##### 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
    September 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(State or other jurisdiction
    of
    incorporation or organization)

05-6008768(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
  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
    REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
    INSTRUCTION H (1) (a) AND (b) OF
    FORM 10-Q
    AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
    DISCLOSURE FORMAT




---



##### 





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


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


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


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


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


5Notes to the Consolidated Financial Statements
    (unaudited)


6Item 1A.


RISK FACTORS


19Item 2.


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


21Item 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


36Item 4.


CONTROLS AND PROCEDURES


36PART II. OTHER INFORMATIONItem 6.


EXHIBITS


37EX-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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Finance charges

$
139


$
166


$
421


$
505Securitization gains


11



14



51



44Rental revenues on operating leases


9



9



26



25Other income


25



25



77



89Total revenues


184



214



575



663Interest expense


70



96



227



298Depreciation of equipment on operating leases


5



5



14



13Net interest margin


109



113



334



352Selling and administrative expenses


57



53



160



156Provision for losses


34



6



101



22Income before income taxes


18



54



73



174Income taxes


4



22



24



66Net income

$
14


$
32


$
49


$
108    2




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##### Table of Contents



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


December 29,2008


2007(In millions)AssetsCash and equivalents

$
136


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


2,222



2,254Installment contracts


2,129



2,052Distribution finance receivables


1,695



1,900Golf course and resort mortgages


1,453



1,240Finance leases


598



613Leveraged leases


477



544Total finance receivables


8,574



8,603Allowance for losses on finance receivables


(137
)


(89
)Finance receivables  net


8,437



8,514Equipment on operating leases  net


257



259Goodwill


169



169Other assets


663



381Total assets

$
9,662


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

$
530


$
437Amounts due to Textron Inc.


28



25Deferred income taxes


445



472Debt


7,645



7,311Total liabilities


8,648



8,245Shareholders equityCapital surplus


592



592Investment in parent company preferred stock


(25
)


(25
)Accumulated other comprehensive (loss) income


(5
)


26Retained earnings


452



545Total shareholders equity


1,014



1,138Total liabilities and shareholders equity

$
9,662


$
9,383    3




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS
    NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
    (Unaudited)
  2008


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

$
49


$
108Adjustments to reconcile net income to net cash provided by
    operating activities:(Decrease) increase in accrued interest and other liabilities


(6
)


43Provision for losses


101



22Depreciation


22



21Amortization


9



9Deferred income tax provision


(27
)


16Non-cash gains in excess of collections on securitizations and
    syndications


(5
)


(2
)Other  net


11



22Net cash provided by operating activities


154



239Cash flows from investing activities:Finance receivables originated or purchased


(9,489
)


(9,690
)Finance receivables repaid


8,602



9,070Proceeds from receivable sales, including securitizations


746



830Proceeds from disposition of operating leases and other assets


27



42Purchase of assets for operating leases


(21
)


(31
)Other capital expenditures


(8
)


(7
)Purchase of Other marketable securities, net of maturities


(83
)


Other investments


1



7Net cash (used) provided by investing activities of continuing
    operations


(225
)


221Cash flows from financing activities:Proceeds from issuance of long-term debt


1,161



1,429Principal payments on long-term debt


(1,139
)


(1,065
)Net increase (decrease) in commercial paper


5



(647
)Net increase (decrease) in other short-term debt


25



(8
)Proceeds from issuance of secured debt


300



Principal payments on nonrecourse debt


(62
)


(43
)Capital contributions from Textron Inc.


7



7Dividends paid to Textron Inc.


(149
)


(142
)Net cash provided (used) by financing activities


148



(469
)Effect of exchange rate changes on cash


(1
)


3Net increase (decrease) in cash and equivalents


76



(6
)Cash and equivalents at beginning of year


60



47Cash and equivalents at end of period

$
136


$
41    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 (Loss)


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














49



49Other comprehensive loss:Foreign currency translation










(33
)






(33
)Change in unrealized net losses on interest-only securities, net
    of income tax benefits










(1
)






(1
)Change in unrealized net gains on hedge contracts, net of income
    taxes










3







3Other comprehensive loss










(31
)






(31
)Comprehensive income


















18Capital contributions from Textron Inc.


