##### Table of Contents





UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal quarter ended
    June 30, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file number 0-27559
      TEXTRON FINANCIAL
    CORPORATION
 (Exact name of registrant as
    specified in its charter)
      Delaware

05-6008768(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)40 Westminster Street,
    P.O. Box 6687, Providence, RI(Address of principal
    executive offices)

02940-6687(Zip code)    401-621-4200
 (Registrants telephone
    number, including area code)
      þ o
   Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ




---



##### 





TEXTRON
    FINANCIAL CORPORATION
  TABLE OF
    CONTENTS
  PagePART I. FINANCIAL INFORMATIONItem 1.


FINANCIAL STATEMENTSConsolidated Statements of Income for the three
    and six months ended June 30, 2008 and 2007 (unaudited)


2Consolidated Balance Sheets at June 30, 2008
    and December 29, 2007 (unaudited)


3Consolidated Statements of Cash Flows for the six
    months ended June 30, 2008 and 2007 (unaudited)


4Consolidated Statements of Changes in
    Shareholders Equity through June 30, 2008
    (unaudited)


5Notes to the Consolidated Financial Statements
    (unaudited)


6Item 2.


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


18Item 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


30Item 4.


CONTROLS AND PROCEDURES


30PART II. OTHER INFORMATIONItem 6.


EXHIBITS


31EX-12 Computation of Ratio of Earnings to Fixed ChargesEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO   1




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements TEXTRON
    FINANCIAL CORPORATION



CONSOLIDATED
    STATEMENTS OF INCOME

(Unaudited) Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Finance charges

$
127


$
173


$
282


$
339Securitization gains


20



15



40



30Rental revenues on operating leases


8



8



17



16Other income


22



43



52



64Total revenues


177



239



391



449Interest expense


71



102



157



202Depreciation of equipment on operating leases


4



4



9



8Net interest margin


102



133



225



239Selling and administrative expenses


49



54



103



103Provision for losses


40



11



67



16Income before income taxes


13



68



55



120Income taxes


9



27



20



44Net income

$
4


$
41


$
35


$
76    2




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  CONSOLIDATED
    BALANCE SHEETS
 (Unaudited)
  June 30,


December 29,2008


2007(In millions)AssetsCash and equivalents

$
56


$
60Finance receivables, net of unearned income:Revolving loans


2,225



2,254Installment contracts


2,055



2,052Distribution finance receivables


1,772



1,900Golf course and resort mortgages


1,403



1,240Finance leases


610



613Leveraged leases


535



544Total finance receivables


8,600



8,603Allowance for losses on finance receivables


(126
)


(89
)Finance receivables  net


8,474



8,514Equipment on operating leases  net


258



259Goodwill


169



169Other assets


572



381Total assets

$
9,529


$
9,383Liabilities and shareholders equityLiabilitiesAccrued interest and other liabilities

$
508


$
437Amounts due to Textron Inc.


23



25Deferred income taxes


431



472Debt


7,547



7,311Total liabilities


8,509



8,245Shareholders equityCapital surplus


592



592Investment in parent company preferred stock


(25
)


(25
)Accumulated other comprehensive income


15



26Retained earnings


438



545Total shareholders equity


1,020



1,138Total liabilities and shareholders equity

$
9,529


$
9,383    3




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 SIX
    MONTHS ENDED JUNE 30, 2008 AND 2007
 (Unaudited)
  2008


2007(In millions)Cash flows from operating activities:Net income

$
35


$
76Adjustments to reconcile net income to net cash provided by
    operating activities:(Decrease) increase in accrued interest and other liabilities


(8
)


12Provision for losses


67



16Depreciation


14



14Amortization


5



5Deferred income tax provision


(41
)


12Non-cash gains in excess of collections on securitizations and
    syndications


(9
)


(2
)Other  net


20



20Net cash provided by operating activities


83



153Cash flows from investing activities:Finance receivables originated or purchased


