income before noncontrolling interest		(205	)		(461	)		145
Net loss	$	(230	)	$	(203	)	$	(461	)
Noncontrolling interest, net of income taxes		(2	)		—			—
Net (loss) income	$	(203	)	$	(461	)	$	145

See Notes to the Consolidated Financial Statements.

-3416-

CONSOLIDATED BALANCE SHEETS

	January 2,			January 3,
	January 1,			January 2,
	2010			2009
	2011			2010
	(In millions)
Assets
Cash and equivalents	$	~~144~~33		$	16144
Finance receivables held for investment, net of unearned income:
Installment contracts		21,~~327~~773			2,~~787~~327
Revolving loans		1,137			1,208
Mortgage loans		859			1,073
Golf course, timeshare and hotel mortgages		1,073			1,206
Revolving loans		501			1,137
Distribution finance receivables		771			647
Leveraged leases		279			313
Finance leases		~~403~~262			~~608~~403
Leveraged leases		313			459
Distribution finance receivables		182			771
Total finance receivables held for investment		63,~~024~~856			6,~~915~~024
Allowance for losses on finance receivables held for investment		(339	)		(~~191~~339	)
Finance receivables held for investment – net		53,~~685~~517			65,~~724~~685
Finance receivables held for sale		~~819~~413			~~1,658~~819
Equipment on operating leases – net		~~216~~177			~~247~~216
Other assets		~~460~~430			~~699~~460
Total assets	$	74,~~324~~570		$	97,~~344~~324
Liabilities and equity
Liabilities and Shareholder’s Equity
Liabilities
Accrued interest and other liabilities	$	~~423~~270		$	~~379~~423
Amounts due to Textron Inc.		~~472~~254			~~161~~472
Deferred income taxes		~~137~~110			~~337~~137
Debt		53,~~488~~435			75,~~388~~488
Total liabilities		64,~~520~~069			86,~~265~~520
Shareholder’s Equity
Capital surplus		1,~~487~~870			1,~~217~~487
Subsidiary preferred stock		1			—1
Investment in parent company preferred stock		(25	)		(25	)
Accumulated other comprehensive loss		~~(49~~—	)		(5549	)
Retained deficit		(~~610~~1,345	)		(58610	)
Total shareholder’s equity		~~804~~501			~~1,079~~804
Total liabilities and shareholder’s equity	$	74,~~324~~570		$	97,~~344~~324

See Notes to the Consolidated Financial Statements.

-3517-

CONSOLIDATED STATEMENTS OF CASH FLOWS

For each of the three years in the period ended January 21, ~~2010~~2011:

	2009			2008			2007
	2010			2009			2008
	(In millions)
Cash flows from operating activities:
Net (loss) income	$	(203	)	$	(461	)	$	145
Net loss	$	(230	)	$	(203	)	$	(461	)
Net income attributable to noncontrolling interest		(2—	)		—(2	)		—
Net (loss) income before noncontrolling interest		(205	)		(461	)		145
Net loss before noncontrolling interest		(230	)		(205	)		(461	)
Adjustments to reconcile net (loss) income before noncontrolling interest to net cash provided by operating activities:
Adjustments to reconcile net loss before noncontrolling interest to net cash (used) provided by operating activities:
Provision for losses		~~265~~142			~~234~~265			33234
Deferred income tax provision		(203	)		(94	)		(7	)
(Decrease) increase in taxes payable		(135	)		167			(25	)
Increase (decrease) in taxes payable		167			(25	)		6
Portfolio losses		112			162			6
Portfolio losses		162			6			6
Special charges, net of income tax		71			1			23
Depreciation and amortization		36			40			40
Deferred income tax provision		(61	)		(203	)		(94	)
Gains on early extinguishment of debt		(30	)		—			—
Depreciation and amortization		30			36			40
Valuation allowance on finance receivables held for sale		(15	)		293			—
(Decrease) increase in accrued interest and other liabilities		(16	)		10			(41	)
Increase (decrease) in accrued interest and other liabilities		10			(41	)		30
Valuation allowance on finance receivables held for sale		8			(15	)		293
Restructuring charges		1			23			—
Gains on early extinguishment of debt		(1	)		(30	)		—
Goodwill impairment		—			~~169~~—			—169
Other – net		1136			2311			923
Net cash provided by operating activities		199			167			262
Net cash (used) provided by operating activities		(44	)		199			167
Cash flows from investing activities:
Finance receivables originated or purchased		(~~3,558~~666	)		(113,~~879~~558	)		(1311,~~124~~879	)
Finance receivables repaid		42,~~801~~324			114,~~245~~801			11,~~863~~245
Proceeds from receivable sales, including securitizations		~~728~~670			~~631~~728			~~994~~631
Proceeds from disposition of other assets, including repossessed assets and properties and operating leases		~~236~~151			40236			5540
Collection of retained interests in securitizations		~~117~~—			15117			815
Purchase of assets for operating leases		(13	)		(26	)		(49	)
Other investments		17			11			(116	)
Other investments		24			(90	)		(28	)
Net cash provided (used) by investing activities		2,496			2,335			(64	)
Net cash provided (used) by investing activities		2,335			(64	)		(281	)
Cash flows from financing activities:
Proceeds from line of credit		1,740			—			—
Principal payments on long-term debt		(1,730	)		(2,498	)		(1,307	)
Proceeds from issuance of long-term debt		—			~~1,161~~—			1,~~878~~161
Principal payments on long-term debt		(2,498	)		(1,307	)		(1,248	)
Principal payments on line of credit		(300	)		—			—
Principal payments on secured debt		(1,092	)		—			—
Proceeds from line of credit		—			1,740			—
Net decrease in commercial paper		(743	)		(668	)		(315	)
Principal payments on secured debt		(225	)		(1,092	)		—
Net increase in intercompany loan due to Textron Inc.		311			133			—
Proceeds from issuance of secured debt		166			143			300
Principal payments on nonrecourse debt		(~~180~~136	)		(~~267~~180	)		(96267	)
Proceeds from issuance of secured debt		143			300			—
Net (decrease) increase in intercompany loan due to Textron Inc.		(218	)		311			133
Net (decrease) increase in other short-term debt		(25	)		19			(55	)
Net decrease in commercial paper		—			(743	)		(668	)
Proceeds from the sale of majority interest in subsidiary		21			—			—
Capital contributions from Textron Inc.		392			279			634
Repurchase of majority interest in subsidiary		(19	)		—			—
Dividends paid to Textron Inc.		(514	)		(358	)		(151	)
Proceeds from the sale of subsidiary preferred stock		1			—			—
Other – net		—			(22	)		19
Capital contributions from Textron Inc.		279			634			9
Net cash used by financing activities		(2,565	)		(2,420	)		(146	)
Dividends paid to Textron Inc.		(358	)		(151	)		(144	)
Effect of exchange rate changes on cash		2			14			(1	)
Net cash (used) provided by financing activities		(2,420	)		(146	)		29
Net (decrease) increase in cash and equivalents		(111	)		128			(44	)
Effect of exchange rate changes on cash		14			(1	)		3
Cash and equivalents at beginning of year		144			16			60
Net increase (decrease) in cash and equivalents		128			(44	)		13
Cash and equivalents at end of year	$	33		$	144		$	16
Cash and equivalents at beginning of year		16			60			47
Cash and equivalents at end of year	$	144		$	16		$	60

See Notes to the Consolidated Financial Statements.

-3618-

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For each of the three years in the period ended January 21, ~~2010~~2011:

				Investment
				In Parent					Accumulated						Total
				Company			Subsidiary		Other			Retained			Share-			Non-
	Capital			Preferred			Preferred		Comprehensive			Earnings			holder’s			controlling			Total
	Surplus			Stock			Stock		Income (Loss)			(Deficit)			Equity			Interest			Equity
	(In millions)
Balance December 30, 2006	$	592		$	(25	)	$	—	$	7		$	568		$	1,142		$	—		$	1,142
Balance December 29, 2007	$	592		$	(25	)	$	—	$	26		$	545		$	1,138		$	—		$	1,138
Comprehensive income:
Net income		—			—			—		—			145			145			—			145
Other comprehensive income:
Foreign currency translation		—			—			—		19			—			19			—			19
Change in unrealized net losses on hedge contracts, net of income taxes		—			—			—		2			—			2			—			2
Change in unrealized net gains on interest-only securities, net of income taxes		—			—			—		(2	)		—			(2	)		—			(2	)
Other comprehensive income		—			—			—		19			—			19			—			19
Comprehensive income		—			—			—		—			—			164			—			164
Cumulative effect of a change in accounting principle		—			—			—		—			(33	)		(33	)		—			(33	)
Capital contributions from Textron Inc.		9			—			—		—			—			9			—			9
Dividends to Textron Inc.		(9	)		—			—		—			(135	)		(144	)		—			(144	)
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		—			—			—		—			(203	)		(203	)		(2	)		(205	)
Other comprehensive gain:
Other comprehensive income:
Foreign currency translation, net of income taxes		—			—			—		7			—			7			—			7
Change in unrealized net losses on retained interests, net of income tax benefit		—			—			—		(1	)		—			(1	)		—			(1	)
Change in unrealized net losses on retained interests, net of income taxes		—			—			—		(1	)		—			(1	)		—			(1	)
Other comprehensive income		—			—			—		6			—			6			—			6
Comprehensive loss		—			—			—		—			—			(197	)		(2	)		(199	)
Capital contributions from Textron Inc.		279			—			—		—			—			279			—			279
Dividends to Textron Inc.		(9	)		—			—		—			(349	)		(358	)		—			(358	)
Sale of subsidiary preferred stock		—			—			1		—			—			1			—			1
Sale of noncontrolling interest		—			—			—		—			—			—			21			21
Repurchase of noncontrolling interest		—			—			—		—			—			—			(19	)		(19	)
Balance January 2, 2010	$	1,487		$	(25	)	$	1	$	(49	)	$	(610	)	$	804		$	—		$	804
Comprehensive loss:
Net loss		—			—			—		—			(230	)		(230	)		—			(230	)
Other comprehensive loss:
Foreign currency translation, net of income taxes(1)		—			—			—		46			—			46			—			46
Change in unrealized net losses on hedge contracts, net of income taxes		—			—			—		3			—			3			—			3
Other comprehensive income		—			—			—		49			—			49			—			49
Comprehensive loss		—			—			—		—			—			(181	)		—			(181	)
Capital contributions from Textron Inc.		392			—			—		—			—			392			—			392
Dividends to Textron Inc.		(9	)		—			—		—			(505	)		(514	)		—			(514	)
Balance January 1, 2011	$	1,870		$	(25	)	$	1	$	—		$	(1,345	)	$	501		$	—		$	501

⁽¹⁾ Includes the $74 million non-cash reclassification of the cumulative currency translation adjustments related to one of the Company’s wholly-owned Canadian subsidiaries within Other comprehensive loss, to Special charges in the Consolidated Statements of Operations.

See Notes to the Consolidated Financial Statements.

-3719-

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 Summary of Significant Accounting Policies

Nature of Operations

We ~~will~~ continue to originate new customer relationships and finance ~~finance~~ receivables in the Captive Finance segment, which includes the Aviation and Golf Equipment product lines. The Aviation product line primarily provides loans, finance leases and operating leases to purchasers of new Cessna aircraft and Bell ~~Bell~~ helicopters. ~~Financing~~We ~~continues~~also toprovide befinancing ~~provided~~continues to purchasers ~~purchasers~~ of used Cessna aircraft and Bell helicopters on a limited basis. The Golf Equipment product line primarily provides finance and operating leases to purchasers of new E-Z-GO ~~and~~golf ~~Jacobsen~~equipment ~~golf~~ and, to a lesser extent, Jacobsen turf-care equipment. The Captive Finance segment also continues to manage our portfolio of loans and leases secured by non-Textron manufactured aircraft.

The Non-captive Finance segment now includes the ~~Asset-Based~~Distribution ~~Lending, Distribution~~ Finance, Golf Mortgage, ~~Hotel,~~ Structured Capital, Timeshare and Other Liquidating product lines. ~~Asset-Based~~ ~~Lending has historically provided revolving credit facilities secured by receivables and inventory and related equipment and real estate term loans~~Historically, ~~and factoring programs across a broad range of manufacturing and service industries;~~ Distribution Finance has offered inventory finance programs for dealers of Textron manufactured products and for dealers of a variety of other household, housing, leisure, agricultural and technology ~~technology~~ products; Golf Mortgage has historically made mortgage loans for the acquisition and refinancing of golf courses and also ~~courses;~~includes the former Hotel product line, ~~was~~which ~~previously~~provided ~~a component of~~mortgage ~~our former Resort Finance segment and has historically provided mortgage~~ loans for the construction and refinancing of hotels; the ~~the~~ Timeshare product line has historically extended loans to developers of vacation interval resorts, secured principally by notes receivable and interval inventory; and Structured Capital has primarily engaged in long-term leases of large-ticket equipment and real estate, primarily with investment grade lessees.

Textron Financial’s financing activities are offered primarily in North America. However, Textron Financial finances certain Textron products worldwide, principally Bell helicopters and Cessna aircraft. All of Textron Financial’s stock is owned by Textron, a global multi-industry company with operations in five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. At January 1, 2011 and January 2, 2010, 46% and 40%, respectively, of Textron ~~Textron~~ Financial’s total ~~managed~~ finance receivables represent finance receivables originated in support of Textron manufactured ~~manufactured~~ products. Textron Financial’s year-end dates conform with Textron’s year-end, which falls on the nearest Saturday to December 31.

Principles of Consolidation

The accompanying Consolidated Financial Statements include the accounts of Textron Financial and its majority-owned subsidiaries. All significant intercompany transactions have been 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 Statements of Changes in Equity. In the fourth quarter of 2009, we repurchased the residual interest.

-38-

We have evaluated subsequent events up to the time of our filing with the Securities and Exchange Commission on February 25, 2010, which is the date that these financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those statements and accompanying notes. Actual results may differ from such estimates.

-20-

Finance Charges

Finance charges include interest on loans, capital lease earnings, leveraged lease earnings and discounts on certain revolving credit ~~and factoring~~ arrangements. Finance charges are recognized in revenues using the interest method to provide a constant rate of return over the terms of the finance assets. Accrual of interest income is suspended ~~for~~if ~~accounts~~credit ~~that~~quality ~~are~~indicators suggest full ~~contractually~~collection ~~delinquent~~of byprincipal ~~more~~and ~~than~~interest ~~three months, unless collection~~ is ~~not~~ doubtful. In addition, we ~~detailed~~automatically ~~reviews~~suspend accrual of interest income on accounts ~~loans~~which ~~may~~are ~~result~~contractually indelinquent ~~earlier~~by ~~suspension~~more ifthan ~~collection~~three ismonths, unless collection of principal and interest is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce ~~loan~~the ~~principal~~net investment balance. Accrual of interest is resumed when the loan becomes contractually current through payment according to the original terms of the loan or, if a loan has been modified, following a period of performance under the terms of the modification, provided we conclude that collection of all principal and interest is no longer doubtful. Previously suspended interest income is recognized at that time.

Finance charges also include the accretion of valuation allowances, which represent 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.

Finance Receivable Origination Fees and Costs

Fees received and direct loan origination costs are deferred and amortized to finance charge revenues over the contractual lives of the respective finance receivables and credit lines using the interest method. Unamortized amounts are recognized in revenues when finance receivables are sold or paid in full.

Other Income (Loss)

Other income includes syndication gains on the sale of loans and leases, late charges, prepayment gains, servicing fees, residual gains, investment income and other miscellaneous fees, which are primarily recognized as income when received. It also includes adjustments to the valuation allowance for finance receivables held for sale.

Portfolio (Losses) Gains

Allowance for Losses on Finance Receivables Held for Investment

~~Management~~We ~~evaluates~~maintain ~~its~~the allowance for losses on finance receivables held ~~receivables~~for investment at a level considered adequate to cover inherent losses in the owned finance receivable held for investment portfolio, based on amanagement’s ~~combination~~evaluation ofand analysis by ~~factors~~product line. For ~~its~~larger ~~homogeneous~~balance ~~loan~~accounts ~~pools~~specifically identified as impaired, ~~Textron~~including ~~Financial~~large accounts in homogeneous ~~examines~~portfolios, ~~current~~a ~~delinquencies~~reserve is established based on comparing the expected future cash flows, ~~characteristics~~discounted ofat the ~~existing~~finance ~~accounts~~receivable’s effective interest rate, ~~historical~~or ~~loss~~the ~~experience~~fair value if the finance receivable is collateral dependent, ~~underlying~~to its carrying amount. The expected future cash flows consider collateral value, the financial performance and ~~general~~liquidity ~~economic~~of ~~conditions~~our borrower, the existence and ~~trends.~~strength ~~For~~of ~~larger~~guarantors, estimated recovery ~~balance~~costs, ~~commercial~~including ~~loans,~~legal ~~Textron~~expenses ~~Financial~~and ~~considers~~costs ~~borrower~~associated with the ~~specific~~repossession/foreclosure ~~information~~and eventual disposal of collateral. When there is a range of potential outcomes, ~~industry~~we ~~trends~~perform multiple discounted cash flow analyses and ~~estimated~~weight ~~discounted~~the outcomes based on ~~cash~~their ~~flows~~relative likelihood of occurrence. This evaluation is inherently subjective, as ~~well~~it asrequires estimates, including the amount ~~factors~~and ~~described~~timing ~~above~~of ~~for~~future cash flows expected to be received ~~homogeneous~~on ~~loan~~impaired ~~pools~~finance receivables and the underlying collateral, which may differ from actual results. While this analysis is specific to each individual account, the most critical factors included in this analysis by product line are as follows:

~~Provision for losses are charged to income in amounts sufficient~~ ~~to maintain the allowance for losses on finance receivables held~~Aviation for investment at a level considered adequate to cover inherent losses in the owned finance receivable held for investment portfolio, based on management’s evaluation and analysis of this portfolio.

