##### 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, 2007oro

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
    02940-6687
 401-621-4200
 (Address and telephone number of
    principal executive offices)
      þ o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
  All of the
    shares of common stock of the registrant are owned by Textron
    Inc.




---



##### 



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, 2007 and 2006
    (unaudited)


2Consolidated Balance Sheets at September 30,
    2007 and December 30, 2006 (unaudited)


3Consolidated Statements of Cash Flows for the
    nine months ended September 30, 2007 and 2006
    (unaudited)


4Consolidated Statements of Changes in
    Shareholders Equity through September 30, 2007
    (unaudited)


5Notes to the Consolidated Financial Statements
    (unaudited)


6Item 2.


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


17Item 3.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


31Item 4.


CONTROLS AND PROCEDURES


31PART II. OTHER INFORMATIONItem 6.


EXHIBITS


32EX-12 Computation of Ratio of Earnings to Fixed ChargesEX-31.1 Section 302 Certification of CEOEX-31.1 Section 302 Certification of CFOEX-31.1 Section 906 Certification of CEOEX-31.1 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 30,2007


2006


2007


2006(In millions)Finance charges

$
166


$
175


$
505


$
476Securitization gains


14



11



44



32Rental revenues on operating leases


9



8



25



24Other income


25



18



89



54Total revenues


214



212



663



586Interest expense


96



95



298



252Depreciation of equipment on operating leases


5



4



13



13Net interest margin


113



113



352



321Selling and administrative expenses


53



50



156



145Provision for losses


6



10



22



18Income before income taxes


54



53



174



158Income taxes


22



7



66



45Net income

$
32


$
46


$
108


$
113    2




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##### Table of Contents



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


December 30,2007


2006(In millions)AssetsCash and equivalents

$
41


$
47Finance receivables, net of unearned income:Revolving loans


2,222



1,948Installment contracts


1,961



1,674Distribution finance receivables


1,676



2,423Golf course and resort mortgages


1,154



1,060Finance leases


623



590Leveraged leases


539



615Total finance receivables


8,175



8,310Allowance for losses on finance receivables


(91
)


(93
)Finance receivables  net


8,084



8,217Equipment on operating leases  net


233



238Goodwill


169



169Other assets


342



329Total assets

$
8,869


$
9,000Liabilities and shareholders equityLiabilitiesAccrued interest and other liabilities

$
532


$
479Amounts due to Textron Inc.


20



20Deferred income taxes


495



497Debt


6,721



6,862Total liabilities


7,768



7,858Shareholders equityCapital surplus


592



592Investment in parent company preferred stock


(25
)


(25
)Accumulated other comprehensive income


26



7Retained earnings


508



568Total shareholders equity


1,101



1,142Total liabilities and shareholders equity

$
8,869


$
9,000    3




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)  TEXTRON
    FINANCIAL CORPORATION
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
    (Unaudited)
  2007


2006(In millions)Cash flows from operating activities:Net income

$
108


$
113Adjustments to reconcile net income to net cash provided by
    operating activities:Increase in accrued interest and other liabilities


43



79Provision for losses


22



18Depreciation


21



21Amortization


9



8Deferred income tax provision


16



18Non-cash gains in excess of collections on securitizations and
    syndications


(2
)


5Other  net


22



8Net cash provided by operating activities of continuing
    operations


239



270Net cash used by operating activities of discontinued operations






(4
)Net cash provided by operating activities


239



266Cash flows from investing activities:Finance receivables originated or purchased


(9,690
)


(9,298
)Finance receivables repaid


9,070



7,636Proceeds from receivable sales, including securitizations


830



185Proceeds from disposition of operating leases and other assets


42



62Purchase of assets for operating leases


(31
)


(53
)Other capital expenditures


(7
)


(8
)Other investments


7



13Net cash provided (used) by investing activities of continuing
    operations


221



(1,463
)Cash flows from financing activities:Proceeds from issuance of long-term debt


1,429



1,514Principal payments on long-term debt


(1,065
)


(756
)Net (decrease) increase in commercial paper


(647
)


444Net decrease in other short-term debt


(8
)


(11
)Proceeds from issuance of nonrecourse debt






142Principal payments on nonrecourse debt


(43
)


(34
)Capital contributions from Textron Inc.