(6,338
)


(6,489
)Finance receivables repaid


5,690



5,795Proceeds from receivable sales, including securitizations


617



711Proceeds from disposition of operating leases and other assets


16



33Purchase of assets for operating leases


(14
)


(28
)Other capital expenditures


(6
)


(4
)Other investments


(99
)


5Net cash (used) provided by investing activities


(134
)


23Cash flows from financing activities:Proceeds from issuance of long-term debt


822



1,069Principal payments on long-term debt


(833
)


(958
)Net decrease in commercial paper


(103
)


(119
)Net increase in other short-term debt


55



18Proceeds from issuance of secured debt


300



Principal payments on nonrecourse debt


(53
)


(31
)Capital contributions from Textron Inc.


5



5Dividends paid to Textron Inc.


(147
)


(140
)Net cash provided (used) by financing activities


46



(156
)Effect of exchange rate changes on cash


1



(1
)Net (decrease) increase in cash and equivalents


(4
)


19Cash and equivalents at beginning of year


60



47Cash and equivalents at end of period

$
56


$
66    4




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
  CONSOLIDATED
    STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (Unaudited)
  Investmentin Parent


Accumulated





TotalCompany


Other





Share-Capital


Preferred


Comprehensive


Retained


holdersSurplus


Stock


Income


Earnings


Equity(In millions)Balance December 30, 2006

$
592


$
(25
)

$
7


$
568


$
1,142Comprehensive income:Net income














145



145Other comprehensive income:Foreign currency translation










19







19Change in unrealized net losses on hedge contracts, net of
    income taxes










2







2Change in unrealized net gains on interest-only securities, net
    of income taxes










(2
)






(2
)Other comprehensive income










19







19Comprehensive income


















164Cumulative effect of a change in accounting principle














(33
)


(33
)Capital contributions from Textron Inc.


9















9Dividends to Textron Inc.


(9
)










(135
)


(144
)Balance December 29, 2007


592



(25
)


26



545



1,138Comprehensive income:Net income














35



35Other comprehensive loss:Foreign currency translation










(11
)






(11
)Other comprehensive loss










(11
)






(11
)Comprehensive income


















24Capital contributions from Textron Inc.


5















5Dividends to Textron Inc.


(5
)










(142
)


(147
)Balance June 30, 2008

$
592


$
(25
)

$
15


$
438


$
1,020    5




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION



NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited) Note 1.
    Basis of
    Presentation  Form 10-K
  Note 2.
    Other
    Income  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Servicing income

$
11


$
9


$
21


$
17Investment income


6



4



10



7Prepayment income


1



1



2



3Late charges


1







2



1Syndication income






2



2



2Other


3



27



15



34Total other income

$
22


$
43


$
52


$
64       Note 3.
    Managed
    and Serviced Finance Receivables    June 30,


December 29,2008


2007(In millions)Total managed and serviced finance receivables

$
12,837


$
12,478Nonrecourse participations


(798
)


(760
)Third-party portfolio servicing


(575
)


(595
)Total managed finance receivables


11,464



11,123Securitized receivables


(2,864
)


(2,520
)Owned finance receivables

$
8,600


$
8,603  6




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
          June 30,


December 29,2008


2007(In millions)Rental receivable

$
1,505


$
1,561Nonrecourse debt


(977
)


(1,030
)Estimated residual values of leased assets


290



297818



828Less unearned income


(283
)


(284
)Investment in leveraged leases


535



544Deferred income taxes


(413
)


(408
)Net investment in leveraged leases

$
122


$
136   No. 13-2 (FSP 13-2),
  Note 4.
    Loan
    Impairment   7




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    June 30,


December 29,2008


2007(In millions)Impaired nonaccrual finance receivables

$
149


$
59Impaired accrual finance receivables


60



143Total impaired finance receivables

$
209


$
202Impaired nonaccrual finance receivables with identified reserve
    requirements