Industry valuation guides, physical condition of the aircraft, ~~-39-~~payment history, existence and strength of guarantors.

Golf Equipment

Age and condition of collateral.

Timeshare

Historical performance of consumer notes receivable collateral, real estate valuations, operating expenses of the borrower, the impact of potential bankruptcy court rulings on the value of our collateral, legal and other professional expenses and borrower’s access to capital.

Golf Mortgage

Historical golf course, hotel or marina cash flow performance, estimates of golf rounds and price per round or occupancy and room rates, market discount and capitalization rates and the existence and strength of guarantors.

-21-

~~Finance receivables held for investment are written down to the~~ ~~fair value (less estimated costs to sell) of the related~~Distribution ~~collateral at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.~~ Finance ~~receivables held for investment are charged off when they are deemed to be uncollectible.~~

Age and condition of primary collateral, the existence and ~~Finance~~strength of guarantors and the existence and value of additional ~~Receivable~~forms ~~Impairment~~of collateral.

~~Textron~~The ~~Financial~~evaluation ~~periodically~~of ~~evaluates~~impaired ~~finance~~Revolving ~~receivables~~loans collateralized by ~~held~~timeshare ~~for~~notes ~~investment,~~receivable ~~excluding~~is ~~homogeneous~~performed ~~loan~~utilizing ~~portfolios and~~internally ~~finance~~developed ~~leases,~~cash ~~for~~flow ~~impairment.~~models ~~Finance~~which ~~receivables~~incorporate ~~classified~~the unique asstructural ~~held~~features ~~for~~of ~~sale~~these ~~are~~loans. ~~reflected~~Timeshare atnotes ~~the~~receivables loans ~~lower~~are loans to developers of ~~cost~~resort orproperties ~~fair~~which are ~~value~~collateralized ~~and~~by ~~are~~pools ~~excluded~~of ~~from~~consumer ~~this~~notes ~~assessment~~receivable. ~~A finance~~These notes receivable isare ~~considered~~originated ~~impaired~~by ~~when~~developers itin isconnection ~~probable that the~~with ~~Company~~the ~~will~~sale beof ~~unable~~vacation tointervals ~~collect~~and ~~all~~typically ~~amounts~~bear ~~due~~interest ~~according to~~at ~~the~~rates ~~contractual~~in ~~terms~~excess of the ~~agreement.~~rate ~~Impaired~~on ~~finance~~our loan to the developer. In ~~receivables~~addition ~~are~~to ~~classified~~the asinterest ~~either~~differential ~~nonaccrual~~between orthe ~~accrual~~consumer notes ~~loans.~~and ~~“Impaired~~our ~~nonaccrual~~loan ~~finance~~to ~~receivables” includes~~the ~~accounts~~developers, ~~that~~there are ~~contractually~~several ~~delinquent~~features ~~by more than~~of ~~three~~our ~~months~~loans ~~for~~ which ~~the~~provide ~~accrual~~protection offrom ~~interest~~credit ~~income~~losses isin the ~~suspended.~~pools ~~“Impaired~~of ~~accrual~~consumer ~~finance~~notes. ~~receivables” represents~~We ~~loans~~have ~~with~~a ~~original~~priority ~~terms~~interest ~~that~~in ~~have~~all ~~been~~cash ~~significantly~~flows ~~modified~~from tothese ~~reflect~~pools ~~deferred~~of ~~principal~~consumer ~~payments~~notes, typically advance ~~generally~~approximately at90% ~~market~~of ~~interest~~the ~~rates~~collateral value, ~~for~~have ~~which~~a ~~collection of~~security ~~principal~~interest ~~and~~in ~~interest~~either isthe ~~not~~underlying ~~doubtful.~~real ~~Nonaccrual~~estate ~~finance~~or the right to ~~receivables~~use ~~include~~the ~~impaired~~resort ~~nonaccrual~~property ~~finance~~and ~~receivables~~often ~~and~~have personal guarantees from ~~accounts~~the inprincipal(s) ~~homogeneous~~of ~~portfolios~~the ~~that~~developer. ~~are~~Our ~~contractually~~impairment models ~~delinquent~~incorporate bymanagement’s ~~more~~best ~~than~~estimate ~~three~~of ~~months.~~credit ~~The~~losses ~~Company performs a~~in ~~valuation~~the pools of ~~the~~consumer ~~collateral~~notes ~~supporting~~based ~~impaired~~on ~~nonaccrual~~historical trends as ~~finance~~adjusted ~~receivables~~for onour aunderstanding ~~quarterly~~of ~~basis~~current ~~using~~trends in the developer’s ~~methods~~underwriting practices and the developer’s ~~described~~ability into ~~Note 12.~~mitigate ~~Fair~~losses ~~Value~~through the repurchase or replacement of ~~Financial~~defaulted ~~Instruments~~notes.

~~Finance~~We ~~receivable~~also ~~impairment~~establish isan ~~measured~~allowance for losses by ~~comparing~~product ~~the~~line to ~~expected~~cover ~~future~~probable, ~~cash~~but ~~flows~~specifically ~~discounted~~unknown atlosses ~~the~~existing ~~finance~~in the ~~receivable’s~~portfolio. ~~effective~~For ~~interest~~homogeneous ~~rate~~portfolios, orincluding Aviation, Golf Equipment and Distribution Finance, the ~~fair~~allowance ~~value~~is ofestablished ~~the~~as ~~collateral~~a ifpercentage ~~the~~of non-recourse finance ~~receivable~~receivables, iswhich ~~collateral~~have ~~dependent,~~not tobeen ~~its~~identified ~~carrying~~as ~~amount~~requiring specific reserves. IfThe percentage ~~the~~is ~~carrying~~based ~~amount~~on isa combination of factors, including ~~higher~~historical loss experience, wecurrent ~~establish~~delinquency aand ~~reserve~~default trends, ~~based~~collateral onvalues ~~this~~and ~~difference.~~both ~~This~~general economic and specific ~~evaluation~~industry istrends. ~~inherently~~For ~~subjective~~non-homogeneous portfolios, asincluding Timeshare itand ~~requires~~Golf ~~estimates~~Mortgage, ~~including~~ the ~~amount~~allowance ~~and~~is ~~timing~~established as a percentage of ~~future~~watchlist ~~cash~~balances. ~~flows~~The ~~expected~~percentage torepresents a becombination ~~received~~of onassumed ~~impaired~~default ~~finance~~likelihood ~~receivables~~ and ~~the~~loss ~~underlying~~severity ~~collateral,~~based ~~which~~on ~~may~~historical ~~differ~~experience, ~~from~~industry ~~actual~~trends ~~results~~and collateral values. The most critical factors included in this analysis by product line are as follows:

Aviation

Collateral value of the portfolio, historical default experience and delinquency trends.

Golf Equipment

Historical loss experience and delinquency trends.

Timeshare

Evaluation of individual loan credit quality indicators such as borrowing base shortfalls for revolving notes receivable facilities, default rates of our notes receivable collateral and the borrower’s access to capital, historical progression from watchlist to nonaccrual status and estimates of loss severity based on analysis of impaired loans in the Timeshare product line.

Golf Mortgage

Evaluation of individual loan credit quality indicators such as delinquency, loan balance to collateral value, debt service coverage and the existence and strength of guarantors, historical progression from watchlist to nonaccrual status and historical loss severity.

Distribution Finance

Historical loss experience, trends in nonaccrual accounts as a percentage of the portfolio and trends in the industry mix of the collateral.

-22-

Finance receivables held for investment are written down to the fair value (less estimated costs to sell) of the related collateral at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible. Finance receivables held for investment are charged off when the remaining balance is deemed to be uncollectible.

Finance Receivable Origination Fees and Costs

Other (Loss) Income

Other (loss) income includes syndication gains on the sale of loans and leases, late charges, prepayment gains, servicing fees, residual gains, investment income and other miscellaneous fees, which are primarily recognized as income when received. It also includes adjustments to the valuation allowance for finance receivables held for sale.

Portfolio Losses, net of Gains

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

Fixed Assets

The cost of fixed assets is depreciated using the straight-line method based on the estimated useful lives of the assets.

Equipment on Operating Leases

Income from operating leases is recognized in equal amounts over the lease terms. The costs of such assets are capitalized and depreciated to estimated residual values using the straight-line method over the estimated useful life of the asset or the lease term.

Pension Benefits and Postretirement Benefits Other than Pensions

Textron Financial participates in Textron’s defined contribution and defined benefit pension plans. The cost of the defined contribution plan amounted to approximately $31.39 million, $43.93 million and $54.09 million in ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively. The cost of the defined benefit pension plan amounted to approximately $89.83 million, $118.38 million and $1011.23 million in ~~2009~~2010, ~~2008~~2009 and ~~2007~~2008, respectively. Defined benefits under salaried plans are based on salary and years of service. Textron’s funding policy is consistent with federal law and regulations. Pension plan assets consist principally of corporate and government bonds and common stocks. Accrued pension expense is included in Accrued interest and other liabilities on Textron Financial’s Consolidated Balance Sheets.

Income Taxes

Textron Financial’s revenues and expenses are included in Textron’s consolidated tax return. Textron Financial’s current tax expense reflects statutory U.S. tax rates applied to taxable income or loss included in Textron’s consolidated returns. Deferred income tax ~~assets~~balances ~~and~~reflect ~~liabilities are~~the ~~determined~~effects ~~based~~of on temporary differences between the financial reporting ~~reporting~~carrying ~~and~~amounts ~~tax bases~~ of assets and liabilities and their tax bases, as ~~applying~~well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates expected to be in effect ~~for~~when ~~the~~taxes ~~year~~are inactually ~~which~~paid weor ~~expect~~recovered. Deferred ~~the~~income ~~differences~~tax ~~will~~assets ~~reverse~~represent oramounts ~~settle.~~available ~~Based~~to onreduce ~~the evaluation~~income oftaxes ~~available~~payable ~~evidence,~~on wetaxable ~~recognize~~income in future years. We evaluate the recoverability of these future tax ~~benefits,~~deductions ~~such~~and ascredits by ~~net~~assessing ~~operating~~the ~~loss~~adequacy ~~carryforwards~~of future expected taxable income from all sources, toincluding the ~~extent~~future ~~that~~reversal itof isexisting ~~more~~taxable ~~likely~~temporary ~~than~~differences, ~~not~~taxable income in carryback years, available tax planning strategies and estimated

-4023-

future taxable income. For those jurisdictions where the expiration date of tax carryforwards or the projected operation results indicate that werealization ~~will~~is ~~realize~~not ~~these~~likely, ~~benefits~~a valuation allowance is provided. We recognize net tax-related interest and ~~penalties related to unrecognized tax~~ ~~benefits~~penalties in income tax ~~expense~~benefit in our Consolidated Statements of of Operations.

Derivative Financial Instruments

Textron Financial has entered into various interest rate and foreign exchange agreements to mitigate its exposure to changes in interest and foreign exchange rates. The Company records all derivative financial instruments on its balance sheet at fair value and recognizes changes in fair values in current earnings unless the derivatives qualify as hedges of future cash flows. For derivatives qualifying as hedges of future cash flows, the Company records the effective portion of the change in fair value as a component of Other comprehensive income in the periods the hedged transaction affects earnings.

Textron Financial recognizes the net interest differential on interest rate exchange agreements as adjustments to finance charges or interest expense to correspond with the hedged positions. In the event of an early termination of a derivative financial instrument, the Company defers the gain or loss in Other comprehensive income until it recognizes the hedged transaction in earnings.

While these exchange agreements expose Textron Financial to credit losses in the event of nonperformance by the counterparties to the agreements, the Company does not expect any such nonperformance. The Company minimizes the risk of nonperformance by entering into contracts with financially sound counterparties having long-term bond ratings of generally no less than single A, by continuously monitoring such credit ratings and by limiting its exposure with any one financial institution. At January 21, ~~2010~~2011, the Company’s largest single counterparty credit exposure was $1910 million.

Fair Value of Financial Instruments

Fair values of financial instruments are based upon estimates at the balance sheet date of the price that would be received in an orderly transaction between market participants. We use quoted market prices and observable inputs when available. However, these inputs are often not available in the markets for many of our assets. In these cases management typically performs discounted cash flow analysis using our best estimates of key assumptions such as credit losses, prepayment speeds and discount rates based on both historical experience and our interpretation of how comparable market data in more active markets should be utilized. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented may differ from amounts Textron Financial could realize or settle currently.

Finance Receivables Held for Sale

Finance receivables are classified as held for sale based on a determination that ~~there~~we is no longer have the intent to hold the finance receivables for the foreseeable future, until maturity or payoff, or ~~there~~we is no longer have 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~~interest ~~existence~~rate ~~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 and strategies, 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.

-4124-

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 determine that finance receivables classified as held for sale will not be sold and we have the intent and ability to hold the finance receivables for the foreseeable future, until maturity or payoff, they are reclassified as Finance receivables held for investment at the lower of cost or fair value at that time.

Cash and Equivalents

Cash and equivalents consist of cash in banks and overnight interest-bearing deposits in banks.

NOTE 2 ~~Portfolio~~Special ~~(Losses) Gains and Other Income~~Charges

~~Portfolio~~Special ~~(losses) gains include impairment~~ charges ~~related~~are ~~to repossessed~~included ~~assets~~in ~~and~~Loss ~~properties,~~before ~~operating~~income ~~assets~~taxes ~~received in~~and ~~satisfaction~~noncontrolling ofinterest, ~~troubled~~however, ~~finance~~these ~~receivables,~~charges ~~investments~~are ~~and~~generally of ~~(losses)~~a ~~gains~~nonrecurring ~~incurred~~nature onand ~~the~~are ~~sale~~not orincluded ~~early~~in ~~termination~~Segment ofloss, ~~finance~~which ~~assets.~~is Toour ~~conform~~measure ~~with~~used ~~current~~for ~~presentation $5 million~~evaluating ofperformance ~~losses in 2008~~ and ~~$15 million of gains~~for indecision-making ~~2007,~~purposes. ~~previously~~Special ~~classified~~charges ~~as Other income,~~ are ~~now~~summarized below ~~classified~~by ~~as Portfolio (losses) gains.~~segment:

Other income is summarized below:


	2010		2009		2008
	Non-Captive		Non-Captive		Captive		Non-Captive
	Finance		Finance		Finance		Finance		Total
	(In millions)
Restructuring charges	$	11	$	13	$	4	$	23	$	27
Other special charges		91		—		—		—		—
Valuation allowance on finance receivables held for sale		—		—		—		293		293
Goodwill impairment		—		—		16		153		169

Total Special charges	$	102	$	13	$	20	$	469	$	489

	2009			2008		2007
	(In millions)
Servicing fees	$	24		$	43	$	36
Investment income		9			23		14
Late charges		3			4		3
Syndication income		1			2		4
Prepayment (losses) gains		(1	)		3		7
Other		(5	)		19		29
Total other income	$	31		$	94	$	93

Restructuring Charges

~~The~~In ~~Other~~conjunction ~~component~~with ofthe ~~Other~~plan ~~income~~to ~~includes~~exit ~~adjustments~~our toNon-captive ~~the~~Finance ~~valuation~~business, ~~allowance~~we ~~for~~announced ~~finance~~a ~~receivables~~restructuring ~~held~~program ~~for~~to ~~sale,~~downsize and ~~commitment~~consolidate ~~fees,~~our ~~residual~~operations ~~gains,~~in ~~insurance~~the ~~fees~~fourth ~~and~~quarter ~~other~~of 2008. ~~miscellaneous~~Restructuring ~~fees,~~charges ~~which~~incurred ~~are~~under ~~primarily~~this ~~recognized~~plan asare ~~income~~summarized in ~~when~~the ~~received.~~table below:

NOTE 3 Special Charges


	2010		2009		2008
	(In millions)
Severance and pension curtailment costs	$	7	$	12	$	15
Contract termination costs		3		1		1
Asset impairments		1		—		11

Total Restructuring charges	$	11	$	13	$	27

~~Special charges are included in (Loss) income before income~~ ~~taxes and noncontrolling interest, however, these charges are~~-25- ~~generally of a nonrecurring nature and are not included in Segment (loss) income, which is our~~

-42-

~~measure~~An ~~used~~analysis ~~for~~of ~~evaluating~~our ~~performance~~restructuring ~~and~~reserve ~~for~~is ~~decision-making purposes.~~presented ~~Special charges are summarized~~ below ~~by segment~~:

	2009				2008
	Severance and
					Valuation
	Pension			Contract
					Allowance on
	Curtailment			Termination			Asset
					Finance
	Costs			Costs			Impairments			Total
	Restructuring				Receivables			Goodwill			Restructuring
	(In millions)
	Charges				Held for Sale			Impairment			Charges		Total
Balance at December 29, 2007	$	—		$	—		$	—		$	—
	(In millions)
Additions		15			1			11			27
Captive Finance	$	—			$	—		$	16		$	4	$	20
Cash Paid		(4	)		—			—			(4	)
Non-captive Finance		13				293			153			23		469
Non-cash utilization		—			—			(11	)		(11	)
Total Special charges	$	13			$	293		$	169		$	27	$	489
Balance at January 3, 2009		11			1			—			12
Additions		12			1			—			13
Cash Paid		(10	)		(2	)		—			(12	)
Balance at January 2, 2010		13			—			—			13
Additions		7			3			1			11
Cash Paid		(13	)		(1	)		—			(14	)
Non-cash utilization		—			—			(1	)		(1	)
Balance at January 1, 2011	$	7		$	2		$	—		$	9

Restructuring costs since the inception of the program through January 1, 2011 are summarized below by segment:


	Captive		Non-captive
	Finance		Finance		Total
	(In millions)
Severance and pension curtailment costs	$	1	$	33	$	34
Non-cash asset impairments		3		9		12
Contract termination costs		—		5		5

Total Restructuring charges	$	4	$	47	$	51

We expect to incur additional costs to exit the Non-captive Finance segment of our business over the next three to five years. These costs are expected to be within a range from $2 million to $5 million and be primarily attributable to severance and retention benefits. We expect to eliminate approximately 900 positions, representing approximately 90% of our total workforce over the life of the program. As of January 1, 2011, we have terminated approximately 740 employees under this program.

