Note 1: Basis of Presentation

Our consolidated financial statements include the accounts of Textron Inc. and all of its majority-owned subsidiaries, along with any variable interest entities for which we are the primary beneficiary. We have prepared these unaudited consolidated financial statements in accordance with accounting principles generally accepted in the U.S. for interim financial information. Accordingly, these interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. The consolidated interim financial statements included in this quarterly report should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 3, 2009. In the opinion of management, the interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair presentation of our consolidated financial position, results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. We have evaluated subsequent events up to the time of our filing with the Securities and Exchange Commission on October 30, 2009, which is the date that these financial statements were issued.

Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Cessna, Bell, Textron Systems and Industrial segments. The Finance group consists of Textron Financial Corporation, its subsidiaries and the securitization trusts consolidated into it, along with two finance subsidiaries owned by Textron Inc. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the consolidated financial statements. All significant intercompany transactions are eliminated from the consolidated financial statements, including retail and wholesale financing activities for inventory sold by our Manufacturing group that is financed by our Finance group.

As discussed in Note 4: Discontinued Operations, on April 3, 2009, we sold HR Textron and in November 2008, we completed the sale of our Fluid & Power business unit. Both of these businesses have been classified as discontinued operations, and all prior period information has been recast to reflect this presentation.

Note 2: Special Charges

In the fourth quarter of 2008, we initiated a restructuring program to reduce overhead costs and improve productivity across the company, which includes corporate and segment direct and indirect workforce reductions and streamlining of administrative overhead, and announced the exit of portions of our commercial finance business. This program was expanded in the first half of 2009 to include additional workforce reductions, primarily at Cessna, and the cancellation of the Citation Columbus development project. In the third quarter of 2009, the program was further expanded to include additional headcount reductions at Corporate and Bell. We expect to eliminate approximately 10,700 positions worldwide representing approximately 25% of our global workforce at the inception of the program. As of October 3, 2009, we have terminated approximately 10,100 employees and have exited 22 owned and leased facilities and plants under this program.

Restructuring costs by segment are as follows:

														Contract
		Severance				Curtailment				Asset				Terminations				Total
(In millions)		Costs				Charges, Net				Impairments				and Other				Restructuring
Three Months Ended October 3, 2009
Cessna		$	10			$	—			$	2			$	5			$	17
Industrial			1				—				—				—				1
Bell			8				—				—				—				8
Textron Systems			1				—				—				—				1
Finance			1				—				—				—				1
Corporate			14				—				—				—				14
		$	35			$	—			$	2			$	5			$	42
Nine Months Ended October 3, 2009
Cessna		$	74			$	26			$	54			$	6			$	160
Industrial			6				(4	)			—				1				3
Bell			8				—				—				—				8
Textron Systems			2				2				—				—				4
Finance			7				1				—				1				9
Corporate			19				—				—				—				19
		$	116			$	25			$	54			$	8			$	203

We record restructuring costs in special charges as these costs are generally of a nonrecurring nature and are not included in segment profit, which is our measure used for evaluating performance and for decision-making purposes. Severance costs related to an approved restructuring program are classified as special charges unless the costs are for volume-related reductions of direct labor that are deemed to be of a temporary or cyclical nature. Most of our severance benefits are provided for under existing severance programs and the associated costs are accrued when they are probable and estimable. Special one-time termination benefits are accounted for once an approved plan is communicated to employees that establishes the terms of the benefit arrangement, the number of employees to be terminated, along with their job classification and location, and the expected completion date.

We recorded net curtailment charges of $25 million for our pension and other postretirement benefit plans in the second quarter of 2009, as our analysis of the impact of workforce reductions on these plans indicated that curtailments had occurred and the amounts could be reasonably estimated. These net curtailment charges are based primarily on the headcount reductions through the end of the second quarter. The curtailment charge for the pension plan is primarily due to the recognition of prior service costs that were previously being amortized over a period of years. We will continue to evaluate additional workforce reductions as they take place to assess additional potential curtailments that may occur.

Asset impairment charges include a $43 million charge recorded in the second quarter of 2009 to write off assets related to the Citation Columbus development project. Due to the prevailing adverse market conditions and after analysis of the business jet market related to the product offering, Cessna formally cancelled the Citation Columbus development project in the second quarter of 2009. Cessna began this project in early 2008 for the development of an all-new, wide-bodied, eight-passenger business jet designed for international travel that would extend Cessna’s product offering as its largest business jet to date. This development project had capitalized costs related to tooling and a partially-constructed manufacturing facility of which $43 million is considered not to be recoverable.