7



25Dividends paid to Textron Inc.


(142
)


(87
)Net cash (used) provided by financing activities of continuing
    operations


(469
)


1,237Effect of exchange rate changes on cash


3



1Net cash (used) provided by continuing operations


(6
)


45Net cash used by discontinued operations






(4
)Net (decrease) increase in cash and equivalents


(6
)


41Cash and equivalents at beginning of year


47



10Cash and equivalents at end of period

$
41


$
51    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)
  Investment


Accumulatedin Parent


Other





TotalCompany


Comprehensive





Share-Capital


Preferred


Income


Retained


holdersSurplus


Stock


(Loss)


Earnings


Equity(In millions)Balance December 31, 2005

$
574


$
(25
)

$
5


$
496


$
1,050Comprehensive income:Net income














152



152Other comprehensive income:Foreign currency translation










1







1Change in unrealized net losses on hedge contracts, net of
    income taxes










5







5Change in unrealized net gains on interest-only securities, net
    of income taxes










(4
)






(4
)Other comprehensive income










2







2Comprehensive income


















154Capital contributions from Textron Inc.


27















27Dividends to Textron Inc.


(9
)










(80
)


(89
)Balance December 30, 2006


592



(25
)


7



568



1,142Comprehensive income:Net income














108



108Other comprehensive income:Foreign currency translation










18







18Change in unrealized net losses on hedge contracts, net of
    income taxes










1







1Change in unrealized net gains on interest-only securities, net
    of income taxes


















Other comprehensive income










19







19Comprehensive income


















127Cumulative effect of a change in accounting principle














(33
)


(33
)Capital contributions from Textron Inc.


7















7Dividends to Textron Inc.


(7
)










(135
)


(142
)Balance September 30, 2007

$
592


$
(25
)

$
26


$
508


$
1,101    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.
    Recent
    Accounting Pronouncements      Note 3.
    Other
    Income  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Servicing income

$
10


$
7


$
27


$
22Prepayment income


4







7



2Investment income


3



4



10



12Syndication income


2



2



4



2Late charges


1



1



2



3Other


5



4



39



13Total other income

$
25


$
18


$
89


$
54    6




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    Note 4.
    Managed
    and Serviced Finance Receivables    September 30,


December 30,2007


2006(In millions)Total managed and serviced finance receivables

$
11,934


$
11,536Nonrecourse participations


(707
)


(695
)Third-party portfolio servicing


(608
)


(581
)Small business administration sales agreements


(4
)


(19
)Total managed finance receivables


10,615



10,241Securitized receivables


(2,440
)


(1,931
)Owned finance receivables

$
8,175


$
8,310           September 30,


December 30,2007


2006(In millions)Rental receivable

$
1,614


$
1,838Nonrecourse debt


(1,082
)


(1,292
)Estimated residual values of leased assets


297



329829



875Less unearned income


(290
)


(260
)Investment in leveraged leases


539



615Deferred income taxes


(405
)


(410
)Net investment in leveraged leases

$
134


$
205   No. 13-2 (FSP 13-2). FSP 13-2
 7




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  FSP 13-2
  FSP 13-2
  Note 5.
    Loan
    Impairment    September 30,


December 30,2007


2006(In millions)Impaired nonaccrual finance receivables

$
56


$
60Impaired accrual finance receivables


13



101Total impaired finance receivables

$
69


$
161Impaired nonaccrual finance receivables with identified reserve
    requirements

$
41


$
36Allowance for losses on impaired nonaccrual finance receivables

$
17


$
17     September 30,


December 30,2007


2006(In millions)Impaired nonaccrual finance receivables

$
56


$
60Nonaccrual homogenous finance receivables


19



15Total nonaccrual finance receivables


75



75Repossessed assets and properties


44



38Total nonperforming assets

$
119


$
113    8




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
        Note 6.
    Other
    Assets  September 30,


December 30,2007


2006(In millions)Retained interests in securitizations

$
198


$
179Repossessed assets and properties


44



38Other long-term investments


33



40Fixed assets  net


32



34Investment in equipment residuals






3Other


35



35Total other assets

$
342


$
329          9




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 7.
    Debt and
    Credit Facilities  September 30,