Other Special charges

In connection with the substantial liquidation of one of the Company’s wholly-owned Canadian subsidiaries in the third quarter of 2010, we recorded a $91 million non-cash pre-tax charge to reclassify the subsidiary’s cumulative currency translation adjustment account within Other comprehensive loss to the Consolidated Statements of Operations. The reclassification of this amount resulted in a $74 million after-tax charge that did not have an impact on Shareholder’s equity.

Valuation Allowance on Finance Receivables Held for Sale

As a result of the plan to exit the Non-captive Finance segment in the fourth quarter of 2008, we designated approximately $1.7 billion of our owned finance receivables as held for sale. The balance of the held for sale finance receivables at the end of 2008 reflected a $293 million pre-tax mark-to market adjustment, net of existing allowance for loan losses, required to adjust the previous carrying value of the finance receivables to fair value ~~as more fully described in Note 12~~. ~~Fair Value of Financial Instruments.~~

-26-

Goodwill Impairment

Based on market conditions that existed in the fourth quarter of 2008 and the plan to downsize our portfolio, we recorded a non-cash, pre-tax impairment charge of $169 million to eliminate the entire balance of goodwill.

~~Restructuring~~NOTE 3 ~~Charges~~Relationship with Textron Inc.

InTextron ~~conjunction~~Financial ~~with~~is a wholly-owned subsidiary of Textron and derives a portion of its business from financing the ~~plan~~sale and lease of products manufactured and sold by Textron. Textron Financial paid Textron $0.2 billion in 2010, $0.4 billion in 2009 and $1.0 billion in 2008 relating to ~~exit~~the ~~portions~~sale of ~~our~~manufactured ~~commercial~~products to third parties that were ~~finance~~financed ~~business~~by us. In addition, we ~~announced~~paid aTextron ~~restructuring~~$10 million, $13 million ~~program~~and to$18 million, respectively, for the ~~downsize~~purchase ~~and~~of ~~consolidate~~equipment ~~our~~on ~~operations~~operating inleases. ~~the~~Textron ~~fourth~~Financial recognized ~~quarter~~finance charge revenues from Textron affiliates (net of payments or reimbursements for interest charged at more or ~~2008~~less than market rates on Textron manufactured products) of $3 million in 2010, $3 million in 2009 and $2 million ~~recorded~~in a2008, ~~restructuring~~and ~~charge~~operating lease revenues of $19 million in 2010, $2720 million in 2009 and $29 million in 2008. Textron Financial and Textron are ~~During~~parties ~~2009~~to several agreements, wecollectively ~~incurred~~referred ~~additional~~to ~~restructuring~~as operating ~~charges~~agreements, which govern many areas of this relationship. It is the intention of these parties to execute transactions at market terms. Under operating agreements with Textron, Textron Financial has recourse to Textron with respect to certain finance receivables and operating leases. Finance receivables of $1344 million at January 1, ~~primarily~~2011 ~~related~~and $56 million toat ~~employee~~January 2, ~~severance~~2010, and operating leases ~~pension~~of ~~curtailment~~$25 million ~~costs.~~at ~~There~~January 1, ~~were~~2011 noand ~~restructuring costs~~$30 million ~~recorded~~January 2, in2010, ~~2007~~were subject to recourse to Textron.

AnIn ~~analysis~~2010 and 2009, pursuant to the terms of ~~our~~an ~~restructuring~~Intercompany ~~reserve~~Loan Facility isAgreement, ~~presented~~Textron ~~below:~~agreed to lend funds to Textron Financial, with interest. As of January 1, 2011 and January 2, 2010, we had an outstanding balance due to Textron of $243 million and $447 million, respectively, and had paid interest of $32 million and $3 million in 2010 and 2009, respectively. The interest rate on this borrowing at both January 1, 2011 and January 2, 2010 was 7.00%. These borrowings are reflected in Amounts due to Textron Inc. on Textron Financial’s Consolidated Balance Sheets. Under the operating agreements between Textron and Textron Financial, Textron has agreed to lend Textron Financial, interest-free, an amount not to exceed the deferred income tax liability of Textron attributable to the manufacturing profit deferred for tax purposes on products manufactured by Textron and financed by Textron Financial. The Company had borrowings from Textron of $11 million and $25 million at January 1, 2011 and January 2, 2010, respectively, under this arrangement.

	Severance and
	Pension			Contract
	Curtailment			Termination			Asset
	Costs			Costs			Impairments			Total
	(In millions)
Balance at December 29, 2007	$	—		$	—		$	—		$	—
Additions		15			1			11			27
Cash Paid		(4	)		—			—			(4	)
Non-cash utilization		—			—			(11	)		(11	)
Balance at January 3, 2009		11			1			—			12
Additions		12			1			—			13
Cash Paid		(10	)		(2	)		—			(12	)
Balance at January 2, 2010	$	13		$	—		$	—		$	13

A subsidiary of Textron has established a credit facility with Export Development Canada which provides funding for the financing of sales of Cessna Aircraft and Bell Helicopter products containing Canadian-manufactured content to non-Canadian buyers. A $145 million portion of the facility expires in June 2011 and the remaining $125 million expires in December 2011. Textron Financial originates and services loans and finance leases as servicer for this subsidiary, which is consolidated by Textron, and has provided a full guarantee of the debt obligations under this facility. These loans and finance leases totaled $69 million as of January 1, 2011.

A subsidiary of Textron has established a $500 million credit facility with the Export-43Import Bank of the United States. The facility expires in June 2012. 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 this subsidiary, which is consolidated by Textron, and has provided a full guarantee of the debt obligations under this facility. These loans and finance leases totaled $288 million as of January 1, 2011 and $182 million as of January 2, 2010.

Under a Support Agreement between Textron Financial and Textron, Textron is required to maintain a controlling interest in Textron Financial. The agreement also requires Textron to ensure that Textron Financial maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $200 million. In 2010 and 2009, Textron Financial’s fixed charge coverage ratio dropped below the required 125%. As a result, Textron made cash payments of $308 million and $270 million to Textron Financial in 2010 and 2009, respectively, and additional payments of $63 million on January 11, 2011 related to 2010, and $75 million on January 12, 2010 related to 2009. These cash payments were reflected as capital contributions to maintain

-27-

~~Restructuring~~compliance ~~costs~~with ~~since~~ the ~~inception~~fixed ofcharge ~~the~~coverage ~~program~~ratio ~~through~~required by the ~~January 2,~~Support ~~2010~~Agreement ~~are~~and ~~summarized~~certain ~~below~~of byTextron ~~segment:~~Financial’s credit agreements.

	Captive		Non-captive
	Finance		Finance		Total
	(In millions)
Severance and pension curtailment costs	$	1	$	26	$	27
Non-cash asset impairments		3		8		11
Contract termination costs		—		2		2
Total Restructuring costs	$	4	$	36	$	40

We had income taxes payable of $44 million and $182 million at January 1, 2011 and January 2, 2010, respectively. These accounts are settled with Textron as its consolidated federal and state tax position are managed.

~~We expect to incur additional costs to exit the Non-captive~~ ~~Finance segment of our business over the next two to three years. These costs are expected to be within a range from $10~~NOTE ~~million to $20 million and be primarily~~4 ~~attributable~~Finance toReceivables ~~severance~~ and ~~retention~~Allowance ~~benefits.~~for WeLosses ~~expect~~on toFinance ~~eliminate~~Receivables ~~approximately~~Held ~~850~~for ~~positions, representing~~Investment ~~approximately 80% of our total workforce since the inception of the program. As of January 2, 2010, we have terminated approximately 550 employees under this program.~~

~~NOTE 4~~Finance ~~Relationship~~Receivables ~~with~~by ~~Textron~~Product ~~Inc.~~Line / Receivable Class

~~Textron~~Finance ~~Financial~~receivables ~~is a wholly-owned subsidiary of Textron and derives a portion of its business from financing the sale and lease of products manufactured and sold~~ by ~~Textron.~~product ~~Textron Financial paid Textron $0.6 billion in 2009~~line, ~~$1.0 billion~~ inwhich ~~2008~~includes ~~and~~both ~~$1.2 billion in 2007 relating~~finance toreceivables ~~the~~held ~~sale~~for ofinvestment ~~manufactured products to third parties that were financed by us. In addition, we paid Textron $13 million, $18 million~~ and ~~$27 million, respectively, for the purchase of equipment on operating leases. Textron Financial recognized~~ finance ~~charge~~receivables ~~revenues~~held ~~from Textron affiliates (net of payments or reimbursements~~ for ~~interest charged at more or~~ ~~less than market rates on Textron manufactured products) of $3 million in 2009~~sale, ~~$2 million~~are inpresented ~~2008 and $4 million~~ in 2007, and operating lease revenues of $20 million in 2009, $29 million in 2008 and $27 million in 2007. Textron Financial and Textron are parties to several agreements, collectively referred to as operating agreements, which govern many areas of this relationship. It is the ~~intention~~following ~~of these parties to execute~~table: transactions at market terms. Under operating agreements with Textron, Textron Financial has recourse to Textron with respect to certain finance receivables and operating leases. Finance receivables of $76 million at January 2, 2010 and $54 million at January 3, 2009, and operating leases of $140 million and $152 million at January 2, 2010 and January 3, 2009, were subject to recourse to Textron or due from Textron.

In 2009 and 2008, pursuant to the terms of an Intercompany Loan Facility Agreement, Textron agreed to lend funds to Textron Financial, with interest. As of January 2, 2010 and January 3, 2009, we had an outstanding balance due to Textron of $447 million and $133 million, respectively, and had paid interest of $3 million in both 2009 and 2008. The interest rate on this borrowing at January 2, 2010 and January 3, 2009 was 7.00% and 4.03%, respectively. These borrowings are reflected in Amounts due to Textron Inc. on Textron Financial’s Consolidated Balance Sheets. In addition, in 2005 Textron amended its credit facility to permit Textron Financial to borrow under the facility subject to remaining availability. In February 2009, Textron borrowed the entire available balance of this $1.25 billion credit facility. Under the operating agreements between Textron and Textron Financial, Textron has agreed to lend Textron Financial, interest-free, an amount not to exceed the deferred income tax liability of Textron attributable to the manufacturing profit deferred for tax purposes on products manufactured by Textron and financed by Textron Financial. The Company had borrowings from Textron of $25 million and $28 million at January 2, 2010 and January 3, 2009 under this arrangement.


	January 1, 2011				January 2, 2010
	(Dollars in millions)
Captive Finance
Aviation	$	1,763	41	%	$	2,353	34	%
Golf Equipment		212	5	%		417	6	%
Non-captive Finance
Timeshare		894	21	%		1,302	19	%
Golf Mortgage		876	21	%		1,085	16	%
Structured Capital		317	7	%		349	5	%
Distribution Finance		120	3	%		1,076	16	%
Other Liquidating		87	2	%		261	4	%

Total finance receivables	$	4,269	100	%	$	6,843	100	%

~~Under~~The aAviation ~~Support~~product ~~Agreement~~line ~~between~~primarily ~~Textron~~includes ~~Financial~~installment contracts and ~~Textron, Textron~~finance isleases ~~required~~provided to ~~maintain~~purchasers aof ~~controlling~~new Cessna ~~interest~~aircraft inand Bell helicopters and also includes ~~Textron~~installment ~~Financial.~~contracts ~~The~~and ~~agreement~~finance ~~also~~leases ~~requires~~secured ~~Textron~~by toused ~~ensure~~Cessna ~~that~~aircraft ~~Textron~~and ~~Financial~~Bell ~~maintains~~helicopters ~~fixed~~and ~~charge~~aircraft ~~coverage~~produced ofby noother ~~less~~manufacturers. ~~than~~These ~~125%~~agreements typically have initial terms ranging from five to ten years and ~~consolidated~~amortization ~~shareholder’s~~terms ~~equity~~ranging from eight to fifteen years. The average balance of noinstallment ~~less~~contracts ~~than~~and finance leases in the Aviation product line was $~~200~~1 million. Inat ~~2009~~January 1, ~~and~~2011. ~~2008,~~Finance ~~Textron~~leases with no ~~Financial’s~~significant ~~fixed~~residual ~~charge~~value ~~coverage~~at ~~ratio~~the ~~dropped~~end ~~below~~of the contractual term ~~required~~are ~~125%.~~classified ~~Textron~~as ~~made~~installment ~~cash~~contracts, ~~payments~~as oftheir ~~$270 million~~legal and ~~and~~economic ~~$625 million~~substance tois ~~Textron~~more ~~Financial~~equivalent into ~~2009~~a ~~and~~secured ~~2008,~~borrowing ~~respectively,~~than ~~and~~a anfinance ~~additional~~lease ~~payment~~with ofa ~~$75 million~~significant onresidual value. The Golf ~~January 12,~~Equipment ~~2010,~~product ~~which~~line ~~were~~primarily ~~reflected~~includes asfinance ~~capital~~leases ~~contributions,~~provided to ~~maintain~~purchasers ~~compliance~~of ~~with~~new E-Z-GO ~~the~~and Jacobsen ~~fixed~~golf ~~charge~~and turf-care equipment. These Captive finance ~~coverage~~receivables ~~ratio~~are ~~required~~secured by the ~~Support~~financed ~~Agreement~~equipment and, ~~Textron~~in some instances, by the personal guarantee of the principals, typically have initial terms of three to five years and had an average balance of less than one-hundred thousand dollars.

The Non-captive segment includes five product lines and several finance receivable types. The Timeshare product line primarily includes revolving loans secured by pools of timeshare interval resort notes receivable and also includes construction/inventory mortgages secured by timeshare interval inventory, real property and in many instances, by the personal guarantee of the principals. Construction/inventory mortgages are typically cross-44collateralized with revolving notes receivable loans to the same borrower. Loans in this portfolio typically have initial revolving terms of one to three years and final maturity terms of an additional one to five years. As of January 1, 2011, borrowers in the Timeshare product line have an average balance of $16 million and a weighted-average contractual maturity of two years.

Golf Mortgage primarily includes golf course mortgages, and also includes mortgages secured by hotels and marinas. Mortgages in this product line are secured by real property and are generally limited to 75% or less of the property’s appraised market value at loan origination. These mortgages typically have initial terms ranging from five to ten years with amortization periods from 20 to 30 years. As of January 1, 2011, loans in the Golf Mortgage product line have an average balance of $7 million and a weighted-average contractual maturity of three years.

-28-

~~Financial’s~~Structured ~~credit~~Capital ~~facility~~primarily ~~and~~includes toleveraged ~~maintain~~leases secured by the ~~leverage~~ownership of the leased equipment and real property. ~~ratio~~Distribution ~~required~~finance receivables are secured by ~~Textron~~the ~~Financial’s~~inventory ~~credit~~of the ~~facility.~~financed Nodistributor or dealer and, in some programs, by ~~related~~recourse ~~payments~~arrangements ~~were~~with ~~required~~the ~~for~~originating ~~2007~~manufacturer.