Since the inception of the restructuring program, we have incurred the following costs through October 3, 2009:

														Contract
		Severance				Curtailment				Asset				Terminations				Total
(In millions)		Costs				Charges, Net				Impairments				and Other				Restructuring
Cessna		$	79			$	26			$	54			$	6			$	165
Industrial			22				(4	)			9				1				28
Bell			8				—				—				—				8
Textron Systems			3				2				—				—				5
Finance			22				1				11				2				36
Corporate			25				—				—				—				25
		$	159			$	25			$	74			$	9			$	267
An analysis of our restructuring reserve activity is summarized below:
														Contract
		Severance				Curtailment				Asset				Terminations
(In millions)		Costs				Charges, Net				Impairment				and Other				Total
Balance at January 3, 2009		$	36			$	—			$	—			$	1			$	37
Provisions			116				25				54				8				203
Non-cash settlement			—				(25	)			(54	)			—				(79	)
Cash paid			(117	)			—				—				(2	)			(119	)
Balance at October 3, 2009		$	35			$	—			$	—			$	7			$	42

The specific restructuring measures and associated estimated costs are based on our best judgment under prevailing circumstances. We believe that the restructuring reserve balance of $42 million is adequate to cover the costs presently accruable relating to activities formally identified and committed to under approved plans as of October 3, 2009 and anticipate that all actions related to these liabilities will be completed within a 12-month period. We estimate that we will incur approximately $40 million in additional pre-tax restructuring costs in the fourth quarter 2009 most of which will result in future cash outlays, primarily attributable to severance payments related to additional workforce reductions throughout the company and a realignment of our management structure. We expect that the program will be substantially completed in 2010. We also expect to incur additional costs to exit the non-captive portion of our Finance segment over the next two to three years. These costs are expected to be primarily attributable to severance and retention benefits and are not reasonably estimable at this time.

Note 3: Retirement Plans

We provide defined benefit pension plans and other postretirement benefits to eligible employees. The components of net periodic benefit cost for these plans are as follows:

										Postretirement Benefits
		Pension Benefits								Other Than Pensions
		October 3,				September 27,				October 3,				September 27,
(In millions)		2009				2008				2009				2008
Three Months Ended
Service cost		$	27			$	35			$	2			$	2
Interest cost			78				75				9				11
Expected return on plan assets			(96	)			(101	)			—				—
Amortization of prior service cost (credit)			4				5				(1	)			(1	)
Amortization of net loss			1				5				2				4
Net periodic benefit cost		$	14			$	19			$	12			$	16
Nine Months Ended
Service cost		$	90			$	106			$	6			$	7
Interest cost			233				227				28				32
Expected return on plan assets			(291	)			(304	)			—				—
Amortization of prior service cost (credit)			13				15				(4	)			(4	)
Amortization of net loss			9				14				6				12
Net periodic benefit cost		$	54			$	58			$	36			$	47

Note 4: Discontinued Operations

On April 3, 2009, we sold HR Textron, an operating unit previously reported within the Textron Systems segment, for $376 million in cash. The sale resulted in an after-tax gain of $8 million after final settlement and net after-tax proceeds of approximately $280 million.

In November 2008, we completed the sale of the Fluid and Power business unit and received approximately $527 million in cash and a six-year note with a face value of $28 million. In connection with the final settlement of the transaction in the third quarter of 2009, we also received a five-year note with a face value of $30 million which had no significant impact on the net gain from disposition.

Results of our discontinued businesses are as follows:

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
(In millions)		2009				2008				2009				2008
Revenue		$	—			$	236			$	48			$	683
Income (loss) from discontinued operations before income taxes		$	—			$	21			$	(1	)		$	46
Income tax expense (benefit)			(1	)			20				(40	)			31
			(1	)			1				39				15
Gain (loss) on sale, net of income taxes			(1	)			—				6				—
Income (loss) from discontinued operations, net of income taxes		$	(2	)		$	1			$	45			$	15

In the first half of 2009, we had a $34 million tax benefit from the reduction in tax contingencies as a result of the HR Textron sale and a valuation allowance reversal on a previously established deferred tax asset.