$
95


$
40Allowance for losses on impaired nonaccrual finance receivables

$
44


$
15     June 30,


December 29,2008


2007(In millions)Impaired nonaccrual finance receivables

$
149


$
59Nonaccrual homogeneous finance receivables


27



20Total nonaccrual finance receivables


176



79Repossessed assets and properties


40



44Total nonperforming assets

$
216


$
123        8




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 5.
    Other
    Assets  June 30,


December 29,2008


2007(In millions)Retained interests in securitizations

$
275


$
203Investments in other marketable securities


118



20Repossessed assets and properties


40



44Other long-term investments


34



32Fixed assets  net


34



33Other


71



49Total other assets

$
572


$
381          9




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 6.
    Debt and
    Credit Facilities  June 30,


December 29,2008


2007(In millions)Short-term debt:Commercial paper

$
1,340


$
1,447Other short-term debt


69



14Total short-term debt


1,409



1,461Long-term debt:Fixed-rate notesDue 2008 (weighted-average rates of 4.71% and 4.15%,
    respectively)


54



654Due 2009 (weighted-average rates of 5.59% and 5.60%,
    respectively)


714



726Due 2010 (weighted-average rates of 4.82% and 4.83%,
    respectively)


1,017



1,007Due 2011 (weighted-average rates of 5.04% and 5.05%,
    respectively)


453



442Due 2012 (weighted-average rates of 4.43% and 4.39%,
    respectively)


52



42Due 2013 and thereafter (weighted-average rates of 5.20% and
    5.19%, respectively)


655



177Total Fixed-rate notes


2,945



3,048Variable-rate notesDue 2008 (weighted-average rates of 2.95% and 5.23%,
    respectively)


395



605Due 2009 (weighted-average rates of 2.90% and 5.22%,
    respectively)


849



825Due 2010 (weighted-average rates of 2.96% and 5.18%,
    respectively)


954



906Due 2011 (weighted-average rates of 3.07% and 5.15%,
    respectively)


275



150Due 2013 and thereafter (weighted-average rate of 3.54)%


100



Total Variable-rate notes


2,573



2,486Secured debt:Due 2009 (3.43)%


300



Subordinated debt:Due 2017 and thereafter (6.00)%


300



300Unamortized discount


(3
)


(4
)Fair value adjustments


23



20Total long-term, secured and subordinated debt


6,138



5,850Total debt

$
7,547


$
7,311    10




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Amount NotReserved as SupportCommercial


Letters of Credit


for CommercialFacility


Paper


Issued under


Paper and Letters ofAmount


Outstanding


Facility


Credit(In millions)Textron Financial multi-year facility expiring in 2012

$
1,750


$
1,340


$
7


$
403Textron multi-year facility expiring in 2012


1,250



89



22



1,139Total

$
3,000


$
1,429


$
29


$
1,542     June 30,


June 30,2008


2007Commercial paper:USD


2.90
%


5.41
%CAD


3.25
%


4.39
%Other short-term debt


3.16
%


4.51
%         and/or
 11




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
            Note 7.
    Accumulated
    Other Comprehensive Income and Comprehensive Income    Six Months EndedJune 30,


June 30,2008


2007(In millions)Beginning of year

$
26


$
7Foreign currency translation


(11
)


9Amortization of deferred losses on hedge contracts, net of
    income taxes of $2 million in 2007






3Net deferred loss on hedge contracts, net of income tax benefit
    of $1 million in 2007






(2
)End of period

$
15


$
17     Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Net income

$
4


$
41


$
35


$
76Other comprehensive income (loss)


3



10



(11
)


10Comprehensive income

$
7


$
51


$
24


$
86  12




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 8.
    Fair
    Value of Financial Instruments  No. 157-2,
  No. 157-2
    Assets
    Recorded at Fair Value on a Recurring Basis
    June 30, 2008Quoted Prices in