~~We had income taxes payable of $182 million and~~ ~~$26 million at January 2, 2010 and January 3,~~Finance ~~2009,~~Receivables ~~respectively. These accounts are settled with Textron as~~Concentrations ~~its consolidated federal and state tax position are managed.~~

Textron Financial’s finance receivables are diversified ~~NOTE 5~~across geographic region, borrower industry and type of ~~Finance~~collateral. ~~Receivables –~~The ~~Terms~~Company does not track revenues by geographic region, as we believe finance receivables by geographic location is a more meaningful concentration measurement. Textron Financial’s geographic concentrations (which includes finance receivables held for investment and finance receivables ~~Concentrations~~held for sale) are as follows:

Managed and Serviced Finance Receivables


	January 1, 2011				January 2, 2010
	(Dollars in millions)
United States:
Southeast	$	1,021	24	%	$	1,579	23	%
West		642	15	%		1,012	15	%
Southwest		586	14	%		943	14	%
Mideast		369	9	%		535	8	%
Midwest		361	8	%		567	8	%
Northeast		82	2	%		127	2	%

Total United States	$	3,061	72	%	$	4,763	70	%

Mexico		309	7	%		415	6	%
South America		241	6	%		330	5	%
Canada		170	4	%		669	10	%
Other international		488	11	%		666	9	%

Total finance receivables	$	4,269	100	%	$	6,843	100	%

	2009			2008
	(In millions)
Total managed and serviced finance receivables	$	8,283		$	12,173
Nonrecourse participations		(765	)		(820	)
Third-party portfolio servicing		(645	)		(532	)
Total managed finance receivables		6,873			10,821
Securitized finance receivables		(30	)		(2,248	)
Finance receivables		6,843			8,573
Finance receivables held for sale		(819	)		(1,658	)
Finance receivables held for investment	$	6,024		$	6,915

Textron Financial’s industry concentrations (which include finance receivables held for investment and finance receivables held for sale) are as follows:

Our business performance is assessed on an owned, managed and a serviced basis. The owned basis includes finance receivables held for investment and finance receivables held for sale reported on the Consolidated Balance Sheets. The managed basis includes owned finance receivables and finance receivables sold in securitizations where we have retained credit risk to the extent of our subordinated interest. The serviced basis includes managed finance receivables and serviced-only finance receivables, which generally consist of participation interests sold to third-party financial institutions without retained credit risk, receivables subject to servicing agreements with third-party financial institutions, finance receivables of resort developers and finance receivables originated and serviced on behalf of other finance subsidiaries of Textron.


	January 1, 2011				January 2, 2010
	(Dollars in millions)
General aviation	$	1,785	41	%	$	2,378	35	%
Resort		894	21	%		1,327	19	%
Golf		857	20	%		1,231	18	%
Other		733	18	%		1,907	28	%

Total finance receivables	$	4,269	100	%	$	6,843	100	%

~~On July 14, 2009, a subsidiary of Textron entered into a~~ ~~$500 million credit facility with the Export-Import Bank of~~Finance ~~the~~Receivables ~~United~~Held ~~States. The facility expires in December 2010. This facility provides funding~~ for ~~the financing of sales of Cessna~~Investment Aircraft Company and Bell Helicopter products to non-U.S. buyers. Texton Financial originates and services loans and finance leases as servicer for this subsidiary, which is consolidated by Textron, and has provided a full guarantee of the debt obligations under this facility. These loans and finance leases which totaled $182 million as of January 2, 2010, are included in third-party portfolio servicing.

Finance receivables held for investment include approximately ~~Receivable~~$635 million ~~Terms~~and $629 million of finance receivables at January 1, 2011 and January 2, 2010, respectively, primarily in the Captive Aviation product line, that have been legally sold to special purpose entities (SPEs) which are consolidated subsidiaries of Textron Financial. The assets of the SPEs are pledged as collateral for $530 million and $559 million of debt as of January 1, 2011 and January 2, 2010, respectively, which has been reflected as securitized on-balance sheet debt. Third-party investors have no legal recourse to Textron Financial beyond the credit enhancement provided by the assets of the SPEs.

~~Distribution~~During ~~finance~~the ~~receivables~~fourth ~~generally~~quarter ~~mature~~of ~~within~~2010, ~~one~~we reclassified ~~year.~~$219 million ~~Distribution~~of Timeshare finance receivables, ~~are~~net ~~secured~~of ~~by the~~a ~~inventory~~$4 million ofallowance ~~the~~for ~~financed~~loan ~~distributor or dealer and~~losses, infrom ~~some~~held for ~~programs,~~investment byto ~~recourse~~held ~~arrangements~~for ~~with~~sale ~~the~~as ~~originating~~a result of an unanticipated ~~manufacturer.~~inquiry ~~Revolving~~we ~~loans~~have ~~and~~received ~~distribution~~to purchase these finance receivables. ~~receivables~~We ~~are~~determined ~~cyclical~~a ~~and~~sale ~~typically~~of ~~result~~these infinance ~~cash~~receivables ~~turnover~~would be ~~that~~consistent ~~exceeds~~with ~~contractual~~our ~~maturities.~~goal Into ~~2009,~~maximize ~~such~~the ~~cash~~economic ~~turnover~~value of our ~~approximated~~portfolio ~~contractual~~and ~~maturities~~accelerate cash collections.

~~Revolving~~During ~~loans generally have terms of one to five years~~2009, ~~and at~~we ~~times~~reclassified ~~convert~~$878 million ~~to term loans that contractually amortize over an additional term~~ of ~~one to five years. Revolving loans consist~~finance ~~of loans secured by trade~~ receivables, ~~inventory,~~net ~~plant and equipment, pools~~ of ~~timeshare~~a ~~interval~~$188 million ~~resort~~valuation ~~notes receivables~~allowance, ~~finance~~from ~~receivable~~held ~~portfolios,~~for ~~pools~~sale ofto ~~residential~~held ~~and recreational~~for ~~land~~investment ~~loans~~following ~~and~~efforts ~~the underlying real property, and in~~to ~~many~~market ~~instances, by~~ the ~~personal~~portfolios ~~guarantee~~and ofprogress ~~the~~made ~~principals.~~through

~~Installment contracts and Finance leases have initial terms~~ ~~ranging from two to 20 years. Installment contracts and~~-29- Finance leases are secured by the financed equipment and, in many instances, by the personal guarantee of the principals or recourse arrangements with the originating vendor. Contractual maturities of finance leases include residual values expected to be realized at contractual maturity. Leases with no significant residual

-45-

~~value~~orderly atliquidation. ~~the~~We ~~end~~also ofreclassified ~~the~~$421 million ~~contractual term are classified as~~of ~~installment~~other ~~contracts,~~finance asreceivable ~~their~~portfolios, ~~legal~~net ~~and~~of ~~economic~~a ~~substance is~~$43 million ~~more~~valuation ~~equivalent~~allowance tofrom aheld ~~secured~~for ~~borrowing~~investment ~~than~~to aheld ~~finance~~for ~~lease~~sale ~~with~~as a ~~significant~~result ~~residual~~of ~~value.~~unanticipated ~~Accordingly,~~purchase ~~contractual maturities~~inquiries. ofDue ~~these~~to ~~contracts represent~~ the ~~minimum lease~~nature ~~payments, net~~ of ~~the~~these ~~unearned~~inquiries, ~~income~~we todetermined bea ~~recognized~~sale ~~over~~of ~~the~~these portfolios ~~life~~would ofbe ~~the~~consistent ~~lease.~~with ~~Total~~our ~~minimum~~goal ~~lease~~to ~~payments~~maximize ~~and~~the ~~unearned~~economic value ~~income~~of ~~related~~our toportfolio ~~these~~and ~~contracts~~accelerate ~~were~~cash $1collections.~~0 billion~~ ~~and~~During the ~~$194 million,~~fourth ~~respectively,~~quarter atof ~~January 2~~2009, ~~2010~~we ~~and $1.2 billion~~recorded ~~and~~ $~~299~~720 million, ~~respectively,~~of atfinance ~~January 3~~receivables, ~~2009.~~previously ~~Minimum~~sold ~~lease~~to ~~payments~~the ~~due~~Distribution ~~under these~~Finance ~~contracts~~securitization ~~for~~trust, ~~each~~on ofour ~~the~~balance ~~next~~sheet. ~~five~~In ~~years~~connection ~~and the aggregate~~with ~~amounts~~recording ~~due~~these ~~thereafter~~finance ~~are~~receivables, ~~as follows:~~ $~~199~~359 million inwere ~~2010,~~classified ~~$182 million~~as inheld ~~2011,~~for ~~$147 million~~sale inand ~~2012, $121 million~~were insold ~~2013,~~prior ~~$82 million~~to inthe ~~2014~~end ~~and~~of ~~$227 million~~the ~~thereafter~~quarter.

Golf course mortgages have initial terms ranging from five to ten years with amortization periods from 15 to 25 years. Timeshare and hotel mortgages generally represent construction and inventory, or operating property loans with terms up to five years. Golf course, timeshare and hotel mortgages are secured by real property and are generally limited to 75% or less of the property’s appraised market value at loan origination. As of January 2, 2010, golf course mortgages consist of loans with an average balance of $6 million and a weighted-average remaining contractual maturity of three years, and timeshare and hotel mortgages consist of loans with an average balance of $9 million and a weighted-average remaining contractual maturity of three years.

Leveraged leases are secured by the ownership of the leased equipment and real property, and have initial terms up to approximately 30 years. Leveraged leases reflect contractual maturities net of contractual nonrecourse debt payments and include residual values expected to be realized at contractual maturity.

Concentrations

Textron Financial’s finance receivables are diversified across geographic region, borrower industry and type of collateral. The Company does not track revenues by geographic region, as we believe managed finance receivables by geographic location is a more meaningful concentration measurement. Textron Financial’s geographic concentrations (as measured by managed finance receivables) were as follows:

	January 2, 2010				January 3, 2009
	(Dollars in millions)
United States:
Southeast	$	1,609	23	%	$	2,728	25	%
West		1,012	15	%		1,667	16	%
Southwest		943	14	%		1,419	13	%
Midwest		567	8	%		1,294	12	%
Mideast		535	8	%		952	9	%
Northeast		127	2	%		256	2	%
Total United States	$	4,793	70	%	$	8,316	77	%
Canada		669	10	%		963	9	%
Mexico		415	6	%		414	4	%
South America		330	5	%		396	3	%
Other international		666	9	%		732	7	%
Total managed finance receivables	$	6,873	100	%	$	10,821	100	%

-46-

Textron Financial’s industry concentrations (as measured by managed finance receivables) were as follows:

	January 2, 2010				January 3, 2009
	(Dollars in millions)
General aviation	$	2,378	35	%	$	2,822	26	%
Resort		1,327	19	%		1,434	13	%
Golf		1,261	18	%		1,696	16	%
Marine		303	4	%		808	7	%
Powersports		268	4	%		534	5	%
Transportation		251	4	%		404	4	%
Manufactured housing		218	3	%		443	4	%
Hotel		215	3	%		202	2	%
Recreational vehicles		95	1	%		403	4	%
Other Real estate		73	1	%		110	1	%
Finance company services		49	1	%		177	2	%
Outdoor power equipment		11	1	%		315	3	%
Information technology equipment		—	—			154	1	%
Other		424	6	%		1,319	12	%
Total managed finance receivables	$	6,873	100	%	$	10,821	100	%

NOTE 6 Finance Receivables Held for Investment

Portfolio Maturities

Portfolio maturities of finance receivables held for investment outstanding at January 2, 2010, excluding valuation allowance, were as follows:

	Less than			1-2		2-3			3-4			4-5		More than
	1 Year			Years		Years			Years			Years		5 Years		Total
	(In millions)
Installment contracts	$	370		$	318	$	347		$	329		$	230	$	733	$	2,327
Revolving loans		288			430		242			131			49		43		1,183
Golf course, timeshare and hotel mortgages		209			298		176			178			63		162		1,086
Distribution finance receivables		650			125		12			4			2		—		793
Finance leases		102			77		79			28			5		112		403
Leveraged leases		(2	)		3		(6	)		(9	)		1		326		313
Total finance receivables held for investment	$	1,617		$	1,251	$	850		$	661		$	350	$	1,376	$	6,105

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.

Finance receivables held for investment include approximately $629 million and $1.1 billion of finance receivables that have been legally sold to special purpose entities (SPEs) and are consolidated subsidiaries of Textron Financial as of January 2, 2010 and January 3, 2009, respectively. The assets of the SPEs are pledged as collateral for $559 million and $853 million of debt as of January 2, 2010 and January 3, 2009, respectively, which have been reflected as securitized on-balance sheet debt. Third-party investors have no legal recourse to Textron Financial beyond the credit enhancement provided by the assets of the SPEs. Finance receivables held for investment also include approximately $96 million and $102 million of finance receivables that were unfunded at January 2, 2010 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.

-47-

During 2009, we reclassified $878 million of finance receivables, net of a $188 million valuation allowance, from held for sale to held for investment following efforts to market the portfolios and progress made through orderly liquidation. We also reclassified $421 million of other finance receivable portfolios, net of a $43 million valuation allowance from held for investment to held for sale as a result of unanticipated purchase inquiries. 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. During the fourth quarter of 2009, we recorded $720 million of finance receivables previously sold to the Distribution Finance securitization on our balance sheet. In connection with recording these finance receivables, $359 million were classified as held for sale and were sold prior to the end of the quarter.

Leveraged Leases

	2009			2008
	January 1, 2011			January 2, 2010
	(In millions)
Rental receivable	$	~~948~~761		$	~~1,252~~948
Nonrecourse debt		(~~570~~414	)		(~~759~~570	)
Estimated residual values of leased assets		~~152~~128			~~229~~152
		530			722
		475			530
Less unearned income		(~~217~~196	)		(~~263~~217	)
Investment in leveraged leases		~~313~~279			~~459~~313
Deferred income taxes		(~~238~~219	)		(~~350~~238	)
Net investment in leveraged leases	$	7560		$	~~109~~75

At both January 21, ~~2010~~2011 and January 32, ~~2009~~2010, ~~approximately~~ approximately 9% ~~and 16%~~ of Textron Financial’s investment in ~~leveraged~~ leveraged leases was collateralized by real estate, respectively.

The components of income from leveraged leases were as follows:

	2009			2008			2007
	2010			2009			2008
	(In millions)
Income recognized	$	53		$	45		$	114
Income tax expense		(21	)		(12	)		(41	)
Income from leveraged leases	$	32		$	3		$	73

~~Finance~~Credit ~~Leases~~Quality Indicators and Nonaccrual Finance Receivables

	2009			2008
	(In millions)
Total minimum lease payments receivable	$	395		$	557
Estimated residual values of leased equipment		183			259
		578			816
Less unearned income		(175	)		(208	)
Net investment in finance leases	$	403		$	608

We internally assess the quality of our finance receivables held for investment portfolio based on a number of key credit quality indicators and statistics such as delinquency, loan balance to collateral value, the liquidity position of individual borrowers and guarantors, debt service coverage in Golf Mortgage and default rates of our notes receivable collateral in Timeshare. Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans/portfolios into three basic categories based on the key credit quality indicators for the individual loan. These three categories are Performing, Watchlist and Nonaccrual.

~~Minimum~~We ~~lease~~classify ~~payments~~finance ~~due~~receivables ~~under~~held ~~finance~~for ~~leases~~investment ~~for~~as Nonaccrual ~~each~~if credit quality indicators suggest full collection of ~~the~~principal and interest is doubtful. In addition, we ~~next~~automatically ~~five~~classify ~~years~~accounts as nonaccrual which are contractually delinquent by more than three months, unless collection of principal and ~~the~~interest ~~aggregate~~is ~~amounts~~not ~~due~~doubtful. Recognition ~~thereafter~~of interest income is suspended for these accounts and all cash collections are asused to reduce the net investment ~~follows:~~balance. ~~$88 million~~We inresume ~~2010~~the accrual of interest when the loan becomes contractually current through payment according to the original terms of the loan or, ~~$66 million~~if ina ~~2011~~loan has been modified, following a ~~$41 million~~period inof ~~2012,~~performance ~~$17 million~~under inthe ~~2013~~terms of the modification, ~~$9 million~~provided inwe ~~2014~~conclude that collection of full principal and interest ~~$174 million~~is ~~thereafter~~no longer doubtful. Previously suspended interest income is recognized at that time.

Accounts are classified as Watchlist when credit quality ~~Finance~~indicators have deteriorated as compared to typical underwriting ~~Receivable~~criteria ~~Impairment~~and we believe collection of full principal and interest is probable, but not certain. All other finance receivables held for investment that do not meet the Watchlist or Nonaccrual categories are classified as

~~Textron Financial periodically evaluates finance receivables~~ ~~held for investment, excluding homogeneous loan portfolios and~~-30- 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

-48-

~~the~~Performing. ~~Company~~The ~~will~~table bebelow ~~unable~~summarizes toour ~~collect~~categorization ~~all amounts due according to the contractual terms~~ of ~~the agreement. Impaired finance~~our ~~receivables are classified as either nonaccrual or accrual loans. “Impaired nonaccrual~~ finance receivables~~” includes~~ ~~accounts~~held ~~that are contractually delinquent by more than three months~~ for which the accrual of interest income is suspended. “Impaired accrual finance receivables” represents loans with original terms that have been significantly modified to reflect deferred principal paymentsinvestment, ~~generally~~ atbased ~~market interest rates, for which 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~~internally ~~described~~assigned incredit ~~Note 12.~~quality ~~Fair Value of Financial Instruments~~indicators.