Note 5: Comprehensive Income

Our comprehensive income for the periods is provided below:

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
(In millions)		2009				2008				2009				2008
Net income		$	4			$	206			$	32			$	695
Other comprehensive income, net of income taxes:
Unrealized gain on pension, net of income taxes of $48			—				—				82				—
Pension curtailment, net of income taxes of $10			—				—				15				—
Recognition of prior service cost and unrealized losses on pension and postretirement benefits			4				8				16				28
Net deferred gain (loss) on hedge contracts			24				(26	)			54				(43	)
Net deferred gain (loss) on retained interests			8				(1	)			(1	)			(1	)
Foreign currency translation and other			(10	)			(66	)			24				(71	)
Comprehensive income		$	30			$	121			$	222			$	608

Note 6: Earnings per Share

In the first quarter of 2009, we adopted the new accounting standard for determining whether instruments granted in share-based payment transactions are participating securities. This new standard requires us to include any unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as participating securities in our computation of basic earnings per share pursuant to the two-class method. We have granted certain restricted stock units that are deemed participating securities, and as a result, prior period basic and diluted weighted-average shares outstanding have been recast to conform to the new calculation. The adoption of this standard resulted in a $0.01 reduction in diluted earnings per share from continuing operations for the three and nine months ended September 27, 2008.

We calculate basic and diluted earnings per share based on income available to common shareholders, which approximates net income for each period. We use the weighted-average number of common shares outstanding during the period and the restricted stock units discussed above for the computation of basic earnings per share using the two-class method. Diluted earnings per share includes the dilutive effect of convertible preferred shares, Convertible Notes (defined below), stock options and warrants and restricted stock units in the weighted-average number of common shares outstanding.

The weighted-average shares outstanding for basic and diluted earnings per share are as follows:

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
(In thousands)		2009				2008				2009				2008
Basic weighted-average shares outstanding			271,224				243,753				260,099				247,370
Dilutive effect of :
Convertible Notes and warrants			5,906				—				—				—
Convertible preferred shares, stock options and restricted stock units			1,299				3,429				—				4,382
Diluted weighted-average shares outstanding			278,429				247,182				260,099				251,752

The potential dilutive effect of 3.5 million weighted-average shares of restricted stocks units, stock options and warrants, convertible preferred stock and Convertible Notes was excluded from the computation of diluted weighted-average shares outstanding for the nine months ended October 3, 2009 as the shares would have an anti-dilutive effect on the loss from continuing operations.

We did not include stock options to purchase 8 million and 9 million shares of common stock outstanding in our calculation of diluted weighted-average shares outstanding for the three and nine months ended October 3, 2009 as the exercise prices were greater than the average market price of our common stock for those periods. These securities could potentially dilute earnings per share in the future.

On May 5, 2009, we issued 4.50% Convertible Senior Notes (the “Convertible Notes”) due 2013, as discussed in Note 9: Debt. In connection with the issuance of these notes, we entered into a warrant transaction with the note underwriters to sell common stock warrants. The initial strike price of these warrants is $15.75 per share of our common stock and the warrants cover an aggregate of 45,714,300 shares of our common stock. When our closing stock price exceeds this strike price, a portion of these shares is dilutive. It is our intention to settle the face value of the Convertible Notes in cash upon conversion/maturity.

Concurrently with the offering and sale of the Convertible Notes, we also offered and sold to the public under the Textron Inc. registration statement 23,805,000 shares of our common stock for net proceeds of approximately $238 million, after deducting discounts, commissions and expenses.

Note 7: Accounts Receivable, Finance Receivables and Securitizations

Accounts Receivable

		October 3,				January 3,
(In millions)		2009				2009
Accounts receivable - Commercial		$	500			$	496
Accounts receivable - U.S. Government contracts			451				422
			951				918
Allowance for doubtful accounts			(25	)			(24	)
		$	926			$	894

Finance Receivables

We evaluate finance receivables on a managed as well as owned basis since we retain subordinated interests in finance receivables sold in securitizations resulting in credit risk. In contrast, we do not have a retained financial interest or credit risk in the performance of the serviced portfolio and, therefore, performance of these portfolios is limited to billing and collection activities. Our Finance group manages and services finance receivables for a variety of investors, participants and third-party portfolio owners. A reconciliation of our managed and serviced finance receivables to finance receivables held for investment, net is provided below:

		October 3,				January 3,
(In millions)		2009				2009
Total managed and serviced finance receivables		$	8,999			$	12,173
Less: Nonrecourse participations sold to independent investors			772				820
Less: Third-party portfolio servicing			318				532
Total managed finance receivables			7,909				10,821
Less: Securitized receivables			813				2,248
Owned finance receivables			7,096				8,573
Less: Finance receivables held for sale			998				1,658
Finance receivables held for investment			6,098				6,915
Allowance for loan losses			(302	)			(191	)
Finance receivables held for investment, net		$	5,796			$	6,724

Finance receivables held for investment at October 3, 2009 and January 3, 2009 include approximately $549 million and $1.1 billion, respectively, of finance receivables that have been legally sold to special purpose entities and are consolidated subsidiaries of Textron Financial Corporation. The assets of these special purpose entities are pledged as collateral for $443 million and $853 million of debt at October 3, 2009 and January 3, 2009, respectively, which is reflected as securitized on-balance sheet debt.