7















7Dividends to Textron Inc.


(7
)










(142
)


(149
)Balance September 30, 2008

$
592


$
(25
)

$
(5
)

$
452


$
1,014    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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Servicing income

$
11


$
10


$
32


$
27Investment income


8



3



18



10Prepayment income


1



4



3



7Late charges


1



1



3



2Syndication income






2



2



4Other


4



5



19



39Total other income

$
25


$
25


$
77


$
89       Note 3.
    Managed
    and Serviced Finance Receivables    September 30,


December 29,2008


2007(In millions)Total managed and serviced finance receivables

$
12,824


$
12,478Nonrecourse participations


(823
)


(760
)Third-party portfolio servicing


(558
)


(595
)Total managed finance receivables


11,443



11,123Securitized receivables


(2,869
)


(2,520
)Owned finance receivables

$
8,574


$
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)
          September 30,


December 29,2008


2007(In millions)Rental receivable

$
1,487


$
1,561Nonrecourse debt


(964
)


(1,030
)Estimated residual values of leased assets


229



297752



828Less unearned income


(275
)


(284
)Investment in leveraged leases


477



544Deferred income taxes


(410
)


(408
)Net investment in leveraged leases

$
67


$
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)
    September 30,


December 29,2008


2007(In millions)Impaired nonaccrual finance receivables

$
158


$
59Impaired accrual finance receivables


69



143Total impaired finance receivables

$
227


$
202Impaired nonaccrual finance receivables with identified reserve
    requirements

$
139


$
40Allowance for losses on impaired nonaccrual finance receivables

$
48


$
15     September 30,


December 29,2008


2007(In millions)Impaired nonaccrual finance receivables

$
158


$
59Nonaccrual homogeneous finance receivables


31



20Total nonaccrual finance receivables


189



79Repossessed assets and properties


61



44Total nonperforming assets

$
250


$
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  September 30,


December 29,2008


2007(In millions)Retained interests in securitizations

$
279


$
203Investments in other marketable securities


104



20Other long-term investments


99



32Repossessed assets and properties


61



44Fixed assets  net


33



33Other


87



49Total other assets

$
663


$
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  September 30,


December 29,2008


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

$
1,445


$
1,447Other short-term debt


36



14Total short-term debt


1,481



1,461Long-term debt:Fixed-rate notesDue 2008 (weighted-average rates of 4.73% and 4.15%,
    respectively)


48



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


710



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


1,018



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


452



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


52



42Due 2013 and thereafter (weighted-average rates of 5.16% and
    5.19%, respectively)


630



177Total Fixed-rate notes


2,910



3,048Variable-rate notesDue 2008 (weighted-average rates of 2.89% and 5.23%,
    respectively)


120



605Due 2009 (weighted-average rates of 3.24% and 5.22%,
    respectively)


846



825Due 2010 (weighted-average rates of 3.14% and 5.18%,
    respectively)


1,287



906Due 2011 (weighted-average rates of 3.19% and 5.15%,
    respectively)


275



150Due 2013 and thereafter (weighted-average rate of 3.71)%


100



Total Variable-rate notes


2,628



2,486Secured debt:Due 2009 (3.76%)


300



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


300



300Unamortized discount


(3
)


(4
)Fair value adjustments


29



20Total long-term, secured and subordinated debt


6,164



5,850Total debt

$
7,645


$
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


$
1,445


$
10


$
295Textron multi-year facility expiring in 2012


1,250



557



21



672Total

$
3,000


$
2,002


$
31


$
967     September 30,


September 30,2008


2007Commercial paper:USD


3.91
%


5.43
%CAD


3.56
%


4.77
%Other short-term debt


3.28
%


5.06
%       Fixed-to-Floating
  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 (Loss) Income and Comprehensive (Loss)
    Income    Nine Months EndedSeptember 30,


September 30,2008


2007(In millions)Beginning of year

$
26


$
7Foreign currency translation


(33
)


18Net deferred loss on interest-only securities, net of income tax
    benefit of $0.3 million