Impaired Finance Receivables
		January 1, 2011														January 2, 2010
	January 2,				January 3,
		Performing					Watchlist			Nonaccrual			Total			Performing			Watchlist			Nonaccrual			Total
	2010				2009
		(Dollars in millions)
	(In millions)
Captive Finance
Impaired nonaccrual finance receivables	$	984			$	234
Aviation		$	1,356				$	238		$	169		$	1,763		$	1,792		$	275		$	286		$	2,353
Impaired accrual finance receivables		217				19
Golf Equipment			138					51			23			212			243			74			16			333
Total impaired finance receivables		1,201				253
Non-captive Finance
Less: Impaired finance receivables without identified reserve requirements		362				71
Timeshare			222					77			382			681			450			474			378			1,302
Impaired nonaccrual finance receivables with identified reserve requirements	$	839			$	182
Golf Mortgage			163					303			219			685			386			249			254			889
Allowance for losses on impaired nonaccrual finance receivables	$	153			$	43
Distribution Finance			76					11			33			120			481			107			88			676
Structured Capital			290					27			—			317			313			31			5			349
Other Liquidating			54					—			24			78			52			57			13			122
Total finance receivables held for investment		$	2,299				$	707		$	850		$	3,856		$	3,717		$	1,267		$	1,040		$	6,024
% of total finance receivables held for investment			59.63	%				18.33	%		22.04	%		100.00	%		61.71	%		21.03	%		17.26	%		100.00	%

Nonaccrual finance receivables ~~include~~decreased ~~impaired~~$190 million ~~nonaccrual~~from the year-end balance, primarily in the Aviation, Distribution Finance and Golf Mortgage product lines. The net reduction of $117 million in the Aviation product line was due to the resolution of several significant accounts through the repossession of collateral, and cash collections, partially offset by new finance receivables identified as nonaccrual in 2010. Distribution Finance product line nonaccrual finance receivables decreased $55 million primarily due to cash collections and repossession of collateral. Golf Mortgage product line nonaccrual finance receivables decreased by $35 million as a result of foreclosure of collateral on several significant accounts, inrestructure ~~homogeneous~~of ~~portfolios~~finance ~~that~~receivables ~~are~~and ~~contractually~~cash ~~delinquent~~collections, partially offset by ~~more~~new ~~than~~finance receivables ~~three~~identified ~~months~~as nonaccrual in 2010.

Nonaccrual Finance Receivables
	January 2,		January 3,
	2010		2009
	(In millions)
Impaired nonaccrual finance receivables	$	984	$	234
Nonaccrual homogeneous finance receivables		56		43
Total nonaccrual finance receivables	$	1,040	$	277

We measure delinquency based on the contractual payment terms of our loans and leases. In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past due principal and/or interest amounts due. If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past due delinquency aging category. Finance receivables held for investment by delinquency aging category is summarized in the tables below. In both 2010 and 2009, there were no accrual status loans that were 90 days past due.

-49-


	January 1, 2011
									Total Finance
	Less than						Greater than		Receivables
	31 Days		31-60 Days		61-90 Days		90 Days		Held for
	Past Due		Past Due		Past Due		Past Due		Investment
	(In millions)
Captive Finance
Aviation	$	1,607	$	67	$	41	$	48	$	1,763
Golf Equipment		171		13		9		19		212
Non-captive Finance
Timeshare		533		14		6		128		681
Golf Mortgage		543		12		7		123		685
Distribution Finance		98		1		—		21		120
Structured Capital		317		—		—		—		317
Other Liquidating		68		1		1		8		78

Total finance receivables held for investment	$	3,337	$	108	$	64	$	347	$	3,856

-31-

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


	January 2, 2010
									Total Finance
	Less than						Greater than		Receivables
	31 Days		31-60 Days		61-90 Days		90 Days		Held for
	Past Due		Past Due		Past Due		Past Due		Investment
	(In millions)
Captive Finance
Aviation	$	2,077	$	102	$	96	$	78	$	2,353
Golf Equipment		300		11		11		11		333
Non-captive Finance
Timeshare		1,213		6		—		83		1,302
Golf Mortgage		615		60		106		108		889
Distribution Finance		590		20		3		63		676
Structured Capital		344		—		—		5		349
Other Liquidating		113		4		1		4		122

Total finance receivables held for investment	$	5,252	$	203	$	217	$	352	$	6,024

							January 3, 2009
	January 2, 2010
					Allowance						Allowance for
					for Losses						Losses on
			Impaired		on Impaired				Impaired		Impaired
	Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual		Nonaccrual
	Finance		Finance		Finance		Finance		Finance		Finance
Collateral Type	Receivables		Receivables		Receivables		Receivables		Receivables		Receivables
	(In millions)
Captive Finance:
General aviation aircraft	$	286	$	272	$	46	$	17	$	6	$	2
Golf equipment		16		2		1		18		—		—
Non-captive Finance:
Notes receivable(1)	$	259	$	254	$	53	$	78	$	74	$	9
Golf course property		166		165		27		107		107		25
Resort construction/inventory		104		104		—		—		—		—
Dealer inventory		88		68		14		43		34		3
Hotels		78		78		7		—		—		—
Land		17		17		4		—		—		—
Marinas		12		12		—		—		—		—
Other		14		12		1		14		13		4
Total	$	1,040	$	984	$	153	$	277	$	234	$	43

For the years-ended January 1, 2011 and January 2, 2010, 60+ days contractual delinquency as a percentage of finance receivables held for investment was 10.67% and 9.51%, respectively.

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

~~The~~We ~~increase~~evaluate inindividual ~~nonaccrual~~ finance receivables isheld ~~primarily~~for investment ~~attributable~~in tonon-homogeneous ~~the~~portfolios ~~lack~~and oflarger ~~liquidity~~accounts ~~available to borrowers~~ in ~~the~~ ~~Non-captive Finance segment’s Timeshare portfolio,~~homogeneous ~~weaker~~loan ~~general~~portfolios ~~economic~~for ~~conditions~~impairment ~~and~~on ~~depressed~~a ~~aircraft~~quarterly ~~values~~basis. Finance inreceivables ~~the~~classified ~~Captive~~as ~~Finance~~held ~~segment.~~for ~~The~~sale ~~increase~~are inreflected ~~the~~at ~~Non-captive~~the ~~Finance~~lower ~~portfolio included one $203 million account,~~ of ~~which~~ ~~$120 million~~cost isor ~~collateralized~~fair byvalue ~~notes receivable~~ and ~~$83 million~~are isexcluded ~~collateralized~~from ~~by several resort~~these ~~properties~~evaluations.

~~The~~A ~~average~~finance ~~recorded~~receivable ~~investment~~is inconsidered impaired ~~nonaccrual~~when ~~finance~~it is probable ~~receivables~~that ~~was~~we ~~$603 million~~will inbe ~~2009,~~unable ~~$143 million~~to incollect all amounts due according to ~~2008~~the ~~and~~contractual ~~$53 million~~terms inof ~~2007.~~the ~~The~~loan ~~average~~agreement. ~~recorded~~This determination ~~investment~~is inmade ~~impaired~~based ~~accrual~~on the review of credit quality indicators as discussed above. Impaired finance receivables ~~amounted~~include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, however; the account’s original terms have been, or are expected to be, ~~$136 million~~significantly inmodified. ~~2009~~If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, ~~$34 million~~the inaccount ~~2008~~is ~~and~~not ~~$31 million~~considered impaired in ~~2007~~years subsequent to the modification.

~~Nonaccrual finance receivables resulted in Textron~~-32- Financial’s finance charges being reduced by $53 million, $16 million and $7 million for 2009, 2008 and 2007, respectively. No finance charges were recognized using the cash basis method.

-50-

~~Allowance~~A summary of impaired loans with and without a related allowance for ~~Losses~~losses, onexcluding ~~Finance~~leveraged ~~Receivables~~leases, ~~Held~~is ~~for~~presented ~~Investment~~in the following tables.

The following table presents changes in the Allowance for losses on finance receivables held for investment:


	January 1, 2011
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
	(In millions)
Impaired loans with no related allowance for losses
Captive Finance
Aviation	$	17	$	21	$	—	$	14
Golf Equipment		—		—		—		1
Non-captive Finance
Timeshare		69		74		—		70
Golf Mortgage		138		146		—		118
Distribution Finance		10		15		—		46
Other Liquidating		15		69		—		7

Total	$	249	$	325	$	—	$	256

Impaired loans with a related allowance for losses
Captive Finance
Aviation	$	147	$	144	$	45	$	187
Golf Equipment		4		5		2		5
Non-captive Finance
Timeshare		355		385		102		356
Golf Mortgage		175		178		39		182
Distribution Finance		11		11		2		18
Other Liquidating		5		4		1		3

Total	$	697	$	727	$	191	$	751

Total Impaired loans
Captive Finance
Aviation	$	164	$	165	$	45	$	201
Golf Equipment		4		5		2		6
Non-captive Finance
Timeshare		424		459		102		426
Golf Mortgage		313		324		39		300
Distribution Finance		21		26		2		64
Other Liquidating		20		73		1		10

Total	$	946	$	1,052	$	191	$	1,007

	2009			2008			2007
	(In millions)
Balance at beginning of year	$	191		$	89		$	93
Provision for losses		265			234			33
Charge-offs		(132	)		(98	)		(49	)
Recoveries		17			12			12
Transfer to valuation allowance on finance receivables held for sale		(2	)		(44	)		—
Foreign currency translation		—			(2	)		—
Balance at end of year	$	339		$	191		$	89

-33-

NOTE 7 Receivable Securitizations

During 2009, we had one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust was a master trust that purchased inventory finance receivables from the Company and issued asset-backed notes to investors. $1.4 billion of the outstanding notes issued by the Distribution Finance securitization trust were repaid through finance receivable collections. During the fourth quarter of 2009, a reduction in the pace of finance receivable collections triggered a corresponding change in required cash distributions, which provided us the ability to repurchase the finance receivables resulting in the consolidation of the securitization trust on our balance sheet. As a result, the finance receivables held by the securitization trust were recorded at their fair value of $720 million, $635 million of debt issued by the securitization trust was recorded on our balance sheet and $85 million of retained interests were removed from the balance sheets. Textron Financial then made a capital contribution to the trust sufficient to repay its $635 million of outstanding debt; following the repayment, the remaining receivables were legally conveyed to Textron Financial and the trust was dissolved.

In March 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance regarding the recognition and presentation of other-than-temporary impairments, which we adopted in the second quarter of 2009. This guidance amends the other-than-temporary impairment criteria associated with marketable debt securities and beneficial interests in securitized financial assets. It requires that an entity evaluate for and record an other-than-temporary impairment when it concludes that it does not intend to sell an impaired security and does not believe it likely that it will be required to sell the security before recovery of the amortized cost basis, regardless of the entity’s positive intent and ability to hold the asset to maturity. Once an entity has determined that an other-than-temporary impairment has occurred, it is required to record the credit loss component of the difference between the security’s amortized cost basis and the estimated fair value in earnings, whereas the remaining difference is to be recognized as a component of Other comprehensive income and amortized over the remaining life of the security.

-51-

A summary of the other-than-temporary impairments recognized during 2009, 2008 and 2007 by securitization trust, including those recognized under previous generally accepted accounting principles is as follows:


	January 2, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
	(In millions)
Impaired loans with no related allowance for losses
Captive Finance
Aviation	$	39	$	39	$	—	$	37
Golf Equipment		—		—		—		—
Non-captive Finance
Timeshare		142		137		—		82
Golf Mortgage		84		86		—		94
Distribution Finance		67		69		—		21
Other Liquidating		17		16		—		6

Total	$	349	$	347	$	—	$	240

Impaired loans with a related allowance for losses
Captive Finance
Aviation	$	258	$	258	$	46	$	98
Golf Equipment		3		3		1		1
Non-captive Finance
Timeshare		354		366		59		234
Golf Mortgage		179		179		32		96
Distribution Finance		46		45		14		49
Other Liquidating		7		8		1		7

Total	$	847	$	859	$	153	$	485

Total Impaired loans
Captive Finance
Aviation	$	297	$	297	$	46	$	135
Golf Equipment		3		3		1		1
Non-captive Finance
Timeshare		496		503		59		316
Golf Mortgage		263		265		32		190
Distribution Finance		113		114		14		70
Other Liquidating		24		24		1		13

Total	$	1,196	$	1,206	$	153	$	725

~~Distribution~~There was no significant interest income recognized on impaired ~~Finance~~loans ~~Securitization~~in ~~Trust~~either 2010 or 2009.

	2009						2008
										2007
	(In millions)
				Subordinated
	Interest-only			Seller			Interest-only			Interest-only
	Securities			Certificates			Securities			Securities
Total other-than-temporary impairments	$	(8	)	$	(31	)	$	(15	)	$	(1	)
Portion of other-than-temporary impairments recognized in Other comprehensive income, before income taxes		—			13			—			—
Net other-than-temporary impairments recognized in earnings	$	(8	)	$	(18	)	$	(15	)	$	(1	)

-34-

Aviation Finance Securitization Trust

	2009		2008			2007
	(In millions)
	Interest-only		Interest-only			Interest-only
	Securities		Securities			Securities
Total other-than-temporary impairments	$	—	$	(6	)	$	(2	)
Portion of other-than-temporary impairments recognized in Other comprehensive income, before income taxes		—		—			—
Net other-than-temporary impairments recognized in earnings	$	—	$	(6	)	$	(2	)

Each of the other-than-temporary impairments recorded in earnings was primarily due to credit losses and the impairment recognized in other comprehensive income is attributable to an increase in market discount rates. There were no temporary impairments recorded in Accumulated other comprehensive income at the end of 2009 or 2008. There was a $1 million temporary impairment charge recorded in Accumulated other comprehensive income for each securitization trust at the end of 2007, primarily as a result of changes in market discount rates.

NOTE 8 Equipment on Operating Leases

	2009			2008
	(In millions)
Equipment on operating leases, at cost:
Aircraft	$	256		$	274
Golf cars		26			30
Accumulated depreciation:
Aircraft		(59	)		(50	)
Golf cars		(7	)		(7	)
Equipment on operating leases – net	$	216		$	247

Initial lease terms of equipment on operating leases range from one year to ten years. Future minimum rentals at January 2, 2010 are $26 million in 2010, $22 million in 2011, $18 million in 2012, $11 million in 2013, $9 million in 2014 and $14 million thereafter.

-52-

~~NOTE 9~~Allowance ~~Other~~for ~~Assets~~Losses on Finance Receivables Held for Investment

	January 2,		January 3,
	2010		2009
	(In millions)
Repossessed assets and properties	$	119	$	70
Operating assets received in satisfaction of troubled finance receivables		112		84
Investments in other marketable securities		68		95
Derivative financial instruments		61		133
Other long-term investments		54		30
Fixed assets – net		21		24
Retained interests in securitizations		9		200
Other		16		63
Total other assets	$	460	$	699

A rollforward of the Allowance for losses on finance receivables held for investment and a summary of its composition, based on how the underlying finance receivables held for investment are evaluated for impairment, is presented below. At January 1, 2011 and January 2, 2010, Finance receivables held for investment in the tables below specifically exclude $279 million and $313 million of leveraged leases, respectively, based on authoritative accounting standards.

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.


	For the Year Ended January 1, 2011
Allowance for losses on finance			Golf					Golf		Distribution			Structured		Other
receivables held for investment	Aviation		Equipment		Timeshare			Mortgage		Finance			Capital		Liquidating		Total
								(In millions)
Beginning balance	$	112	$	9	$	79		$	65	$	62		$	—	$	12	$	339
Provision for losses		36		14		38			66		(18	)		—		6		142
Less net charge-offs		44		7		7			52		23			—		5		138
Transfers		—		—		(4	)		—		—			—		—		(4	)

Ending balance	$	104	$	16	$	106		$	79	$	21		$	—	$	13	$	339


Individually evaluated for impairment	$	45	$	2	$	102		$	39	$	2		$	—	$	1	$	191
Collectively evaluated for impairment		59		14		4			40		19			—		12		148

Ending balance	$	104	$	16	$	106		$	79	$	21		$	—	$	13	$	339

Finance receivables held for investment
Individually evaluated for impairment	$	164	$	4	$	424		$	313	$	21		$	—	$	20	$	946
Collectively evaluated for impairment		1,599		208		257			372		99			38		58		2,631

Ending balance	$	1,763	$	212	$	681		$	685	$	120		$	38	$	78	$	3,577

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 January 2, 2010 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 revenues and expenses related to these assets, excluding investments made for capital improvements, are recorded in Selling and administrative expenses. In 2009, revenues were $24 million and $21 million from golf courses and other real estate, respectively, and expenses were $26 million and $22 million from golf courses and other real estate, respectively.


	For the Year Ended January 2, 2010
Allowance for losses on finance			Golf					Golf		Distribution		Structured		Other
receivables held for investment	Aviation		Equipment			Timeshare		Mortgage		Finance		Capital		Liquidating		Total
								(In millions)
Beginning balance	$	29	$	9		$	35	$	52	$	55	$	—	$	11	$	191
Provision for losses		109		9			47		45		47		—		8		265
Less net charge-offs		26		7			3		32		40		—		7		115
Transfers		—		(2	)		—		—		—		—		—		(2	)

Ending balance	$	112	$	9		$	79	$	65	$	62	$	—	$	12	$	339


Individually evaluated for impairment	$	46	$	1		$	59	$	32	$	14	$	—	$	1	$	153
Collectively evaluated for impairment		66		8			20		33		48		—		11		186

Ending balance	$	112	$	9		$	79	$	65	$	62	$	—	$	12	$	339

Finance receivables held for investment
Individually evaluated for impairment	$	297	$	3		$	496	$	263	$	113	$	—	$	24	$	1,196
Collectively evaluated for impairment		2,056		330			806		626		563		36		98		4,515

Ending balance	$	2,353	$	333		$	1,302	$	889	$	676	$	36	$	122	$	5,711

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.