December 30,2007


2006(In millions)Short-term debt:Commercial paper

$
1,114


$
1,719Other short-term debt


61



60Total short-term debt


1,175



1,779Long-term debt:Fixed-rate notesDue 2007 (weighted-average rates of 4.34% and 5.50%,
    respectively)


29



843Due 2008 (weighted-average rates of 4.12% and 4.12%,
    respectively)


628



611Due 2009 (weighted-average rates of 5.63% and 5.67%,
    respectively)


717



649Due 2010 (weighted-average rates of 4.58% and 4.58%,
    respectively)


557



557Due 2011 and thereafter (weighted-average rates of 5.05% and
    5.03%, respectively)


661



651Total Fixed-rate notes


2,592



3,311Variable-rate notesDue 2007 (weighted-average rates of 4.92% and 5.80%,
    respectively)


100



275Due 2008 (weighted-average rates of 5.54% and 5.45%,
    respectively)


630



355Due 2009 (weighted-average rates of 5.42% and 5.47%,
    respectively)


888



913Due 2010 (weighted-average rates of 5.31% and 5.49%,
    respectively)


905



276Due 2011 (weighted-average rate of 5.51)%


150



Total Variable-rate notes


2,673



1,819Subordinated debt:Due 2017 and thereafter (6.00)%


300



Unamortized discount


(4
)


(3
)Fair value adjustments


(15
)


(44
)Total long-term and subordinated debt


5,546



5,083Total debt

$
6,721


$
6,862    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


$
1,114


$
12


$
624Textron multi-year facility expiring in 2012


1,250







20



1,230Total

$
3,000


$
1,114


$
32


$
1,854     September 30,


September 30,2007


2006Commercial paper


5.27
%


5.29
%Other short-term debt


5.06
%


3.36
%       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 8.
    Accumulated
    Other Comprehensive Income and Comprehensive Income    Nine Months EndedSeptember 30,


September 30,2007


2006(In millions)Beginning of year

$
7


$
5Foreign currency translation


18



5Amortization of deferred losses on hedge contracts, net of
    income taxes of $3 million and $1 million, respectively


4



3Net deferred (loss) gain on hedge contracts, net of income tax
    benefit of $1 million and income taxes of $1 million,
    respectively


(3
)


2Net deferred loss on interest-only securities, net of income tax
    benefit of $1 million in 2006






(2
)End of period

$
26


$
13     Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Net income

$
32


$
46


$
108


$
113Other comprehensive income


9



2



19



8Comprehensive income

$
41


$
48


$
127


$
121  12




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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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


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


1.3



1.3



1.7



1.3Foreign tax rate differential


(1.1
)


(7.0
)


(0.9
)


(3.2
)Canadian dollar functional currency






(21.5
)


(1.2
)


(7.3
)Change in state valuation allowance


0.9



4.5



0.8



1.5Interest on tax contingencies  leveraged leases


3.2



2.3



2.9



2.3Tax credits


(0.6
)


(3.8
)


(1.0
)


(2.1
)Other, net


0.5



1.1



0.6



0.7Effective income tax rate


39.2
%


11.9
%


37.9
%


28.2
%         non-U.S. income
 13




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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     14




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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 30,2007


2006


2007


2006(In millions)Revenues:Distribution Finance

$
66


$
70


$
225


$
193Aviation Finance


45



36



129



96Resort Finance


37



28



102



88Golf Finance


34



35



105



97Asset-Based Lending


25



23



71



67Structured Capital


6



15



27



30Corporate and Other


1



5



4



15Total revenues

$
214


$
212


$
663


$
586Income before income taxes:(1)(2)Distribution Finance

$
19


$
23


$
74


$
71Aviation Finance


12



8



34



24Resort Finance


12



6



35



27Golf Finance


10



6



29



23Asset-Based Lending


5



2



17



8Structured Capital


2



10



13



15Corporate and Other


(6
)


(2
)


(28
)