In connection with our fourth quarter 2008 plan to exit portions of the commercial finance business, we classified certain finance receivables as held for sale. As a result of our marketing efforts for these finance receivables, we determined that the markets for certain classes of finance receivables were illiquid and inactive during the first half of 2009. We realized that, given market conditions, we were likely to be able to generate more cash flow from the loans’ obligors and/or the underlying collateral than from a buyer of the portfolio. We reached this conclusion based on our evaluation of the obligors’ ability to repay the loans as compared to our evaluation of both the existence of potential buyers for these assets and market prices. Accordingly, since we intended to hold a portion of these finance receivables for the foreseeable future, we reclassified $719 million, net of the valuation allowance, from the held for sale classification to held for investment in the first half of 2009.

As a result of the significant influence of economic and liquidity conditions on our business plans, strategies and liquidity position, and the rapid changes in these and other factors we utilize to determine which assets are classified as held for sale, we currently believe the term “foreseeable future” represents a time period of six to nine months. Unanticipated changes in both internal and external factors affecting our financial performance, liquidity position or the value and/or marketability of our finance receivables could result in a modification of this assessment.

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

Nonaccrual and Impaired Finance Receivables

We periodically evaluate finance receivables held for investment, excluding homogeneous loan portfolios and finance leases, for impairment. Finance receivables classified as held for sale are reflected at fair value and are excluded from this assessment. A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired finance receivables are classified as either nonaccrual or accrual loans. Nonaccrual finance receivables includes accounts that are contractually delinquent by more than three months for which the accrual of interest income is suspended. Impaired accrual finance receivables represent loans with original terms that have been significantly modified to reflect deferred principal payments, generally at market interest rates, for which collection of principal and interest is not doubtful.

The impaired finance receivables are as follows:

		October 3,				January 3,
(In millions)		2009				2009
Impaired nonaccrual finance receivables		$	781			$	234
Impaired accrual finance receivables			276				19
Total impaired finance receivables		$	1,057			$	253
Less: Impaired finance receivables without identified reserve requirements			378				71
Impaired nonaccrual finance receivables with identified reserve requirements		$	679			$	182

Nonaccrual finance receivables include impaired nonaccrual finance receivables and nonaccrual accounts in homogeneous loan portfolios that are contractually delinquent by more than three months, but are not considered to be impaired. A summary of these finance receivables and the related allowance for losses by collateral type is as follows:

				October 3, 2009												January 3, 2009
												Allowance												Allowance for
												for Losses												Losses on
								Impaired				on Impaired								Impaired				Impaired
				Nonaccrual				Nonaccrual				Nonaccrual				Nonaccrual				Nonaccrual				Nonaccrual
				Finance				Finance				Finance				Finance				Finance				Finance
(In millions)		Collateral Type		Receivables				Receivables				Receivables				Receivables				Receivables				Receivables
Resort		Notes receivable(1)		$	303			$	300			$	42			$	78			$	74			$	9
Finance		Hotels			62				62				7				—				—				—
		Resort construction and inventory			67				67				—				—				—				—
		Land			17				17				4				—				—				—
Distribution Finance		Dealer inventory			89				67				21				43				34				3
Captive Finance		General aviation aircraft			139				123				24				17				6				2
		Golf equipment			16				3				1				18				—				—
Golf Mortgage		Golf course property			96				95				21				107				107				25
Finance		Marinas			8				8				—				—				—				—
Structured Capital		Capital equipment			32				32				27				—				—				—
Other					9				7				—				14				13				4
		Total		$	838			$	781			$	147			$	277			$	234			$	43

The increase in nonaccrual finance receivables is primarily attributable to the lack of liquidity available to borrowers in resort finance, weaker general economic conditions and weaker aircraft values in captive finance. The increase in resort finance included one $212 million account, which is primarily collateralized by timeshare notes receivable and several resort properties. For structured capital, the increase in nonaccrual finance receivables and the allowance for losses on impaired nonaccrual finance receivables is due to a $32 million lease that is secured by automobile manufacturing equipment. Nonaccrual finance receivables resulted in a $36 million reduction in Finance revenues for the nine months ended October 3, 2009, compared with $10 million in the corresponding period of 2008, as no finance charges were recognized using the cash basis method.