	January 1,			January 2,
	2011			2010
Allowance for losses on finance receivables held for investment as a percentage of finance receivables held for investment		8.80	%		5.63	%
Allowance for losses on finance receivables held for investment as a percentage of nonaccrual finance receivables held for investment		39.92	%		32.62	%
Allowance for losses on impaired nonaccrual finance receivables as a percentage of impaired nonaccrual finance receivables		23.82	%		15.57	%

~~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 January 2, 2010, unrealized losses on these investments were $13 million. These investments have been in a continuous, unrealized loss position for greater than twelve months. These unrealized losses are the result of market yield expectations and are considered temporary due to the continued performance of the underlying collateral of the timeshare securitization trusts. In reaching our conclusion that the investments are not other-~~than~~35-~~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.

Interest-only securities within Retained interests in securitizations were $3 million and $12 million at January 2, 2010 and January 3, 2009, respectively.

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NOTE 105 ~~Debt~~Equipment ~~and~~on ~~Credit~~Operating ~~Facilities~~Leases

	January 2,			January 3,
	January 1,			January 2,
	2010			2009
	2011			2010
	(In millions)
Short-term debt:
Equipment on operating leases, at cost:
Commercial paper	$	—		$	743
Aircraft	$	243		$	256
Other short-term debt		—			25
Golf cars		22			26
Total short-term debt		—			768
Accumulated depreciation:
Credit Line borrowings:
Aircraft		(81	)		(59	)
Due 2012 (weighted-average rate of 0.91%)		1,740			—
Golf cars		(7	)		(7	)
Long-term debt:
Equipment on operating leases – net	$	177		$	216
Fixed-rate notes
Due 2009 (weighted-average rate of 5.62%)		—			698
Due 2010 (weighted-average rates of 4.80% and 4.82%, respectively)		581			1,018
Due 2011 (weighted-average rates of 4.96% and 5.04%, respectively)		218			452
Due 2012 (weighted-average rates of 4.43% and 4.43%, respectively)		52			52
Due 2013 (weighted-average rates of 5.19% and 5.19%, respectively)		478			478
Due 2014 (weighted-average rates of 5.07% and 5.07%, respectively)		111			111
Due 2015 and thereafter (weighted-average rates of 7.21% and 4.98%, respectively)		53			41
Total fixed-rate notes		1,493			2,850
Variable-rate notes
Due 2009 (weighted-average rate of 2.78%)		—			836
Due 2010 (weighted-average rates of 0.60% and 3.09%, respectively)		1,054			1,297
Due 2011 (weighted-average rates of 0.75% and 3.40%, respectively)		201			275
Due 2013 (weighted-average rates of 1.16% and 3.07%, respectively)		100			100
Total variable-rate notes		1,355			2,508
Securitized on-balance sheet debt:
Amortizing (weighted-average rates of 1.45% and 3.09%, respectively)		559			853
Subordinated debt:
Due 2017 and thereafter (6.00%)		300			300
Unamortized discount		(2	)		(3	)
Fair value adjustments		43			112
Total long-term, securitized on-balance sheet and subordinated debt		3,748			6,620
Total debt	$	5,488		$	7,388

OnInitial ~~February 3,~~lease ~~2009,~~terms weof ~~drew~~equipment ~~down~~ on ~~the~~operating ~~available~~leases ~~balance~~range from ofone ~~the~~year ~~$1.75 billion~~to ~~bank~~twelve ~~credit~~years. ~~line~~Future ~~due~~minimum torentals ~~the economic~~at ~~environment~~January 1, ~~and~~2011 ~~the~~are ~~risks~~$21 million ~~associated~~in ~~with~~2011, $16 million ~~the~~in ~~capital~~2012, ~~markets~~$8 million in 2013, ~~general,~~$6 million ~~including~~in ~~the~~2014, ~~difficulty~~$4 million in ~~accessing~~2015 ~~sufficient~~and ~~commercial~~$9 million ~~paper on a daily basis~~thereafter.

~~We extinguished, through open market purchases,~~ ~~$655~~NOTE ~~million of our debt securities prior to maturity~~6 ~~during~~Other ~~2009, resulting in gains of $47 million. During the~~Assets fourth quarter, Textron Inc. and Textron Financial Corporation announced separate cash tender offers for up to a $650 million aggregate principal amount of five separate series of outstanding debt securities with maturity dates ranging from November 2009 to June 2012. We extinguished $319 million of our debt securities with maturity dates ranging from 2009 to 2011 and recognized a gain on these early extinguishments of $8 million in the fourth quarter of 2009.

~~Subordinated~~Textron ~~debt~~Financial’s ~~consists~~Other ofassets ~~$300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes, which~~ are ~~unsecured~~summarized and rank junior to all of our existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par on or after February 15, 2017, and are obligated to redeem the notes beginning on February 15, 2042. Pursuant to the terms of the notes or the replacement capital covenant described below~~, any redemption of the notes~~: must be made from the sale of certain replacement capital securities or a capital contribution from Textron. Interest on the notes is fixed at 6% until February 15, 2017, and floats at three-

-54-


	January 1,		January 2,
	2011		2010
	(In millions)
Repossessed assets and properties	$	157	$	119
Operating assets received in satisfaction of troubled finance receivables		107		112
Investment in other marketable securities		51		68
Other long-term investments		50		54
Derivative financial instruments		34		61
Other		31		46

Total other assets	$	430	$	460

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. At both January 1, 2011 and January 2, 2010, 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, net of gains, for the shortfall between estimated fair value and the carrying amount. The revenues and expenses related to these assets, excluding investments made for capital improvements, are recorded in Operating and administrative expenses. In 2010, revenues were $32 million and $15 million from golf courses and other real estate, respectively, and expenses were $43 million and $14 million from golf courses and other real estate, respectively. In 2009, revenues were $24 million and $21 million from golf courses and other real estate, respectively, and expenses were $26 million and $22 million from golf courses and other real estate, respectively.

Investments in other marketable securities represent investments in notes receivable issued by timeshare securitization trusts. We have classified these investments as available for sale in connection with the reclassification of $219 million of Timeshare finance receivables from held for investment to held for sale as discussed in Note 4. Finance Receivables and Allowance for Losses on Finance Receivables Held for Investment. At January 1, 2011, unrealized losses were $2 million on $28 million of these investments for which fair value was lower than our

-36-

~~month~~carrying ~~LIBOR~~value. +These ~~1.735%~~investments ~~thereafter~~have been in a continuous, unrealized loss position for greater than twelve months. WeThese unrealized ~~may~~losses ~~defer~~are ~~payment~~primarily the result of market yield ~~interest~~expectations onand ~~one~~are orconsidered ~~more~~temporary ~~occasions,~~due into ~~each~~the ~~case,~~continued performance ~~for~~of athe ~~period~~underlying collateral of the timeshare upsecuritization trusts. In reaching our conclusion that the investments are not other-than-temporarily impaired, we relied on industry analyst reports, credit ratings specific to ~~10 years~~each investment and information on delinquency, loss and payment experience of the collateral underlying each security.

NOTE 7 Debt and Credit Facilities


	January 1,			January 2,
	2011			2010
	(In millions)
Credit Line borrowings:
Due 2012 (weighted-average rates of 0.91% and 0.91%, respectively)	$	1,440		$	1,740
Long-term debt:
Fixed-rate notes
Due 2010 (weighted-average rate of 4.80%)		—			581
Due 2011 (weighted-average rates of 4.95% and 4.96%, respectively)		203			218
Due 2012 (weighted-average rates of 4.43% and 4.43%, respectively)		52			52
Due 2013 (weighted-average rates of 5.18% and 5.19%, respectively)		453			478
Due 2014 (weighted-average rates of 5.07% and 5.07%, respectively)		111			111
Due 2015 (weighted-average rates of 4.59% and 4.59%, respectively)		10			10
Due 2016 and thereafter (weighted-average rates of 5.11% and 7.85%, respectively)		31			43

Total fixed-rate notes		860			1,493
Variable-rate notes
Due 2010 (weighted-average rate of 0.60%)		—			1,054
Due 2011 (weighted-average rates of 0.83% and 0.75%, respectively)		171			201
Due 2013 (weighted-average rates of 1.18% and 1.16%, respectively)		100			100

Total variable-rate notes		271			1,355
Securitized on-balance sheet debt:
Amortizing (weighted-average rates of 2.01% and 1.45%, respectively)		530			559
Subordinated debt:
Due 2042 and thereafter (6.00%)		300			300
Unamortized discount		(1	)		(2	)
Fair value adjustments		35			43

Total long-term, securitized on-balance sheet and subordinated debt		1,995			3,748

Total debt	$	3,435		$	5,488

On February 3, 2009, we drew down on the available balance of the $1.75 billion bank credit line due to the economic environment and the risks associated with the capital markets in general, including the difficulty in accessing sufficient commercial paper on a daily basis. On December 29, 2010, we repaid $300 million of the bank credit line.

The Company extinguished through open market transactions $131 million and $655 million of our medium term notes prior to maturity during 2010 and 2009, respectively, resulting in gains of $1 million and $47 million, respectively. During 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. Textron Financial Corporation extinguished $319 million of its medium-term notes with maturity dates ranging from 2009 to 2011 and recognized a gain on these early extinguishments of $8 million in 2009.

Subordinated debt consists of $300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes, which are unsecured and rank junior to all of our existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par on or after February 15, 2017, and are obligated to redeem the

-37-

notes beginning on February 15, 2042. Pursuant to the terms of the notes or the replacement capital covenant described below, any redemption of the notes must be made from the sale of certain replacement capital securities or a capital contribution from Textron. Interest on the notes is fixed at 6% until February 15, 2017, and floats at three-month LIBOR + 1.735% thereafter. We may defer payment of interest on one or more occasions, in each case, for a period of up to 10 years.

We agreed, in a replacement capital covenant for the benefit of the holders of a specified class of covered debt, that we will not redeem the notes on or before February 15, 2047, unless we have received a capital contribution from Textron and/or net proceeds from the sale of certain replacement capital securities in certain specified amounts. The initial class of covered debtholders are the holders of our 5.125% Medium Term Notes, Series E, due August 15, 2014, in the principal amount of $100 million.

We had interest rate exchange agreements related to the conversion of fixed-rate debt to variable-rate debt of $628 million and $946 million at January 1, 2011 and January 2, 2010, respectively, whereby we make periodic floating-rate payments in exchange for periodic fixed-rate receipts. The weighted-average rate of these borrowings considering the impact of interest ~~rates~~rate exchange agreements, including fees was 1.38% and 1.99% for the years ended January 1, 2011 and January 2, 2010, respectively. The weighted-average rate on ~~short~~remaining fixed-~~term~~rate ~~borrowings~~notes atnot subject ~~year-end~~to ~~were~~interest asrate ~~follows:~~exchange agreements, including fees was 5.72% and 5.82% for the years ended January 1, 2011 and January 2, 2010, respectively.

	2009		2008			2007
Commercial paper:
USD		—		5.64	%		5.19	%
CAD		—		—			4.48	%
Other short-term debt		—		1.78	%		4.92	%

Interest on our variable-rate notes is predominantly tied to the three-month LIBOR. The weighted-average interest rates on these notes before consideration of the effect of interest rate exchange agreements including fees were 1.02% and 1.44% during 2010 and 2009, respectively. We had $161 million of interest rate exchange agreements at January 2, 2010 related to the conversion of variable rate debt to fixed rate debt with a weighted-average fixed interest rate of 4.67%. There were no interest rate exchange agreements related to the conversion of variable rate debt to fixed rate debt outstanding at January 1, 2011. The weighted-average rate on the remaining variable-rate notes not subject to interest rate exchange agreements was 1.41% during 2009.

~~The~~Our ~~combined~~lending ~~weighted-average~~agreements ~~interest~~contain ~~rates~~various onrestrictive ~~these~~provisions regarding ~~borrowings~~additional debt (not to exceed nine times consolidated ~~during~~net worth and qualifying subordinated obligations), minimum net worth ($200 million), the ~~last~~creation ~~three~~of ~~years~~liens ~~were~~and ~~4.37~~the maintenance of a fixed charge coverage ratio (no less than 125%). inAs ~~2009,~~more fully described in Note 3.~~63%~~ inRelationship ~~2008~~with Textron Inc., Textron made cash payments of $308 million and ~~5.16%~~$270 million to Textron Financial in ~~2007.~~2010 ~~The~~and ~~weighted-average~~2009, respectively, ~~interest~~and ~~rates~~additional payments of $63 million on ~~short-term~~January 11, ~~borrowings~~2011 ~~have~~related ~~been~~to ~~determined~~2010, byand ~~relating~~$75 million ~~the~~on ~~annualized~~January 12, ~~interest~~2010 ~~cost~~related ~~including~~to ~~fees~~2009. These cash payments were reflected as capital contributions to maintain compliance with the ~~daily~~fixed ~~average~~charge coverage ratio required by the Support ~~dollar~~Agreement ~~amounts~~and ~~outstanding~~certain of Textron Financial’s credit agreements.

WeFor ~~had interest rate exchange agreements related to~~ the ~~conversion~~ ofyears ~~fixed-rate~~ended ~~debt to variable-rate debt of $946~~January ~~million and $2.~~1 ~~billion~~, at2011 and January 2, ~~2010~~ ~~and January 3~~2010, ~~2009, respectively, whereby~~ we ~~make~~declared ~~periodic floating-rate~~and ~~payments~~paid individends ~~exchange~~to ~~for~~Textron ~~periodic fixed-rate receipts. The weighted-average rate~~ of ~~these borrowings~~ ~~considering the impact of interest rate exchange agreements, including fees was 1.99% and 3.94% for the years ended January~~$514 2,million ~~2010~~ and ~~January~~$358 3million, ~~2009,~~ respectively. ~~The~~Leverage ~~weighted-average~~limits ~~rate~~as ondescribed ~~remaining~~above ~~fixed-rate~~limit ~~notes~~the ~~not~~payment ~~subject to~~of ~~interest~~dividends ~~rate~~to ~~exchange agreements, including fees was 5.82%~~an ~~and~~additional ~~5.45% for the years ended January~~$348 2,million ~~2010~~at ~~and~~ January 31, ~~2009, respectively~~2011.

~~Interest~~We onmade ~~our~~cash ~~variable-rate~~payments ~~notes~~for ~~is predominantly tied to the three-month LIBOR. The weighted-average~~ interest ~~rates on these notes before consideration~~ of ~~the~~$127 million ~~effect~~in ~~of interest rate exchange agreements including fees were 1.44% and 3.65% during 2009 and 2008~~2010, ~~respectively. In addition, we had~~ $~~161~~170 million ~~and~~in ~~$140 million interest rate exchange agreements at January 2, 2010 and January 3,~~ 2009~~, respectively,~~ ~~related to the conversion of variable-rate debt to fixed-rate debt with a weighted-average fixed interest rate of 4.67%~~ and ~~4.81%, respectively. The weighted-average rate on remaining variable-rate notes not subject to interest rate exchange agreements was 1.41% and 3.69% for the years ended January~~$310 2,million ~~2010~~in ~~and January 3, 2009, respectively~~2008.

~~Through our subsidiary, Textron Financial Canada Funding Corp.~~ ~~(Textron Canada Funding), we had periodically issued debt~~NOTE 8 ~~securities.~~Derivative WeFinancial ~~own 100% of the common stock of Textron Canada~~Instruments Funding, which is a financing subsidiary with operations, revenues and cash flows related to the issuance, administration and repayment of debt securities that are fully and unconditionally guaranteed by Textron Financial.

~~Our~~Textron ~~lending~~Financial ~~agreements~~utilizes ~~contain~~derivative ~~various~~instruments ~~restrictive~~to ~~provisions~~mitigate ~~regarding~~its ~~additional~~exposure ~~debt~~to ~~(not~~fluctuations toin ~~exceed~~interest ~~nine~~rates ~~times~~and ~~consolidated~~foreign ~~net~~currencies. ~~worth~~These ~~and~~instruments ~~qualifying~~include ~~subordinated~~interest ~~obligations),~~rate ~~minimum net~~exchange ~~worth~~agreements ~~($200 million),~~and ~~the~~foreign ~~creation~~currency ofexchange ~~liens~~agreements. ~~and~~The ~~the~~Company ~~maintenance~~does ofnot ahold ~~fixed~~or ~~charges~~issue ~~coverage~~derivative ~~ratio~~financial ~~(no~~instruments ~~less than~~for ~~125%).~~trading Asor ~~more~~speculative ~~fully~~purposes. ~~described~~The inCompany ~~Note 4.~~did ~~Relationship~~not ~~with~~experience ~~Textron~~a ~~Inc.,~~significant ~~Textron~~net ~~made~~gain ~~cash~~or ~~payments~~loss in earnings as a result of ~~$270 million~~the ~~and~~ineffectiveness, ~~$625 million~~or tothe usexclusion inof ~~2009~~any ~~and~~component ~~2008,~~from ~~respectively, and~~its anassessment ~~additional~~of ~~payment~~hedge effectiveness, of ~~$75 million~~its onderivative ~~January 12,~~financial instruments in 2010, ~~which~~2009 and 2008. The fair values of derivative instruments are ~~reflected~~included asin ~~capital~~either ~~contributions,~~Other toassets ~~maintain~~or ~~compliance~~Accrued ~~with~~interest ~~the~~and ~~fixed~~other ~~charge~~liabilities ~~coverage~~in ~~and~~the ~~leverage~~Consolidated Balance ~~ratios~~Sheets.