(1
)


Amortization of deferred losses on hedge contracts, net of
    income taxes of $0.4 million and $2.4 million,
    respectively


1



4Net deferred gain (loss) on hedge contracts, net of income taxes
    of $1.2 million and income tax benefit of
    $1.5 million, respectively


2



(3
)End of period

$
(5
)

$
26  12




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Net income

$
14


$
32


$
49


$
108Other comprehensive (loss) income


(20
)


9



(31
)


19Comprehensive (loss) income

$
(6
)

$
41


$
18


$
127   Note 8.
    Fair
    Value of Financial Instruments  No. 157-2,
  No. 157-2
   13




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Assets
    Recorded at Fair Value on a Recurring Basis
    September 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

$
48


$



$



$
48Derivative financial instruments, net


27







27



Total assets

$
75


$



$
27


$
48   Valuation
    Techniques
     14




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##### Table of Contents



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


Nine MonthsEnded


EndedSeptember 30,


September 30,2008


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

$
53


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


17



59Change in value recognized in Other income


1



2Impairment charges


(5
)


(5
)Collections


(18
)


(51
)Balance, end of period

$
48


$
48   Note 9.
    Income
    Taxes    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


35.0
%(Decrease) increase in taxes resulting from:State income taxes


(1.6
)


0.9



8.0



1.8Foreign tax rate differential


(6.6
)


(1.4
)


(6.3
)


(1.3
)Canadian dollar functional currency


0.1



0.3



0.1



(1.1
)Change in state valuation allowance






0.9



(15.3
)


0.8Tax contingencies  leveraged leases


(4.2
)


4.1



15.3



3.8Tax credits


(7.1
)


(0.6
)


(4.0
)


(1.0
)Other, net


3.6







(0.4
)


(0.1
)Effective income tax rate


19.2
%


39.2
%


32.4
%


37.9
%    15




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
      Note 10.
    Contingencies     16




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues:Distribution Finance

$
49


$
66


$
174


$
225Aviation Finance


44



45



140



129Resort Finance


32



37



98



102Golf Finance


31



34



97



105Asset-Based Lending


18



25



55



71Structured Capital


7



6



7



27Corporate and Other


3



1



4



4Total revenues

$
184


$
214


$
575


$
663Income before income taxes:(1)(2)Distribution Finance

$
(13
)

$
19


$
(4
)

$
74Aviation Finance


14



12



48



34Resort Finance


11



12



41



35Golf Finance






10



2



29Asset-Based Lending


1



5



(7
)


17Structured Capital


4



2



(2
)


13Corporate and Other


1



(6
)


(5
)


(28
)Income before income taxes

$
18


$
54


$
73


$
174   September 30,


December 29,2008


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

$
2,432


$
2,279Golf Finance


1,832



1,680Distribution Finance


1,727



1,936Resort Finance


1,714



1,521Asset-Based Lending


952



1,004Structured Capital


624



631Corporate and Other


94



109Total finance assets

$
9,375


$
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 17




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  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;
    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).  Note 12.
    Subsequent
    Events       18




---



##### Table of Contents



Item 1A.
    Risk
    Factors  Form 10-K
  Current
    levels of market volatility are unprecedented, which may
    continue to increase our cost of funds or disrupt our access to
    the capital markets.
    Measures
    we are taking to reduce our capital requirements may not
    work.
    Difficult
    conditions in the financial markets have adversely affected our
    business and results of our operations, and we do not expect
    these conditions to improve in the near future.
   19




---



##### Table of Contents



Item 1A.
    Risk
    Factors (Continued)  The
    soundness of our customers and business partners could affect
    our business and results of operations.
    The
    soundness of financial institutions could adversely affect
    us.
    Any
    reduction in our credit rating could increase the cost of our
    funding from the capital markets.
   20




---



##### 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
             21




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  other-than-temporary
  Recent
    Developments
        Financial
    Condition
  Liquidity
    and Capital Resources
   22