(10
)Income before income taxes

$
54


$
53


$
174


$
158   September 30,


December 30,2007


2006(In millions)Finance assets:(3)Aviation Finance

$
2,097


$
1,776Distribution Finance


1,755



2,422Golf Finance


1,587



1,524Resort Finance


1,456



1,296Asset-Based Lending


1,020



864Structured Capital


651



756Corporate and Other


117



170Total finance assets

$
8,683


$
8,808  15




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##### Table of Contents



Item 1.
    Financial
    Statements (Continued)   TEXTRON
    FINANCIAL CORPORATION
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
    (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.Prior to 2007, we allocated 100% of the interest expense
    recognized to the Companys operating segments without
    adjustment. In addition, the allocation was determined, to the
    extent possible, based on matching variable-rate debt with
    variable-rate finance assets and fixed-rate debt with fixed-rate
    finance assets. Any excess floating-rate debt was allocated to
    fixed-rate finance assets. A change in the allocation
    methodology was made in 2007 to measure the results of each
    segment more consistently with the economic characteristics of
    its existing portfolio, which coincided with a change in how
    management internally evaluates segment operating performance.
    The 2006 results have not been restated under the new
    methodology. This change had a $3 million and
    $11 million positive effect on the collective results of
    the six core portfolio segments for the three and nine months
    ended September 30, 2007, respectively.(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). 16




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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
   17




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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


$
1,114


$
12


$
624Textron multi-year facility expiring in 2012


1,250







20



1,230Total

$
3,000


$
1,114


$
32


$
1,854                18




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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
      Managed
    Finance Receivables
    September 30,


December 30,2007


2006(Dollars in millions)Distribution Finance

$
3,629



34
%

$
3,753



37
%Aviation Finance


2,219



21
%


1,939



19
%Golf Finance


1,569



15
%


1,518



15
%Resort Finance


1,461



14
%


1,295



13
%Asset-Based Lending


1,020



9
%


864



8
%Structured Capital


627



6
%


730



7
%Corporate and Other


90



1
%


142



1
%Total managed finance receivables

$
10,615



100
%

$
10,241



100
%  19




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  No. 13-2 (FSP 13-2).
  Nonperforming
    Assets
      September 30,


December 30,2007


2006(Dollars in millions)Golf Finance

$
26



1.66
%

$
29



1.89
%Aviation Finance


26



1.23
%


12



0.70
%Distribution Finance


14



0.76
%


7



0.28
%Asset-Based Lending


12



1.20
%


16



1.81
%Resort Finance


11



0.76
%


16



1.22
%Corporate and Other


30



25.77
%


33



19.74
%Total nonperforming assets

$
119



1.37
%

$
113



1.28
%     Interest
    Rate Sensitivity
       20




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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
     21




---



##### 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 nine months ended September 30, 2007 vs.
    September 30, 2006
  Revenues
    and Net Interest Margin
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(Dollars in millions)Finance charges

$
166


$
175


$
505


$
476Securitization gains


14



11



44



32Rental revenues on operating leases


9



8



25



24Other income


25



18



89



54Total revenues


214



212



663



586Interest expense


96



95



298



252Depreciation of equipment on operating leases


5



4



13



13Net interest margin

$
113


$
113


$
352


$
321Portfolio yield


8.72
%


9.46
%


8.56
%


9.17
%Net interest margin as a percentage of average net investment


5.76
%


5.91
%


5.79
%


5.98
%   Revenues
    FSP 13-2
  Net
    Interest Margin
   22




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Continued)  FSP 13-2
  FSP 13-2
  Selling
    and Administrative Expenses
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(Dollars in millions)Selling and administrative expenses

$
53


$
50


$
156


$
145Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables


1.80
%


1.86
%


1.75
%


1.89
%Operating efficiency ratio


46.9
%


44.2
%


44.3
%


45.2
%    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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Allowance for losses on finance receivables beginning of period

$
86


$
92


$
93


$
96Provision for losses


6



10



22



18Less net charge-offs:Distribution Finance


3



3



9



4Asset-Based Lending


(1
)


4



7



6Golf Finance










2



1Aviation Finance










1



1Resort Finance


(1
)


1



(2
)


2Corporate and Other










7



6Total net charge-offs


1



8



24



20Allowance for losses on finance receivables end of period

$
91


$
94


$
91


$
94      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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006Federal statutory income tax rate