Securitizations

Our Finance group has historically sold its distribution finance receivables to a qualified special purpose trust through securitization transactions. Distribution finance receivables represent loans secured by dealer inventories that typically are collected upon the sale of the underlying product. The distribution finance revolving securitization trust is a master trust that purchases inventory finance receivables from the Finance group and issues asset-backed notes to investors. Through a revolving securitization, the proceeds from collection of the principal balance of these loans can be used by the trust to purchase additional distribution finance receivables from us each month. Proceeds from securitizations include amounts received related to the incremental increase in the issuance of additional asset-backed notes to investors, and exclude amounts received related to the ongoing replenishment of the outstanding sold balance of these short-duration finance receivables. For the nine months ended October 3, 2009, we had no proceeds from securitizations, compared with $250 million in the corresponding period of 2008.

Generally, we retain an interest in the assets sold in the form of servicing responsibilities and subordinated interests, including interest-only securities, seller certificates and cash reserves. We had $103 million and $191 million of retained interests associated with $775 million and $2.2 billion of off-balance sheet finance receivables in the distribution finance securitization trust as of October 3, 2009 and January 3, 2009, respectively. The amortized cost basis of our retained interests is $86 million at October 3, 2009. At October 3, 2009, the trust had $978 million of asset-backed notes outstanding of which $103 million represent our remaining retained interests. In connection with the maturity of the notes, the trust accumulated $203 million of cash during the third quarter of 2009 from collections of finance receivables. This cash, combined with cash accumulated during the first eight days of October, was utilized to repay $240 million of the notes held by third-party investors in October 2009. Due to required amortization and accumulation periods associated with the scheduled maturity of the remaining asset-backed notes, the trust’s revolving period ended in the third quarter of 2009. As of October 8, 2009, due to a change in required cash distributions, the trust will be consolidated by us.

Cash received on retained interests totaled $117 million and $44 million for the nine months ended October 3, 2009 and September 27, 2008, respectively. Servicing fees received totaled $3 million and $18 million for the three and nine months ended October 3, 2009, respectively, compared with $8 million and $25 million for the corresponding periods of 2008.

Total net pre-tax losses, including impairments were $27 million for the nine months ended October 3, 2009. During the second quarter of 2009, we recognized a $31 million other-than-temporary impairment of our retained interests, excluding interest-only securities. Of this amount, $18 million was charged to income primarily due to credit losses, representing a decrease in cash flows expected to be collected on these interests for the distribution finance revolving securitization. The remaining $13 million impairment charge was recognized in other comprehensive income as it is attributable to an increase in market discount rates. For the three and nine months ended September 27, 2008, net pre-tax gains, including impairments totaled $10 million and $40 million, respectively. See Note 12: Fair Values of Assets and Liabilities for disclosure of the fair value estimates for retained interests in securitizations and the impairments recorded on the interest-only securities and other retained interests in 2009.

Note 8: Inventories

		October 3,				January 3,
(In millions)		2009				2009
Finished goods		$	908			$	1,081
Work in process			2,062				1,866
Raw materials			637				765
			3,607				3,712
Progress/milestone payments			(891	)			(619	)
		$	2,716			$	3,093

Note 9: Debt

On September 14, 2009, we issued $600 million of senior notes under our existing registration statement, comprised of $350 million of 6.20% notes due 2015 and $250 million of 7.25% notes due 2019. Concurrently, Textron Inc. and Textron Financial Corporation announced separate cash tender offers for up to $650 million aggregate principal amount of five separate series of outstanding debt securities with maturity dates ranging from November 2009 to June 2012. The primary purpose of these transactions was to lengthen the maturity profile of our indebtedness. In connection with these transactions, Textron Inc. extinguished $122 million of its $250 million 4.5% notes due 2010 as of October 3, 2009, and recognized a $3 million pre-tax loss on the early extinguishment of this debt, which is included in selling, general and administrative expense.

Subsequent to the end of the quarter, in connection with the tender offers, on October 13, 2009, Textron Inc. extinguished $146 million of its $300 million 6.5% notes due 2012 and Textron Financial Corporation extinguished $319 million of its medium-term notes with interest rates ranging from 4.6% to 6.0% and maturity dates ranging from November 2009 to February 2011. The related pre-tax loss on these extinguishments totaled $9 million and will be recognized in the fourth quarter of 2009.