---



##### 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


$
1,445


$
10


$
295Textron multi-year facility expiring in 2012


1,250



557



21



672Total

$
3,000


$
2,002


$
31


$
967       Fitch Ratings

Moodys

Standard & PoorsLong-term ratings

A−

A3

A−Short-term ratings

F2

P2

A2Outlook

Negative

Negative

Watch (Negative)    23




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)          Payments/Receipts Due by PeriodLess Than


1-2


2-3


3-4


4-5


More Than1 Year


Years


Years


Years


Years


5 years


Total(In millions)Payments due:Multi-year credit facilities and commercial paper

$



$



$



$
1,445


$



$



$
1,445Other short-term debt


36























36Term debt


1,239



2,567



1,229



53



578



472



6,138Off-balance sheet debt


2,113



77



77



111



79



211



2,668Total payments due


3,388



2,644



1,306



1,609



657



683



10,287Cash and contractual receipts:Finance receivable receipts


2,570



1,571



1,118



830



695



1,790



8,574Off-balance sheet finance receivable receipts


2,294



77



77



111



79



231



2,869Total contractual receipts


4,864



1,648



1,195



941



774



2,021



11,443Cash


136























136Total cash and contractual receipts


5,000



1,648



1,195



941



774



2,021



11,579Net cash and contractual receipts (payments)

$
1,612


$
(996
)

$
(111
)

$
(668
)

$
117


$
1,338


$
1,292Cumulative net cash and contractual receipts (payments)

$
1,612


$
616


$
505


$
(163
)

$
(46
)

$
1,292    24




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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
       25




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)    Nine Months EndedSeptember 30,


September 30,2008


2007(In millions)Distribution finance receivables

$
40


$
43Aviation finance loans


9



1Other finance receivables


2



Total net pre-tax gains

$
51


$
44       Managed
    Finance Receivables
    September 30,


December 29,2008


2007(Dollars in millions)Distribution Finance

$
3,720



32
%

$
3,812



34
%Aviation Finance


2,747



24
%


2,448



22
%Golf Finance


1,813



16
%


1,663



15
%Resort Finance


1,613



14
%


1,506



14
%Asset-Based Lending


952



8
%


1,004



9
%Structured Capital


528



5
%


608



5
%Corporate and Other


70



1
%


82



1
%Total managed finance receivables

$
11,443



100
%

$
11,123



100
%   Nonperforming
    Assets
   26




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##### Table of Contents



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


December 29,2008


2007(Dollars in millions)Distribution Finance

$
74



4.29
%

$
23



1.20
%Golf Finance


58



3.14
%


21



1.24
%Asset-Based Lending


52



5.48
%


23



2.31
%Aviation Finance


21



0.89
%


20



0.89
%Resort Finance


15



0.87
%


9



0.57
%Corporate and Other


30



31.97
%


27



24.73
%Total nonperforming assets

$
250



2.67
%

$
123



1.34
%     Interest
    Rate Sensitivity
       27




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(Dollars in millions)Finance charges

$
139


$
166


$
421


$
505Securitization gains


11



14



51



44Rental revenues on operating leases


9



9



26



25Other income


25



25



77



89Total revenues


184



214



575



663Interest expense


70



96



227



298Depreciation of equipment on operating leases


5



5



14



13Net interest margin

$
109


$
113


$
334


$
352Portfolio yield


6.89
%


8.72
%


6.91
%


8.56
%Net interest margin as a percentage of average net investment


5.23
%


5.76
%


5.31
%


5.79
%  28




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  Revenues
      Net
    Interest Margin
      Selling
    and Administrative Expenses
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(Dollars in millions)Selling and administrative expenses

$
57


$
53


$
160


$
156Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables


1.80
%


1.80
%


1.68
%


1.75
%    29




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


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

$
126


$
86


$
89


$
93Provision for losses


34



6



101



22Less net charge-offs:Distribution Finance


20



3



43



9Asset-Based Lending


1



(1
)


5



7Golf Finance


1







2



2Aviation Finance










3



1Resort Finance






(1
)


(1
)


(2
)Corporate and Other


1







1



7Total net charge-offs


23



1



53



24Allowance for losses on finance receivables end of period

$
137


$
91


$
137


$
91        30




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


35.0
%(Decrease) increase in taxes resulting from:State income taxes


(1.6
)