35.0
%


35.0
%


35.0
%


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


1.3



1.3



1.7



1.3Foreign tax rate differential


(1.1
)


(7.0
)


(0.9
)


(3.2
)Canadian dollar functional currency






(21.5
)


(1.2
)


(7.3
)Change in state valuation allowance


0.9



4.5



0.8



1.5Interest on tax contingencies  leveraged leases


3.2



2.3



2.9



2.3Tax credits


(0.6
)


(3.8
)


(1.0
)


(2.1
)Other, net


0.5



1.1



0.6



0.7Effective income tax rate


39.2
%


11.9
%


37.9
%


28.2
%     Operating
    Results by Segment
    Distribution
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
66


$
70


$
225


$
193Net interest margin

$
49


$
48


$
158


$
135Selling and administrative expenses


25



21



71



61Provision for losses


5



4



13



3Segment income

$
19


$
23


$
74


$
71    25




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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 30,2007


2006


2007


2006(In millions)Revenues

$
45


$
36


$
129


$
96Net interest margin

$
18


$
13


$
53


$
39Selling and administrative expenses


5



5



15



15Provision for losses


1







4



Segment income

$
12


$
8


$
34


$
24     Resort
    Finance
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
37


$
28


$
102


$
88Net interest margin

$
19


$
12


$
51


$
46Selling and administrative expenses


7



6



19



17Provision for losses










(3
)


2Segment income

$
12


$
6


$
35


$
27    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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
34


$
35


$
105


$
97Net interest margin

$
15


$
14


$
47


$
40Selling and administrative expenses


5



5



15



14Provision for losses






3



3



3Segment income

$
10


$
6


$
29


$
23     Asset-Based
    Lending
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
25


$
23


$
71


$
67Net interest margin

$
12


$
13


$
36


$
39Selling and administrative expenses


6



6



18



18Provision for losses


1



5



1



13Segment income

$
5


$
2


$
17


$
8    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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
6


$
15


$
27


$
30Net interest margin

$
3


$
11


$
16


$
18Selling and administrative expenses


1



1



3



3Segment income

$
2


$
10


$
13


$
15   FSP 13-2 FSP 13-2
  Corporate
    and Other Segment
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006(In millions)Revenues

$
1


$
5


$
4


$
15Net interest margin

$
(3
)

$
2


$
(9
)

$
4Selling and administrative expenses


4



6



15



17Provision for losses


(1
)


(2
)


4



(3
)Segment loss

$
(6
)

$
(2
)

$
(28
)

$
(10
)    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


Nine Months EndedSeptember 30,


September 30,


September 30,


September 30,2007


2006


2007


2006Net interest margin as a percentage of average net investment(1)


5.76
%


5.91
%


5.79
%


5.98
%Return on average equity


12.06
%


17.38
%


13.39
%


14.29
%Return on average assets


1.48
%


2.20
%


1.61
%


1.88
%Selling and administrative expenses as a percentage of average
    managed and serviced finance receivables(2)


1.80
%


1.86
%


1.75
%


1.89
%Operating efficiency ratio(3)


46.9
%


44.2
%


44.3
%


45.2
%Net charge-offs as a percentage of average finance receivables


0.11
%


0.42
%


0.38
%


0.37
%   September 30,


December 30,2007


200660+ days contractual delinquency as a percentage of finance
    receivables(4)


1.07
%


0.77
%Nonperforming assets as a percentage of finance assets(5)


1.37
%


1.28
%Allowance for losses on finance receivables as a percentage of
    finance receivables


1.11
%


1.11
%Allowance for losses on finance receivables as a percentage of
    nonaccrual finance receivables


120.6
%


123.1
%Total debt to tangible shareholders equity(6)


7.42
x


7.10x     (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.  Recent
    Accounting Pronouncements
   29




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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, such as the Risk Factors
    contained in our 2006 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 debt financing 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) performance of acquisitions.
 30




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##### Table of Contents



Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Form 10-Q.
  Item 4.
    Controls
    and Procedures  Rule 13a-15(e) 15d-15(e)
   31




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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  32




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##### Table of Contents



SIGNATURES
      /s/  Thomas
    J. Cullen       33