For the nine months ended October 3, 2009, Textron Financial Corporation has extinguished through open market purchases an additional $595 million of its debt and has recognized a pre-tax gain of $9 million and $48 million for the three and nine months ended October 3, 2009. In the third quarter of 2009, Textron Inc. extinguished through open market purchases an additional $62 million of its debt and recognized a pre-tax gain of $6 million.

Our debt and credit facilities are summarized below:

		October 3,				January 3,
(In millions)		2009				2009
Manufacturing group:
Short-term debt:
Commercial paper		$	—			$	867
Current portion of long-term debt			134				9
Total short-term debt			134				876
Long-term senior debt:
Medium-term notes due 2010 to 2011			14				17
4.50% due 2010			128				250
Credit line borrowings due 2012			1,172				—
6.50% due 2012			300				300
3.875% due 2013			379				429
4.50% convertible senior notes due 2013			463				—
6.20% due 2015			350				—
5.60% due 2017			350				350
7.25% due 2019			250				—
6.625% due 2020			240				219
Other			112				137
			3,758				1,702
Current portion of long-term debt			(134	)			(9	)
Total long-term debt			3,624				1,693
Total Manufacturing group debt		$	3,758			$	2,569
Finance group:
Commercial paper		$	—			$	743
Other short-term debt			—				25
Medium-term fixed-rate and variable-rate notes:
Due 2009			756				1,534
Due 2010			1,969				2,315
Due 2011			579				727
Due 2012			55				52
Due 2013 and thereafter			762				730
Credit line borrowings due 2012			1,740				—
Securitized on-balance sheet debt			443				853
6% Fixed-to-Floating Rate Junior Subordinated Notes due 2017 and thereafter			300				300
Fair value adjustments and unamortized discount			64				109
Total Finance group debt		$	6,668			$	7,388

4.50% Convertible Senior Notes

On May 5, 2009, we issued $600 million of 4.50% Convertible Senior Notes (the “Convertible Notes”) with a maturity date of May 1, 2013 and interest payable semi-annually on May 1 and November 1. The Convertible Notes are convertible, under certain circumstances, at the holder’s option, into shares of our common stock, at an initial conversion rate of 76.1905 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $13.125 per share. Upon conversion, we have the right to settle the conversion of each $1,000 principal amount of Convertible Notes with any of the three following alternatives: (1) shares of our common stock, (2) cash, or (3) a combination of cash and shares of our common stock.

The Convertible Notes are convertible only under the following certain circumstances: (1) during any calendar quarter commencing after June 30, 2009 and only during such calendar quarter, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the applicable conversion price per share of common stock on the last trading day of such preceding calendar quarter, (2) during the five business day period after any ten consecutive trading day measurement period in which the trading price per $1,000 principal amount of Convertible Notes for each day in the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate, (3) if specified distributions to holders of our common stock are made or specified corporate transactions occur, or (4) at any time on or after February 19, 2013. As of October 3, 2009, none of the conditions permitting conversion of the Convertible Notes had been satisfied.

The net proceeds from the issuance of the Convertible Notes totaled approximately $582 million after deducting discounts, commissions and expenses. The Convertible Notes are accounted for in accordance with generally accepted accounting principles, which require us to separately account for the liability (debt) and the equity (conversion option) components of the Convertible Notes in a manner that reflects our non-convertible debt borrowing rate. Accordingly, we recorded a debt discount and corresponding increase to additional paid in capital of approximately $135 million as of the date of issuance. We are amortizing the debt discount utilizing the effective interest method over the life of the Convertible Notes which increases the effective interest rate of the Convertible Notes from its coupon rate of 4.50% to 11.72%. Transaction costs of $18 million were proportionately allocated between the liability and equity components.

Concurrently with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with two counterparties, including an underwriter and an affiliate of an underwriter, of the Convertible Notes, for purposes of reducing the potential dilutive effect upon the conversion. The initial strike price of the convertible note hedge transactions is $13.125 per share of our common stock (the same as the initial conversion price of the Convertible Notes) and is subject to certain customary adjustments. The convertible note hedge transactions cover 45,714,300 shares of common stock, subject to anti-dilution adjustments. We may settle the convertible note hedge transactions in shares, cash or a combination of cash and shares, at our option. The cost of the convertible note hedge transactions was $140 million, which was recorded as a reduction to additional paid-in capital. Separately and concurrently with entering into these hedge transactions, we entered into warrant transactions whereby we sold warrants to each of the hedge counterparties to acquire, subject to anti-dilution adjustments, an aggregate of 45,714,300 shares of common stock at an initial exercise price of $15.75 per share. The aggregate proceeds from the warrant transactions were $95 million, which was recorded as an increase to additional paid-in capital.