0.9



8.0



1.8Foreign tax rate differential


(6.6
)


(1.4
)


(6.3
)


(1.3
)Canadian dollar functional currency


0.1



0.3



0.1



(1.1
)Change in state valuation allowance






0.9



(15.3
)


0.8Tax contingencies  leveraged leases


(4.2
)


4.1



15.3



3.8Tax credits


(7.1
)


(0.6
)


(4.0
)


(1.0
)Other, net


3.6







(0.4
)


(0.1
)Effective income tax rate


19.2
%


39.2
%


32.4
%


37.9
%       Operating
    Results by Segment
    Distribution
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
49


$
66


$
174


$
225Net interest margin

$
38


$
49


$
130


$
158Selling and administrative expenses


27



25



78



71Provision for losses


24



5



56



13Segment (loss) income

$
(13
)

$
19


$
(4
)

$
74  31




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##### Table of Contents



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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
44


$
45


$
140


$
129Net interest margin

$
22


$
18


$
72


$
53Selling and administrative expenses


7



5



20



15Provision for losses


1



1



4



4Segment income

$
14


$
12


$
48


$
34     Resort
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
32


$
37


$
98


$
102Net interest margin

$
19


$
19


$
59


$
51Selling and administrative expenses


6



7



17



19Provision for losses


2







1



(3
)Segment income

$
11


$
12


$
41


$
35  32




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
31


$
34


$
97


$
105Net interest margin

$
12


$
15


$
41


$
47Selling and administrative expenses


7



5



18



15Provision for losses


5







21



3Segment income

$



$
10


$
2


$
29     Asset-Based
    Lending
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
18


$
25


$
55


$
71Net interest margin

$
11


$
12


$
32


$
36Selling and administrative expenses


8



6



20



18Provision for losses


2



1



19



1Segment income (loss)

$
1


$
5


$
(7
)

$
17    33




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
7


$
6


$
7


$
27Net interest margin

$
4


$
3


$
(1
)

$
16Selling and administrative expenses






1



1



3Segment income (loss)

$
4


$
2


$
(2
)

$
13       Corporate
    and Other Segment
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


2007(In millions)Revenues

$
3


$
1


$
4


$
4Net interest margin

$
3


$
(3
)

$
1


$
(9
)Selling and administrative expenses


2



4



6



15Provision for losses






(1
)






4Segment income (loss)

$
1


$
(6
)

$
(5
)

$
(28
)    34




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2008


2007


2008


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


5.23
%


5.76
%


5.31
%


5.79
%Return on average equity


5.51
%


12.06
%


6.16
%


13.39
%Return on average assets


0.59
%


1.48
%


0.68
%


1.61
%Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables(2)


1.80
%


1.80
%


1.68
%


1.75
%Operating efficiency ratio(3)


52.3
%


46.9
%


47.9
%


44.3
%Net charge-offs as a percentage of average finance receivables


1.05
%


0.11
%


0.81
%


0.38
%   September 30,


December 29,2008


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


1.06
%


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


2.67
%


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


1.60
%


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


72.7
%


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


9.00
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; 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. 35




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##### Table of Contents



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, including the Risk
    Factors contained herein and 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 and certain minimum levels of financial
    performance required under our committed credit facilities and
    under our support agreement with Textron; (h) access to
    financing, including securitizations, at competitive rates;
    (i) access to equity in the form of retained earnings and
    capital contributions from Textron; (j) uncertainty in
    estimating contingent liabilities and establishing reserves
    tailored 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
    downsize, including effecting an orderly liquidation of certain
    product lines; (n) bankruptcy or other financial problems
    at major customers that could cause disruptions or difficulty in
    collecting amounts owed by such customers, and
    (o) continued volatility and further deterioration of the
    capital markets.
  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
  Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   36




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##### Table of Contents



PART II.
    OTHER INFORMATION



TEXTRON
    FINANCIAL CORPORATION Item 6.
    Exhibits  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  37




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##### Table of Contents



SIGNATURES
      
       38