~~For the years ended January 2, 2010 and January 3,~~ ~~2009, we declared and paid dividends to Textron of~~-38- ~~$358 million and $151 million, respectively. Leverage limits as described above limit the payment of dividends to an additional $604 million at January 2, 2010.~~

We made cash payments for interest of $170 million in 2009, $310 million in 2008, and $388 million in 2007.

-55-

The following table summarizes the Company’s significant ~~NOTE 11~~derivative activities relating to qualifying hedges of interest ~~Derivative~~rate ~~Financial~~risk ~~Instruments~~and foreign currency exposure:

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 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 2009, 2008 and 2007. The fair values of derivative instruments are included in either Other assets or Accrued interest and other liabilities in the Consolidated Balance Sheets.


	Notional Amount Fair Value Amount
					Assets				Liabilities
	January 1,		January 2,		January 1,		January 2,		January 1,			January 2,
	2011		2010		2011		2010		2011			2010
	(In millions)
Fair Value Hedges
*Interest Rate Exchange Agreements*
Fixed-rate debt	$	628	$	946	$	34	$	40	$	—		$	—
Fixed-rate receivables		451		419		—		3		(6	)		(3	)

Net Investment Hedges
*Foreign Currency Forward Exchange Agreements*
Foreign-dollar functional currency subsidiary equity		38		71		—		—		—			(2	)

Cash Flow Hedges
*Cross-Currency Interest Rate Exchange Agreements*
Foreign-dollar denominated variable-rate debt/receivable		4		165		—		18		(2	)		(1	)

	$	1,121	$	1,601	$	34	$	61	$	(8	)	$	(6	)

~~The~~As ~~following~~a ~~table~~result ~~summarizes~~of ~~the~~our ~~Company’s~~exit ~~derivative~~plan announced in December 2008, we no ~~activities~~longer ~~relating~~viewed toour ~~qualifying~~investment ~~hedges~~in our Canadian subsidiary as permanent. Therefore, we began hedging our net investment in this subsidiary during the fourth quarter of ~~interest~~2008 ~~rate~~to ~~risk~~prevent any ~~and~~reduction ~~foreign~~in ~~currency~~the ~~exposure:~~U.S. dollar equivalent cash flows we will receive upon liquidation of this subsidiary.

	Notional Amount Fair Value Amount
					Assets				Liabilities
	2009		2008		2009		2008		2009			2008
	(In millions)
Fair Value Hedges
Interest Rate Exchange Agreements
Fixed-rate debt	$	946	$	2,055	$	40	$	112	$	—		$	—
Fixed-rate receivable		387		—		3		—		—			—
Fixed-rate receivable		32		32		—		—		(3	)		(7	)
Net Investment Hedges
Foreign Currency Forward Exchange Agreements
Foreign-dollar functional currency subsidiary equity		71		139		—		—		(2	)		—
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreements
Foreign-dollar denominated variable-rate debt		161		140		18		21		—			—
Foreign-dollar denominated variable-rate receivable		4		5		—		—		(1	)		(1	)
	$	1,601	$	2,371	$	61	$	133	$	(6	)	$	(8	)

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. At January 1, 2011 and January 2, 2010, notional amounts of $141 million and $531 million, respectively, of these foreign currency forward exchange agreements were not designated in hedge relationships. The fair value of these non-designated derivative instruments were $(1) million and $(13) million at January 1, 2011 and January 2, 2010, respectively. Net losses on foreign currency forward exchange agreements were $(11) million and $(106) million in 2010 and 2009, respectively. These net losses were largely offset by the translation of the related foreign currency denominated assets and liabilities, and were recorded in Operating and administrative expenses.

As a result of our exit plan announced in 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 January 2, 2010 and January 3, 2009:

					Fair Value Amount
	Notional Amount
					Assets				Liabilities
	2009		2008		2009		2008		2009			2008
	(In millions)
Foreign currency forward exchange agreements	$	531	$	536	$	—	$	—	$	(13	)	$	—
Interest rate exchange agreements		—		336		—		—		—			(13	)
	$	531	$	872	$	—	$	—	$	(13	)	$	(13	)

-56-

Foreign currency forward exchange agreements are utilized by the Company to convert foreign currency denominated assets and liabilities into the functional currency of the respective legal entity. Gains and losses related to these instruments are naturally offset by the translation of the related foreign currency denominated assets and liabilities. In 2009, losses on foreign currency forward exchange agreements were offset by $106 million of gains resulting from the translation of foreign currency denominated assets and liabilities. These gains were also recorded in Selling and administrative expenses.

The effect of derivative instruments in the Consolidated Statements of Operations is as follows:

			Amount of Gain/(Loss)
	Gain/(Loss) Location		~~2009~~2010			~~2008~~2009
			(In millions)
Fair Value Hedges
Interest rate exchange agreements		Interest expense	$	~~(13~~25	)	$	~~120~~(13	)
Interest rate exchange agreements		Finance charges		10(11	)		(710	)
Non-designated Hedges
Interest rate exchange agreements		Other income	$	1		$	(3	)
Foreign currency forward exchange agreements		Selling and administrative expenses		(107	)		(6	)

	Amount of Gain/(Loss)
	in Other
	Comprehensive Income								Gain/(Loss) Amount
							Gain/(Loss) Location
	2009			2008					2009			2008
	(In millions)
Cash Flow Hedges
Cross-Currency Interest Rate Exchange Agreement
Interest impact	$	(4	)	$	(5	)		Interest expense	$	(4	)		$ (2	)
Foreign exchange impact		—			—			Selling and administrative expenses		(2	)		25

Losses included in earnings related to cash flow hedges were $(5) million and $(6) million in 2010 and 2009, respectively. Losses included in Other Comprehensive Income related to cash flow hedges were $(1) million and $(4) million in 2010 and 2009, respectively.

~~NOTE 12~~ ~~Fair Value of Financial Instruments~~-39-

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.

-57-

NOTE 9 Fair Value of Financial Instruments

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~~Derivative ~~valuation~~Financial ~~of each asset:~~Instruments

	January 2, 2010
	(In millions)
	Level 2		Level 3
Derivative financial instruments, net	$	42	$	—
Interest-only security		—		3
Total assets	$	42	$	3

We measure our derivative financial instruments, net at fair value on a recurring basis using Level 2 inputs. The net balance of these derivative financial instruments was $26 million and $42 million at January 1, 2011 and January 2, 2010, respectively. The Company’s derivative contracts are not exchange-traded and 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 January 1, 2011 and January 2, 2010.

~~Derivatives~~Investment in Other Marketable Securities

~~The~~As ~~Company’s~~of ~~derivative~~January 1, ~~contracts~~2011, ~~are~~our ~~not~~Investment ~~exchange-traded. Derivative~~in ~~financial~~other ~~instruments are measured at fair value~~marketable ~~utilizing~~securities ~~widely accepted, third-party developed valuation models. The actual terms~~ of ~~each~~$51 million ~~individual~~was ~~contract~~classified ~~are~~as ~~entered~~available for ~~into~~sale ~~the model in addition to interest rate~~ and ~~foreign~~measured ~~exchange rate~~at ~~data~~fair ~~which~~value isusing ~~based~~Level 2 oninputs. ~~readily observable market data~~The ~~published~~estimate byof ~~third-party leading financial news and data providers. Credit risk is factored into the~~ fair value ~~of derivative~~was ~~assets and liabilities~~ based on ~~the~~observable ~~differential between~~market ~~both~~inputs ~~the Company’s credit default swap spread~~ for ~~liabilities~~similar ~~and~~securitization ~~the~~interests ~~counterparty’s~~in ~~credit~~markets ~~default~~that ~~swap~~are relatively ~~spread~~inactive ~~for assets as~~ compared to ~~a standard AA-rated counterparty, however, this had no significant impact on~~ the ~~valuation~~ asmarket ofenvironment ~~January 2,~~in ~~2010~~which ~~and~~they ~~January 3, 2009,~~were asoriginally ~~most of our counterparties are AA-rated and the vast majority of our derivative instruments are in an asset position~~issued.

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~~each ~~years~~period ~~ended January 2, 2010 and January 3, 2009, respectively~~presented:

	2009			2008
	2010			2009
	(In millions)
Retained Interests in Securitizations
Balance, beginning of period	$	123		$	4312
Transfers from nonrecurring classification		~~110~~—			—110
Reclassification to Finance receivables held for investment		(853	)		(1985	)
Net gains for the period:
Change in value recognized in Other comprehensive loss		—			11
Increase due to securitization gains on sale of finance receivables		—			66
Impairments recognized in earnings		—			(8	)
Change in value recognized in Other income		—			2
Collections, net		—			(37	)
Change in value recognized in Other comprehensive income		11			—
Balance, end of period	$	—		$	3
Impairments recognized in earnings		(8	)		(21	)
Collections, net		(37	)		(59	)
Balance, end of period	$	3		$	12

~~For additional disclosure regarding the reclassification to~~ ~~Finance receivables held for investment and the impairments~~-40- ~~recognized in earnings, refer to Note 7. Receivable Securitizations.~~

-58-

Assets Recorded at Fair Value on a Nonrecurring Basis

The table below presents the balance at January 1, 2011 and January 2, 2010 of those assets that were measured at fair value on a nonrecurring basis ~~using~~during ~~significant~~the ~~unobservable~~2010 and 2009, ~~inputs~~respectively, ~~(Level 3) at~~and the ~~end~~related losses recorded in the Consolidated Statements of ~~each~~Operations. ~~period:~~These assets were measured using significant unobservable inputs (Level 3).

	January 2,		January 3,
	Balance at				Total Loss
	2010		2009
	January 1,		January 2,
	(In millions)
	2011		2010		2010			2009
Finance receivables held for sale	$	819	$	1,658
	(In millions)
Impaired finance receivables	$	~~686~~504	$	~~139~~694	$	(148	)	$	(165	)
Repossessed assets and properties		85		—
Finance receivables held for sale		413		819		(22	)		(14	)
Operating assets received in satisfaction of troubled finance receivables		41		—
Repossessed assets and properties		117		85		(38	)		(30	)
Total assets	$	1,631	$	1,797
Other investments		32		30		(9	)		(20	)
Operating assets received in satisfaction of troubled finance receivables		—		41		—			(11	)

Finance Receivables Held for Sale

Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the Non-captive Finance segment through a combination of orderly liquidation of finance receivables as they mature and selected sales, $819 million of finance receivables, net of a $104 million valuation allowance, have been classified as held for sale as of January 2, 2010. The finance receivables held for sale as of January 2, 2010 are primarily assets in the Distribution Finance, Golf Mortgage and Asset-Based Lending product lines, but also include $84 million of finance receivables in the Golf Equipment product line within the Captive Finance segment. The majority of the finance receivables held for sale were identified at the individual loan level. Golf course, timeshare and hotel 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 collection of others to maximize economic value. Distribution Finance receivables were identified primarily based on the associated manufacturer relationship, which can have a significant impact on the relative value of the finance receivables. These finance receivables are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. The decrease in the fair value of the finance receivables held for sale was $14 million in 2009 and was recorded within Other income in the Consolidated Statements of Operations. During 2009, we sold $728 million of finance receivables, the vast majority of which were classified as held for sale, including $399 million in the Distribution Finance product line and $127 million in the Asset-Based Lending product line. We received proceeds approximating our carrying value for each of these transactions. See Note 6. Finance Receivables Held for Investment regarding changes in classification of certain finance receivables between held for sale and held for investment during 2009.

There are no active, quoted market prices for our finance receivables. The estimate of fair value was determined based on 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 the sale of individual loans. The models incorporate estimates of the rate of return, financing cost, capital structure and/or discount rate 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 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 receivables held for sale involve significant management judgment, which can result in differences between our fair value estimates and those of other market participants.

Impaired Finance Receivables

~~Finance~~Impaired ~~receivable~~nonaccrual ~~impairment~~finance isreceivables ~~measured~~represent byassets recorded ~~comparing~~at fair value on a nonrecurring basis since the ~~expected~~measurement ~~future~~of ~~cash~~required ~~flows~~reserves ~~discounted~~on atour ~~the~~impaired finance ~~receivable’s~~receivables ~~effective~~is ~~interest~~significantly ~~rate,~~dependent oron the fair value of the ~~the~~underlying collateral. ifFair 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 on impaired finance ~~receivable~~receivables isare ~~collateral~~recorded to Provision for losses in the Consolidated Statements of Operations.

Finance ~~-59-~~Receivables Held for Sale

Finance receivables held for sale are recorded at the lower of cost or fair value. As a result of our plan to exit the Non-captive Finance business through a combination of orderly liquidation of finance receivables as they mature and selected sales, $413 million of finance receivables, net of a $42 million valuation allowance, have been classified as held for sale as of January 1, 2011. The finance receivables held for sale as of January 1, 2011 are primarily assets in the Timeshare and Golf Mortgage product lines. Timeshare finance receivables classified as held for sale were identified at the individual loan level; whereas Golf course mortgages 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 collection of others to maximize economic value. These finance receivables are recorded at fair value on a nonrecurring basis during periods in which the fair value is lower than the cost value. Fair value measurements on finance receivables held for sale are recorded in Other income in the Consolidated Statements of Operations. During 2010, we sold $375 million of finance receivables classified as held for sale in the Distribution Finance product line and recorded $26 million of gains related to these sales. In addition, we sold $84 million of finance receivables classified as held for sale in the Captive Golf equipment product line at book value. During 2010, we sold a total of $670 million of finance receivables and recorded net gains of $31 million related to these sales. During 2009, we sold $728 million of finance receivables, the vast majority of which were classified as held for sale, including $399 million in the Distribution Finance product line and $127 million in the Asset-Based Lending portfolio. We received proceeds approximating our carrying value for each of these transactions. See Note 4. Finance Receivables and Allowance for Losses on Finance Receivables Held for Investment regarding changes in classification of certain finance receivables between held for sale and held for investment during 2010 and 2009.

-41-

~~dependent,~~expectations 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~~prospective ~~cash~~purchasers ~~flows~~are ~~expected~~compared to beobservable ~~received~~market ~~on impaired finance receivables and the underlying collateral~~inputs, ~~which~~including ~~may~~bids ~~differ~~ from ~~actual results. Impaired~~prospective ~~nonaccrual~~purchasers ~~finance~~and ~~receivables~~certain ~~represent~~bond ~~assets~~market ~~recorded~~indices atfor ~~fair value~~loans ~~on a nonrecurring basis since the measurement~~ of ~~required~~similar ~~reserves~~perceived oncredit ~~our~~quality. ~~impaired~~Although ~~finance~~we ~~receivables~~utilize isand ~~significantly~~prioritize ~~dependent~~these onmarket ~~the~~observable ~~fair~~inputs ~~value~~in ofour ~~the~~discounted ~~underlying~~cash ~~collateral. Fair~~flow ~~values~~models, ofthese ~~collateral~~inputs are ~~determined~~not ~~based~~typically onderived ~~the~~from ~~use~~markets ofwith ~~appraisals,~~directly ~~industry~~comparable ~~pricing~~loan ~~guides~~structures, ~~input~~industries ~~from~~and ~~market~~collateral ~~participants~~types. Therefore, ~~our~~valuations ~~recent~~of ~~experience~~finance ~~selling~~receivables ~~similar~~held ~~assets or~~for ~~internally~~sale ~~developed~~involve ~~discounted~~significant ~~cash~~management ~~flow~~judgment, ~~models.~~which ~~Fair~~can ~~value~~result ~~measurements recorded during 2009 and 2008 on impaired finance receivables resulted~~ in ~~charges~~differences ofbetween ~~$165 million~~our ~~and $63 million,~~fair ~~respectively~~value toestimates ~~Provision for losses in the Consolidated Statements of Operations,~~ and ~~were~~those ~~primarily~~of ~~related~~other tomarket ~~initial fair value adjustments~~participants.

~~The evaluation of impaired Revolving loans collateralized by~~ ~~timeshare notes receivable is performed utilizing internally~~Repossessed ~~developed~~Assets cash flow models which incorporate the unique structural features of these loans. Timeshare notes receivables loans are loans to developers of resort properties which are collateralized by pools of consumer notes receivable. These notes receivable are originated by developers in connection with the sale of vacation intervals and ~~typically~~Properties ~~bear~~/ ~~interest~~Operating ~~at rates~~Assets inReceived excess of the rate on our loan to the developer. In addition to the interest differential between the consumer notes and our loan to the developers, there are several features of our loans which provide protection from credit losses in ~~the~~ ~~pools~~Satisfaction of ~~consumer~~Troubled ~~notes.~~Finance ~~We have a priority interest in all cash~~Receivables flows from these pools of consumer notes, typically advance approximately 90% of the collateral value, have a security interest in either the underlying real estate or the right to use the resort property and often have personal guarantees from the principal of the borrower. Our impairment models incorporate management’s best estimate of credit losses in the pools of consumer notes based on historical trends as adjusted for our understanding of current trends in the developer’s underwriting practices and the developer’s ability to mitigate losses through the repurchase or replacement of defaulted notes.

The fair value of repossessed assets and properties and ~~Repossessed~~operating assets received in satisfaction of troubled finance ~~Assets~~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/Operating~~properties, ~~Assets~~which ~~Received~~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~~satisfaction of troubled finance receivables, if the sum of ~~Troubled~~the ~~Finance~~undiscounted ~~Receivables~~cash flows is estimated to be less than the carrying value, the Company records a charge to income for any shortfall between estimated fair value and the carrying amount. Fair value measurements on these assets are recorded in Portfolio losses, net of gains, in the Consolidated Statements of Operations.