SignificantActive Markets for


Significant Other


UnobservableIdentical Assets


Observable Inputs


InputsAssets

Total


(Level 1)


(Level 2)


(Level 3)(In millions)Interest-only strips

$
53


$



$



$
53Derivative financial instruments, net


22







22



Total assets

$
75


$



$
22


$
53  13




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Valuation
    Techniques
      Changes
    in Fair Value for Unobservable Input
    Three Months


Six MonthsEnded


EndedJune 30,


June 30,2008


2008(In millions)Interest-only StripsBalance, beginning of period

$
52


$
43Net gains for the period:Increase due to securitization gains on sale of finance
    receivables


21



42Change in value recognized in Other income






1Change in value recognized in Other comprehensive income


(2
)


Collections


(18
)


(33
)Balance, end of period

$
53


$
53  14




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 9.
    Income
    Taxes    Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


35.0
%Increase (decrease) in taxes resulting from:State income taxes


43.8



2.5



11.7



2.1Foreign tax rate differential


15.2



(0.9
)


(6.1
)


(1.3
)Canadian dollar functional currency


0.2







0.1



(1.7
)Change in state valuation allowance


(83.8
)


1.3



(20.1
)


0.7Tax contingencies


73.8



3.4



21.4



3.8Tax credits


(6.8
)


(1.0
)


(3.0
)


(1.2
)Other, net


(9.1
)


(0.1
)


(2.4
)


(0.1
)Effective income tax rate


68.3
%


40.2
%


36.6
%


37.3
%           Note 10.
    Contingencies   15




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
      Note 11.
    Financial
    Information about Operating Segments    Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues:Distribution Finance

$
60


$
76


$
125


$
159Aviation Finance


46



44



96



84Golf Finance


32



37



66



71Resort Finance


31



33



66



65Asset-Based Lending


17



23



37



46Structured Capital


(9
)


24







21Corporate and Other






2



1



3Total revenues

$
177


$
239


$
391


$
449Income before income taxes:(1)(2)Distribution Finance

$
(3
)

$
27


$
9


$
55Aviation Finance


17



11



34



22Golf Finance


(7
)


11



2



19Resort Finance


15



10



30



23Asset-Based Lending


4



4



(8
)


12Structured Capital


(11
)


19



(6
)


11Corporate and Other


(2
)


(14
)


(6
)


(22
)Income before income taxes

$
13


$
68


$
55


$
120   16




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  June 30,


December 29,2008


2007(In millions)Finance assets:(3)Aviation Finance

$
2,317


$
2,279Distribution Finance


1,832



1,936Golf Finance


1,829



1,680Resort Finance


1,644



1,521Asset-Based Lending


982



1,004Structured Capital


621



631Corporate and Other


100



109Total finance assets

$
9,325


$
9,160     (1)
    
    Interest expense is allocated to each segment in proportion to
    its net investment in finance assets. Net investment in finance
    assets includes finance assets less deferred income taxes,
    security deposits and other specifically identified liabilities.
    The interest allocated matches all variable-rate finance assets
    with variable-rate debt costs and all fixed-rate finance assets
    with fixed-rate debt costs and includes only debt issued during
    historical periods with credit spreads consistent with those in
    existence during the periods in which the current receivable
    portfolio was originated. If this allocation results in greater
    or less interest expense than was actually incurred by the
    Company, the remaining balance is included in the Corporate and
    Other segments interest expense.(2)
    
    Indirect expenses are allocated to each segment based on the use
    of such resources. Most allocations are based on the
    segments proportion of net investment in finance assets,
    headcount, number of transactions, computer resources and senior
    management time.(3)
    
    Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    investment in equipment residuals; Acquisition, Development and
    Construction arrangements; and other short- and long-term
    investments (some of which are classified in Other assets on
    Textron Financials Consolidated Balance Sheets). 17




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  TEXTRON
    FINANCIAL CORPORATION
  Key
    Business Initiatives and Trends
          Financial
    Condition
  Liquidity
    and Capital Resources
     18