We incurred cash and non-cash interest expense of $14 million and $24 million for these Convertible Notes for the three and nine months ended October 3, 2009. As of October 3, 2009, the unamortized discount amount, including issuance costs totaled $137 million, resulting in a net carrying value of $463 million for the liability component.

Credit facility

On July 14, 2009, a newly formed, wholly-owned finance subsidiary of Textron entered into a credit agreement with the Export-Import Bank of the United States which establishes a $500 million credit facility to provide funding to finance purchases of aircraft by non-U.S. buyers from Cessna and Bell. The facility is structured to be available for financing sales to international customers who take delivery of new aircraft by December 2010. At October 3, 2009, we had $30 million outstanding under this facility.

Note 10: Guarantees and Indemnifications

As disclosed under the caption “Guarantees and Indemnifications” in Note 18 to the Consolidated Financial Statements in Textron’s 2008 Annual Report on Form 10-K, we have issued or are party to certain guarantees, including a performance guarantee related to the VH-71 helicopter program. In June 2009, we received notification that the VH-71 helicopter program was terminated for convenience by the U.S. Government, and the related performance guarantee was cancelled in October. As of October 3, 2009, there has been no other material change to our guarantees.

Warranty and Product Maintenance Programs

We provide limited warranty and product maintenance programs, including parts and labor, for certain products for periods ranging from one to five years. We estimate the costs that may be incurred under warranty programs and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect this liability include the number of products sold, historical and anticipated rates of warranty claims, and cost per claim. We assess the adequacy of our recorded warranty and product maintenance liabilities periodically and adjust the amounts as necessary.

Changes in our warranty and product maintenance liabilities are as follows:

		Nine Months Ended
		October 3,				September 27,
(In millions)		2009				2008
Accrual at the beginning of period		$	278			$	313
Provision			129				145
Settlements			(168	)			(149	)
Adjustments to prior accrual estimates			18				(12	)
Reclassification adjustments			—				(5	)
Accrual at the end of period		$	257			$	292

Note 11: Commitments and Contingencies

We are subject to legal proceedings and other claims arising out of the conduct of our business, including proceedings and claims relating to commercial and financial transactions; government contracts; compliance with applicable laws and regulations; production partners; product liability; employment; and environmental, safety and health matters. Some of these legal proceedings and claims seek damages, fines or penalties in substantial amounts or remediation of environmental contamination. As a government contractor, we are subject to audits, reviews and investigations to determine whether our operations are being conducted in accordance with applicable regulatory requirements. Under federal government procurement regulations, certain claims brought by the U.S. Government could result in our being suspended or debarred from U.S. Government contracting for a period of time. On the basis of information presently available, we do not believe that existing proceedings and claims will have a material effect on our financial position or results of operations.

ARH Program Termination

On October 16, 2008, we received notification from the U.S. Department of Defense that it would not certify the continuation of the Armed Reconnaissance Helicopter (ARH) program to Congress under the Nunn-McCurdy Act, resulting in the termination of the program for the convenience of the Government. The ARH program included a development phase, covered by the System Development and Demonstration (SDD) contract, and a production phase. We submitted our claim for the termination costs for the SDD contract in October 2009, and believe that these costs are fully recoverable from the U.S. Government.

Prior to termination of the program, we obtained inventory and incurred vendor obligations for long-lead time materials related to the anticipated Low Rate Initial Production (LRIP) contracts to maintain the program schedule based on our belief that the LRIP contracts would be awarded. We have since terminated these vendor contracts and are negotiating to settle our termination obligations, which we estimate may cost up to approximately $75 million. We continue to evaluate the utility of the related inventory to other Bell programs, customers, or vendors. This review and the related discussions with vendors are ongoing. We estimate that our potential loss resulting from our LRIP-related vendor obligations will be between approximately $50 million and $75 million. At October 3, 2009, our reserves related to this program totaled $50 million. In October 2009, we filed a claim with the U.S. Government to request reimbursement of costs expended in support of the LRIP program.