~~The fair value of repossessed assets and properties and~~ ~~operating assets received in satisfaction of troubled finance~~Other ~~receivables is determined based on the use of appraisals,~~Investments 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 2009, charges on these assets totaled $41 million and were recorded in Portfolio (losses) gains in the Consolidated Statements of Operations.

Other investments, which are accounted for under the equity ~~-60-~~method of accounting, are recorded at fair value if the sum of the undiscounted cash flows from the investment is estimated to be less than the carrying value. There are no active, quoted market prices for our equity method investments. The estimates of fair value are determined utilizing internally developed discounted cash flow models, which incorporate assumptions specific to the nature of the investments’ business and underlying assets. These assumptions include industry valuation benchmarks such as discount rates, capitalization rates and cash flow multiples as well as assumptions more specifically related to the amount and timing of the businesses’ operating cash flow. Fair value measurements on these assets are recorded in Portfolio losses, net of gains, in the Consolidated Statements of Operations.

-42-

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:

		January 2, 2010								January 3, 2009
	January 1, 2011							January 2, 2010
	Carrying	~~Carrying~~		Estimated		~~Estimated~~		Carrying		~~Carrying~~	Estimated		~~Estimated~~
	Value	~~Value~~		Fair Value		~~Fair Value~~		Value		~~Value~~	Fair Value		~~Fair Value~~
		~~(In millions)~~		(In millions)
Assets:
Installment contracts	$	$1,654	~~2,204~~	$	1,583	$	~~2,007~~	$	2,204	$	~~2,748~~$	2,007	$	~~2,408~~
Revolving loans			1,058				902				1,170			986
Mortgage loans		781			686				1,008			924
Golf course, timeshare and hotel mortgages			1,008				924				1,150			931
Revolving loans		395			359				1,058			902
Distribution finance receivables		161	~~709~~		157		~~690~~		709		~~597~~	690		~~503~~
Investment in other marketable securities		—	68		—		56		68		95	56		78
Retained interests in securitizations, excluding interest-only securities		—	6		—		6		6		~~188~~	6		~~178~~
	$	$2,991	~~5,053~~	$	2,785	$	~~4,585~~	$	5,053	$	~~5,948~~$	4,585	$	~~5,084~~
Liabilities:
Bank line of credit	$	$1,440	~~1,740~~	$	1,410	$	~~1,682~~	$	1,740	$	—$	1,682	$	—
Fixed-rate debt		894	~~1,534~~		885		~~1,490~~		1,534		~~2,959~~	1,490		~~2,518~~
Variable-rate debt			1,355				1,333				2,508			2,292
Securitized on-balance sheet debt		530			481				559			548
Securitized on-balance sheet debt			559				548				853			824
Subordinated debt		300			252				300			207
Subordinated debt			300				207				300			105
Variable-rate debt		271			272				1,355			1,333
Short-term debt			—				—				768			768
Amounts due to Textron Inc.		254			252				472			469
Amounts due to Textron Inc.			472				469				161			156
	$	3,689		$	3,552			$	5,960		$	5,729
		$	5,960			$	5,729			$	7,549		$	6,663

At January 2, 2010 and January 3, 2009, interest-only securities totaling $3 million and $12 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~~leveraged leases, ~~leveraged~~finance leases and operating leases ($~~403~~279 million, $~~313~~262 million and $~~216~~177 million, respectively, at January 21, ~~2010~~2011 and $~~608~~313 million, $~~459~~403 million and $~~247~~216 million, respectively, at January 32, ~~2009~~2010), 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~~At January 2, 2010, these notes ~~are~~were classified as held to maturity and were held at amortized cost. The estimate of fair value was based on observable market inputs for similar securitization interests in markets that are relatively inactive compared to the market environment in which they were originally issued.

-6143-

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 January 21, ~~2010~~2011 and January 32, ~~2009~~2010, 5435% and 8254%, respectively, of the fair value of ~~term~~ debt was determined based on observable market transactions. The remaining fair values were determined based on discounted cash flow analyses using ~~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 1310 Investment in Parent Company Preferred Stock

On April 12, 2000, Textron made a $25 million noncash capital contribution to Textron Financial consisting of all of the outstanding shares of Textron Funding Corporation (Textron Funding), a related corporate holding company. Textron Funding’s only asset is 1,522 shares of Textron Inc. Series D cumulative preferred stock, bearing an annual dividend yield of 5.92%. The preferred stock, which has a face value of $152 million, is carried at its original cost of $25 million and is presented in a manner similar to treasury stock for financial reporting purposes. Dividends on the preferred stock are treated as additional capital contributions from Textron.

NOTE 1411 Comprehensive (loss~~) income~~

Comprehensive (loss) ~~income~~ is summarized below:

	2009			2008			2007
	2010			2009			2008
	(In millions)
Net (loss) income	$	(203	)	$	(461	)	$	145
Net loss	$	(230	)	$	(203	)	$	(461	)
Foreign currency translation, net of income tax benefit of $8.9 million in 2009 and $39.7 million in 2008		7			(79	)		19
Foreign currency translation, net of income taxes of $48.6 million in 2010 and income tax benefits of $8.9 million in 2009 and $39.7 million in 2008		46			7			(79	)
Amortization of deferred losses on hedge contracts, net of income taxes of $2.9 million in 2007		—			—			5
Net deferred gain (loss) on hedge contracts, net of income tax expense of $1.6 million in 2010 and income tax benefit of $0.8 million in 2008		3			—			(1	)
Net deferred loss on hedge contracts, net of income tax benefit of $0.8 million in 2008 and $1.6 million in 2007		—			(1	)		(3	)
Net deferred loss on retained interests, net of income tax benefits of $0.3 million in 2009 and $0.2 million in 2008		—			(1	)		(1	)
Net deferred loss on retained interests, net of income tax benefit of $0.3 million in 2009, $0.2 million in 2008 and $0.9 million in 2007		(1	)		(1	)		(2	)
Comprehensive loss	$	(181	)	$	(197	)	$	(542	)
Comprehensive (loss) income	$	(197	)	$	(542	)	$	164

In 2010, foreign currency translation includes the ~~NOTE~~$74 15million non-cash reclassification of the cumulative ~~Income~~currency ~~Taxes~~translation adjustments related to one of the Company’s wholly-owned Canadian subsidiaries within Other comprehensive loss, to Special charges in the Consolidated Statements of Operations.

~~(Loss)~~NOTE 12 Income ~~income before income taxes and noncontrolling interest:~~Taxes

	2009			2008			2007
	(In millions)
United States	$	(309	)	$	(478	)	$	206
Foreign		4			(61	)		16
Total	$	(305	)	$	(539	)	$	222

Loss before income taxes and noncontrolling interest:

-62-


	2010			2009			2008
	(In millions)
United States	$	(354	)	$	(309	)	$	(478	)
Foreign		13			4			(61	)

Total	$	(341	)	$	(305	)	$	(539	)

-44-

The components of income ~~taxes~~tax ~~were~~benefit are as follows:

	2009			2008			2007
	2010			2009			2008
	(In millions)
Current:
Federal	$	~~108~~(29	)	$	19108		$	5519
State		12(2	)		(812	)		14(8	)
Foreign		(172	)		5(17	)		155
Total current income tax expense	$	103		$	16		$	84
Total current income tax (benefit) expense	$	(33	)	$	103		$	16
Deferred:
Federal	$	(~~197~~70	)	$	(89197	)	$	14(89	)
State		(238	)		1(23	)		~~(10~~1	)
Foreign		17—			(617	)		(116	)
Total deferred income tax (benefit) expense		(203	)		(94	)		(7	)
Total deferred income tax benefit		(78	)		(203	)		(94	)
Total income tax (benefit) expense	$	(100	)	$	(78	)	$	77
Total income tax benefit	$	(111	)	$	(100	)	$	(78	)

~~The~~Cash ~~2009~~paid ~~current~~(refunded) ~~federal~~for income taxes was $101 million in 2010, $(75) million in 2009 and ~~state~~$52 million ~~provisions~~in ~~include~~2008. During 2010 Textron Financial paid $~~85M~~103 million ofin taxes ~~tax~~and ~~related~~interest to the ~~sale~~Internal ofRevenue ~~certain~~Service ~~leverage~~(IRS) ~~leases~~ primarily related to ~~which~~ wea ~~had~~partial ~~previously~~payment ~~recorded~~for ~~significant~~the ~~deferred~~2008 ~~tax~~settlement reached ~~liabilities.~~with ~~The~~the ~~tax~~IRS iswith ~~expected~~respect to bethe ~~paid~~challenge ~~over~~of atax ~~period of~~deductions ~~years~~taken inby ~~accordance~~the ~~with~~Company ain prior ~~settlement~~years ~~with~~for ~~the~~certain ~~Internal~~leveraged lease ~~Revenue Service (IRS)~~transactions.

Cash (refunded) paid for income taxes was $(75) million in 2009, $52 million in 2008 and $48 million in 2007.

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

	2009			2008			2007
	2010			2009			2008
Federal statutory income tax rate		(35.0	)%		(35.0	)%		(35.0	)%
Increase (decrease) in taxes resulting from:
State income taxes		(2.3.5	)		(02.83	)		1.(0.8	)
Non-U.S. tax rate differential		0(1.6	)		30.76			(3.37	)
Change in state valuation allowance		1.06			(1.40	)		0(1.34	)
Tax contingencies		2.0			2.5			4.0
Unrecognized tax benefits and interest		4.7			2.0			2.5
Tax credits		(0.9	)		(0.7	)		(1.1	)
Goodwill impairment		—			—			9.8
Goodwill impairment		—			9.8			—
Change in status of foreign subsidiaries		2.1			1.9			7.6
Change in status of foreign subsidiary		1.9			7.6			—
Other, net		(0.9	)		(1.0	)		(0.8	)
Other, net		(0.1	)		(0.1	)		(1.0	)
Effective income tax rate		(32.6	)%		(32.8	)%		(14.4	)%
Effective income tax rate		(32.8	)%		(14.4	)%		34.9	%

~~For~~In ~~the~~2010 ~~year~~and ~~ended January 2~~2009, ~~2010,~~ the difference between the statutory ~~tax~~ rate and the effective tax rate iswas ~~primarily attributable~~not to interest on tax contingencies, the majority of which is associated with leveraged leases, an increase in the estimate of the taxable amount of a distribution from the Company’s wholly-owned Canadian subsidiary and a change in management’s assessment of the amount of the state deferred tax asset that is realizable, partially offset by the benefit for state taxessignificant.

~~For~~In ~~the year ended January 3~~2008, ~~2009,~~ the difference between the statutory tax rate and the effective tax rate is primarily attributable to an impairment of goodwill that is not deductible for tax purposes, the provision of taxes on the earnings of a Canadian subsidiary in which we can no longer assert that we are permanently invested, unrecognized ~~interest~~tax onbenefits ~~tax~~and ~~contingencies~~interest, the majority of which are is associated with leveraged leases, and the effects of events related to cross border financing.

~~For~~The ~~the~~amount ~~year~~of ~~ended~~income ~~December~~taxes we pay is subject to ongoing audits by U.S. 29federal, ~~2007~~state, ~~the~~and non-U.S. tax authorities, ~~difference~~which may result in proposed assessments. Our ~~between~~estimate for the ~~statutory~~potential outcome for any uncertain tax ~~rate~~issue is ~~and~~highly ~~the~~judgmental. ~~effective~~We assess our income tax ~~rate~~positions isand ~~primarily~~record ~~attributable~~tax benefits for all years subject to ~~interest~~examination onbased upon ~~tax~~management’s ~~contingencies~~evaluation of the facts, circumstances, and information available at the reporting date. For those tax ~~majority~~positions offor which it is ~~associated~~more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with ~~leveraged~~a ~~leases~~greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Interest and penalties are accrued, where applicable. If we do not believe that it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized.

Our future results may include favorable or unfavorable ~~-63-~~adjustments to our estimated tax liabilities due to closure of income tax examinations, new regulatory or judicial pronouncements, expiration of statutes of limitations or other relevant events. As a result, our effective tax rate may fluctuate significantly on a quarterly and annual basis.

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~~and~~Our anunrecognized ~~increase~~tax inbenefits ~~state~~represent ~~taxes,~~tax ~~partially~~positions ~~offset~~for bywhich reserves ~~the~~have ~~effects~~been established. Unrecognized state tax benefits ofand ~~events~~interest related to ~~cross~~unrecognized ~~border~~tax ~~financing~~benefits ~~and~~are reflected net of applicable tax ~~credits~~benefits. A reconciliation of our unrecognized tax benefits, excluding accrued interest, is as follows:

The amount of income taxes we pay is subject to ongoing audits by Federal, state, and foreign tax authorities. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, we record an estimate of the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions for which it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized.


	2010			2009
	(In millions)
Balance – Beginning of year	$	9		$	6
Additions for tax positions of the current year		—			2
Additions for tax positions of prior years		—			3
Reductions for tax positions of prior years		(2	)		—
Reductions for expiration of statute of limitation		(1	)		—
Reductions for settlements with tax authorities		—			(2	)

Balance – End of year	$	6		$	9

AsAt ~~future~~January 1, ~~results~~2011 ~~may~~and ~~include~~January 2, ~~favorable~~2010, ~~or unfavorable~~approximately ~~adjustments~~$6 million toand ~~our~~$9 million, ~~estimates~~respectively, ~~due~~of tothese unrecognized ~~closure~~benefits, ofif ~~income~~recognized, ~~tax~~would favorably affect the ~~examinations,~~Company’s ~~new~~effective ~~regulatory~~tax orrate ~~judicial~~in ~~pronouncements,~~a orfuture period. The ~~other~~Company ~~relevant~~does ~~events,~~not ~~our~~believe ~~effective~~that ~~tax~~it ~~rate~~is ~~may~~reasonably ~~fluctuate~~possible that the ~~significantly~~estimates onof aunrecognized ~~quarterly~~tax ~~and~~benefits ~~annual~~will ~~basis~~change significantly in the next 12 months.

~~Our~~During ~~unrecognized~~2010, ~~tax~~2009 ~~benefits~~and ~~represent~~2008, ~~tax~~the ~~positions~~Company ~~for~~recognized ~~which~~net ~~reserves~~tax-related ~~have~~interest ~~been~~expense ~~established.~~totaling ~~Unrecognized~~approximately $16 million, ~~state~~$5 million ~~tax~~and ~~benefits~~$13 million, ~~and~~respectively, ~~interest~~in ~~related~~the toConsolidated ~~unrecognized~~Statements ~~tax~~of ~~benefits~~Operations. ~~are reflected~~At ~~net~~January 1, of2011 ~~applicable~~and ~~tax~~January 2, ~~benefits.~~2010, Athe ~~reconciliation~~Company ofhad ~~our~~a ~~unrealized~~total ~~tax~~of ~~benefits~~$31 million and $43 million respectively, ~~excluding~~of net accrued interest, isexpense ~~provided~~included in the Company’s ~~below:~~Consolidated Balance Sheets.

	2009			2008
	(In millions)
Balance – Beginning of year	$	6		$	9
Additions for tax positions of the current year		2			—
Additions for tax positions of prior years		3			—
Reductions for tax positions of prior years		—			(3	)
Reductions for settlements with tax authorities		(2	)		—
Balance – End of year	$	9		$	6

In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada and the U.S. With few exceptions, we no longer are subject to U.S. federal, state and local income tax examinations for years before 1997 and non-U.S. income tax examinations for years before 2005.

AtThe ~~January 2,~~tax ~~2010~~effect ~~and~~of ~~January 3,~~temporary ~~2009,~~differences ~~approximately $9 million~~that ~~and~~give ~~$6 million,~~rise ~~respectively, of these~~to ~~unrecognized~~significant ~~benefits,~~portions ifof ~~recognized, would favorably affect~~ the Company’s ~~effective~~net ~~tax~~deferred ~~rate in any future period. The~~tax ~~Company~~assets ~~does~~and ~~not~~liabilities ~~believe~~were ~~that~~as ~~it is reasonably possible that the~~follows: ~~estimates of unrecognized tax benefits will change significantly in the next 12 months.~~

The Company recognizes net tax-related interest and penalties in income tax expense in its Consolidated Statements of Operations. During 2009, 2008 and 2007, the Company recognized approximately $5 million, $13 million and $9 million, respectively, of net tax-related interest expense. At January 2, 2010 and January 3, 2009, $43 million and $38 million of accrued net tax – related interest was included in Accrued interest and other liabilities in the Company’s Consolidated Balance Sheets, respectively.


	January 1, 2011				January 2, 2010
	(In millions)
Deferred tax assets:
Allowance for losses on finance receivables held for investment	$	128			$	132
Valuation allowance on finance receivables held for sale		28				69
Foreign currency translation		—				32
Obligation for pension and postretirement benefits		34				32
Nonaccrual finance receivables		31				19
Net operating losses and credits		18				10
Deferred origination fees		6				9
Other		43				41

Total deferred tax assets		288				344
Valuation allowance for deferred tax assets		(22	)	<

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Filing Compare · TEXTRON FINANCIAL CORP