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Amount NotReserved as SupportCommercial


Letters of Credit


for CommercialFacility


Paper


Issued under


Paper and Letters ofAmount


Outstanding


Facility


Credit(In millions)Textron Financial multi-year facility expiring in 2012

$
1,750


$
1,340


$
7


$
403Textron multi-year facility expiring in 2012


1,250



89



22



1,139Total

$
3,000


$
1,429


$
29


$
1,542                19




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Off-Balance
    Sheet Arrangements
          Six Months EndedJune 30,


June 30,2008


2007(In millions)Distribution finance receivables

$
30


$
30Aviation finance loans


8



Other finance receivables


2



Total net pre-tax gains

$
40


$
30       Managed
    Finance Receivables
    June 30,


December 29,2008


2007(Dollars in millions)Distribution Finance

$
3,827



33
%

$
3,812



34
%Aviation Finance


2,638



23
%


2,448



22
%Golf Finance


1,816



16
%


1,663



15
%Resort Finance


1,535



13
%


1,506



14
%Asset-Based Lending


982



9
%


1,004



9
%Structured Capital


592



5
%


608



5
%Corporate and Other


74



1
%


82



1
%Total managed finance receivables

$
11,464



100
%

$
11,123



100
%  20




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Nonperforming
    Assets
      June 30,


December 29,2008


2007(Dollars in millions)Golf Finance

$
55



3.03
%

$
21



1.24
%Distribution Finance


53



2.88
%


23



1.20
%Asset-Based Lending


52



5.30
%


23



2.31
%Aviation Finance


19



0.81
%


20



0.89
%Resort Finance


9



0.54
%


9



0.57
%Corporate and Other


28



27.72
%


27



24.73
%Total nonperforming assets

$
216



2.31
%

$
123



1.34
%     Interest
    Rate Sensitivity
     21




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Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Financial
    Risk Management
     22




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  RESULTS
    OF OPERATIONS
  For
    the three and six months ended June 30, 2008 vs.
    June 30, 2007
  Revenues
    and Net Interest Margin
    Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(Dollars in millions)Finance charges

$
127


$
173


$
282


$
339Securitization gains


20



15



40



30Rental revenues on operating leases


8



8



17



16Other income


22



43



52



64Total revenues


177



239



391



449Interest expense


71



102



157



202Depreciation of equipment on operating leases


4



4



9



8Net interest margin

$
102


$
133


$
225


$
239Portfolio yield


6.31
%


8.67
%


6.92
%


8.49
%Net interest margin as a percentage of average net investment


4.91
%


6.47
%


5.35
%


5.81
%       Selling
    and Administrative Expenses
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(Dollars in millions)Selling and administrative expenses

$
49


$
54


$
103


$
103Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables


1.53
%


1.76
%


1.62
%


1.72
%Operating efficiency ratio


48.0
%


40.6
%


45.8
%


43.1
%  23




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Provision
    for Losses
    Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Allowance for losses on finance receivables beginning of period

$
105


$
94


$
89


$
93Provision for losses


40



11



67



16Less net charge-offs:Distribution Finance


14



3



23



6Asset-Based Lending


4



8



4



8Aviation Finance


1



1



3



1Golf Finance






2



1



2Resort Finance






(1
)


(1
)


(1
)Corporate and Other






6







7Total net charge-offs


19



19



30



23Allowance for losses on finance receivables end of period

$
126


$
86


$
126


$
86        24




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Income
    Taxes
    Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


35.0
%Increase (decrease) in taxes resulting from:State income taxes


43.8



2.5



11.7



2.1Foreign tax rate differential


15.2



(0.9
)


(6.1
)


(1.3
)Canadian dollar functional currency


0.2







0.1



(1.7
)Change in state valuation allowance


(83.8
)


1.3



(20.1
)