Note 12: Fair Values of Assets and Liabilities

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We prioritize the assumptions that market participants would use in pricing the asset or liability (the “inputs”) into a three-tier fair value hierarchy. This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exists, requiring companies to develop their own assumptions. Observable inputs that do not meet the criteria of Level 1, and include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability, based on the best information available in the circumstances. Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the assets and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset and liability.

		October 3, 2009												January 3, 2009
(In millions)		(Level 1)				(Level 2)				(Level 3)				(Level 1)				(Level 2)				(Level 3)
Assets
Manufacturing group
Foreign currency exchange contracts		$	—			$	43			$	—			$	—			$	2			$	—
Forward contracts for Textron Inc. stock			6				—				—				—				—				—
Finance group
Derivative financial instruments			—				78				—				—				133				—
Retained interests in securitizations			—				—				88				—				—				12
Total assets		$	6			$	121			$	88			$	—			$	135			$	12
Liabilities
Manufacturing group
Forward contracts for Textron Inc. stock		$	—			$	—			$	—			$	98			$	—			$	—
Foreign currency exchange contracts			—				24				—				—				84				—
Finance group
Derivative financial instruments			—				5				—				—				21				—
Total liabilities		$	—			$	29			$	—			$	98			$	105			$	—

Foreign currency exchange contracts are measured at fair value using the market method valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers. This is observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. We record changes in the fair value of these contracts, to the extent they are effective as cash flow hedges, in other comprehensive income. If a contract does not qualify for hedge accounting or is designated as a fair value hedge, changes in the fair value of the contract are recorded in income.

The Finance group’s derivative contracts are not exchange-traded. Derivative financial instruments are measured at fair value utilizing widely accepted, third-party developed valuation models. The actual terms of each individual contract are entered into a valuation model, along with interest rate and foreign exchange rate data, which is based on readily observable market data published by third-party leading financial news and data providers. Credit risk is factored into the fair value of derivative assets and liabilities based on the differential between both our credit default swap spread for liabilities and the counterparty’s credit default swap spread for assets as compared to a standard AA-rated counterparty; however, this had no significant impact on the valuation as of October 3, 2009 as most of our counterparties are AA-rated and the vast majority of our derivative instruments are in an asset position.

Retained interests in securitizations represent our subordinated interest in finance receivables sold to qualified special purpose trusts and include interest-only securities, seller certificates, cash reserve accounts and servicing rights and obligations. We estimate fair value upon the initial recognition of the retained interest based on the present value of expected future cash flows using our best estimates of key assumptions – credit losses, prepayment speeds, forward interest rate yield curves and discount rates commensurate with the risks involved. These inputs are classified as Level 3 since they reflect our own judgment regarding the assumptions market participants would use in pricing these assets based on the best information available in the circumstances as there is no active market for these assets. We review the fair values of the retained interests quarterly using a discounted cash flow model and updated assumptions, and compare such amounts with the amortized cost basis. At October 3, 2009, the key economic assumptions used in measuring the retained interests related to the distribution finance revolving securitization included an annual rate for expected credit losses of 4.98%, a monthly payment rate of 12.5% and a residual cash flows discount rate of 10.1%. Net charge-offs as a percentage of distribution finance receivables was 4.89% for the nine months ended October 3, 2009, compared with 1.94% for the full year of 2008. The 60+ days contractual delinquency percentage for distribution finance receivables was 6.36% and 2.08% at October 3, 2009 and January 3, 2009, respectively.

Cash settlement forward contracts on our common stock are used to manage the expense related to stock-based compensation awards. The use of these forward contracts modifies compensation expense exposure to changes in the stock price with the intent of reducing potential variability. These contracts are measured at fair value using the market method valuation technique. Since the input to this technique is based on the quoted price of our common stock at the measurement date, it is classified as Level 1. Gains or losses on these instruments are recorded as an adjustment to compensation expense.

The table below presents the change in fair value measurements for our retained interests in securitizations that used significant unobservable inputs (Level 3):

		Three Months Ended								Nine Months Ended
		October 3,				September 27,				October 3,				September 27,
(In millions)		2009				2008				2009				2008
Balance, beginning of period		$	3			$	53			$	12			$	43
Transfers from nonrecurring classification			110				—				110				—
Net gains for the period:
Increase due to securitization gains on sale of finance receivables			—				17				—				59
Change in value recognized in Finance revenues			—				1				—				2
Change in value recognized in other comprehensive income			12				—				11				—
Impairments recognized in earnings			—				(5	)			(8	)			(5	)
Collections, net			(37	)			(18	)			(37	)			(51	)
Balance, end of period		$	88			$	48			$	88			$	48