0.7Tax contingencies


73.8



3.4



21.4



3.8Tax credits


(6.8
)


(1.0
)


(3.0
)


(1.2
)Other, net


(9.1
)


(0.1
)


(2.4
)


(0.1
)Effective income tax rate


68.3
%


40.2
%


36.6
%


37.3
%          25




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Operating
    Results by Segment
    Distribution
    Finance
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
60


$
76


$
125


$
159Net interest margin

$
45


$
53


$
92


$
109Selling and administrative expenses


26



23



51



46Provision for losses


22



3



32



8Segment (loss) income

$
(3
)

$
27


$
9


$
55       Aviation
    Finance
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
46


$
44


$
96


$
84Net interest margin

$
25


$
18


$
50


$
35Selling and administrative expenses


6



5



13



10Provision for losses


2



2



3



3Segment income

$
17


$
11


$
34


$
22      26




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Golf
    Finance
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
32


$
37


$
66


$
71Net interest margin

$
14


$
17


$
29


$
32Selling and administrative expenses


5



5



11



10Provision for losses


16



1



16



3Segment (loss) income

$
(7
)

$
11


$
2


$
19     Resort
    Finance
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
31


$
33


$
66


$
65Net interest margin

$
20


$
16


$
40


$
32Selling and administrative expenses


5



6



11



12Provision for losses










(1
)


(3
)Segment income

$
15


$
10


$
30


$
23       Asset-Based
    Lending
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
17


$
23


$
37


$
46Net interest margin

$
10


$
12


$
21


$
24Selling and administrative expenses


6



7



12



12Provision for losses






1



17



Segment income (loss)

$
4


$
4


$
(8
)

$
12  27




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)      Structured
    Capital
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$
(9
)

$
24


$



$
21Net interest margin

$
(11
)

$
20


$
(5
)

$
13Selling and administrative expenses






1



1



2Segment (loss) income

$
(11
)

$
19


$
(6
)

$
11       Corporate
    and Other Segment
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007(In millions)Revenues

$



$
2


$
1


$
3Net interest margin

$
(1
)

$
(3
)

$
(2
)

$
(6
)Selling and administrative expenses


1



7



4



11Provision for losses






4







5Segment loss

$
(2
)

$
(14
)

$
(6
)

$
(22
)    28




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Selected
    Financial Ratios
  Three Months Ended


Six Months EndedJune 30,


June 30,


June 30,


June 30,2008


2007


2008


2007Net interest margin as a percentage of average net investment(1)


4.91
%


6.47
%


5.35
%


5.81
%Return on average equity


1.60
%


15.73
%


6.46
%


14.09
%Return on average assets


0.17
%


1.79
%


0.72
%


1.67
%Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables(2)


1.53
%


1.76
%


1.62
%


1.72
%Operating efficiency ratio(3)


48.0
%


40.6
%


45.8
%


43.1
%Net charge-offs as a percentage of average finance receivables


0.89
%


0.91
%


0.68
%


0.52
%   June 30,


December 29,2008


200760+ days contractual delinquency as a percentage of finance
    receivables(4)


0.61
%


0.43
%Nonperforming assets as a percentage of finance assets(5)


2.31
%


1.34
%Allowance for losses on finance receivables as a percentage of
    finance receivables


1.46
%


1.03
%Allowance for losses on finance receivables as a percentage of
    nonaccrual finance receivables


71.8
%


111.7
%Total debt to tangible shareholders equity(6)


9.04
x


7.76
x     (1)
    
    Represents revenues earned less interest expense on borrowings
    and operating lease depreciation as a percentage of average net
    investment. Average net investment includes finance receivables
    plus operating leases, less deferred taxes on leveraged leases.(2)
    
    Average managed and serviced finance receivables include owned
    receivables, receivables serviced under securitizations,
    participations and third-party portfolio servicing agreements.(3)
    
    Operating efficiency ratio is selling and administrative
    expenses divided by net interest margin.(4)
    
    Delinquency excludes any captive finance receivables with
    recourse to Textron. Captive finance receivables represent
    third-party finance receivables originated in connection with
    the sale or lease of Textron manufactured products. Percentages
    are expressed as a function of total Textron Financial
    independent and nonrecourse captive receivables.(5)
    
    Finance assets include: finance receivables; equipment on
    operating leases, net of accumulated depreciation; repossessed
    assets and properties; retained interests in securitizations;
    interest-only securities; investment in equipment residuals;
    Acquisition, Development and Construction arrangements; and
    short- and long-term investments (some of which are classified
    in Other assets on Textron Financials Consolidated Balance
    Sheets). Nonperforming assets include independent and
    nonrecourse captive finance assets.(6)
    
    Tangible shareholders equity equals Shareholders
    equity, excluding Accumulated other comprehensive income (loss),
    less Goodwill. 29




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Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)   Forward-looking
    Information
  Certain statements in this Quarterly Report on
    Form 10-Q
    and other oral and written statements made by Textron Financial
    from time to time are forward-looking statements, including
    those that discuss strategies, goals, outlook or other
    non-historical matters; or project revenues, income, returns or
    other financial measures. These forward-looking statements speak
    only as of the date on which they are made, and we undertake no
    obligation to update or revise any forward-looking statements.
    These forward-looking statements are subject to risks and
    uncertainties that may cause actual results to differ materially
    from those contained in the statements, such as the Risk Factors
    contained in our 2007 Annual Report on
    Form 10-K
    and including the following: (a) changes in worldwide
    economic and political conditions that impact interest and
    foreign exchange rates; (b) the occurrence of slowdowns or
    downturns in customer markets in which Textron products are sold
    or supplied and financed or where we offer financing;
    (c) the ability to realize full value of 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
    post-retirement employee costs; (f) the impact of changes
    in tax legislation; (g) the ability to maintain portfolio
    credit quality; (h) access to financing, including
    securitizations, at competitive rates; (i) access to equity
    in the form of retained earnings and capital contributions from
    Textron; (j) uncertainty in estimating contingent
    liabilities and establishing reserves tailored to address such
    contingencies; (k) the launching of significant new
    products or programs which could result in unanticipated
    expenses; and (l) risks and uncertainties related to
    acquisitions and dispositions.
  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
  Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   30




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##### Table of Contents



PART II.
    OTHER INFORMATION



TEXTRON
    FINANCIAL CORPORATION Item 6.
    Exhibits  4
.1

Series 2008-CP-2
    Supplement, dated as of May 13, 2008, to the Amended and
    Restated Indenture, dated as of May 26, 2005, by and among
    Textron Financial Floorplan Master Note Trust, The Bank of New
    York, as indenture trustee, and Textron Financial, as servicer.
    Incorporated by reference to Exhibit 4.1 to Textron
    Financial Corporations Current Report on
    Form 8-K
    filed May 15, 2008.4
.2

Amendment No. 1, dated as of May 13, 2008, to
    Series 2008-CP-1
    Supplement, dated as of March 20, 2008, to the Amended and
    Restated Indenture, dated as of May 26, 2005, by and among
    Textron Financial Floorplan Master Note Trust, The Bank of New
    York, as indenture trustee, and Textron Financial, as servicer.
    Incorporated by reference to Exhibit 4.1 to Textron
    Financial Corporations Current Report on
    Form 8-K
    filed May 15, 2008.12


Computation of Ratio of Earnings to Fixed Charges31
.1

Certification of Chief Executive Officer Pursuant to
    Rule 13a-14(a)31
.2

Certification of Chief Financial Officer Pursuant to
    Rule 13a-14(a)32
.1

Certification of Chief Executive Officer Pursuant to
    18 U.S.C. Section 135032
.2

Certification of Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350  31




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##### Table of Contents



SIGNATURES
      /s/  Thomas
    J. Cullen       32