Consolidated Results of Operations
In our discussion of comparative results for the Manufacturing group, changes in revenue and segment profit are typically expressed in terms of volume, pricing, foreign exchange and acquisitions. Additionally, changes in segment profit may be expressed in terms of mix, inflation and cost-performance. Volume represents changes in the number of units delivered or services provided. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Acquisitions refer to the results generated from businesses that were acquired within the previous 12 months. For segment profit, mix represents a change due to the composition of products and/or services sold at different profit margins. Inflation represents higher material, wages, benefits or other costs. Cost performance reflects an increase or decrease in research and development, depreciation, warranty, product liability, quality/scrap, labor efficiency, overhead, product line profitability, start-up, ramp-up and cost reduction initiatives, or other manufacturing inputs. For U.S. Government business, performance generally refers to changes in estimated contract rates. These changes typically relate to profit recognition associated with revisions to total estimated costs to complete a contract that reflect improved (or deteriorated) operating performance on the contract, and are recognized by recording cumulative catch-up adjustments in the current period.
Revenues
Revenues increased $1.6 billion, or 13%, to $14.2 billion in 2008, compared with 2007. This increase is primarily due to the following factors in our manufacturing businesses, which were partially offset by lower revenues in the commercial finance business of $152 million:
• Additional revenues from newly acquired businesses of $820 million, primarily the acquisition of AAI at Textron Systems;

• Higher manufacturing volume of $514 million, reflecting:

- $341 million in higher volume at Cessna, primarily related to an increase in business jet deliveries;

- $134 million in higher volume at Bell, largely related to the V-22 and H-1 programs; and

- $101 million in increased volume at Textron Systems from higher ASV aftermarket, Lycoming and Intelligent Battlefield Systems (IBS) products; partially offset by

- $62 million decrease in the Industrial segment, principally due to lower demand at Kautex;

• Higher pricing of $382 million, with $252 million at Cessna, $87 million at Bell and $34 million in the Industrial segment; and

• Favorable foreign exchange impact of $95 million in the Industrial segment.

Revenues increased $1.6 billion, or 15%, to $12.6 billion in 2007, compared with 2006. The primary reasons for this increase are:
• Higher manufacturing volume of $1.0 billion, reflecting:

- $631 million in higher volume at Cessna, primarily related to an increase in business jet deliveries;

- $112 million increase in the Industrial segment, principally due to higher demand at Kautex;

- $142 million in higher volume at Bell, largely related to the H-1 program; and

- $93 million in increased volume at Textron Systems from higher ASV deliveries;

• Higher pricing of $320 million, with $212 million at Cessna, $87 million in Bell's commercial business and $22 million in the Industrial segment;

• Additional revenues from newly acquired businesses of $166 million, primarily the acquisitions of Overwatch Systems and AAI;

• Favorable foreign exchange impact of $115 million in the Industrial segment; and

• A $66 million impact from higher average finance receivables due to growth in the aviation and resort finance businesses in the Finance segment.

Segment Profit
Segment profit decreased $116 million, or 7%, to $1.5 billion in 2008, compared with 2007. This decrease is primarily due to $272 million in reduced profits in the Finance segment, largely due to an increase in the provision for loan losses of $201 million, partially offset by the following factors:
• A $73 million benefit from higher volume and mix reflecting $110 million in higher volume at Cessna, primarily related to an increase in business jet deliveries, offset by $54 million in lower volume and mix in the Industrial Segment;

• $50 million in profit from newly acquired businesses; and

• $43 million in pricing in excess of inflation reflecting $82 million in pricing in excess of inflation at Cessna and $32 million at Bell, partially offset by $61 million in inflation in excess of pricing at Industrial.

Segment profit increased $342 million, or 27%, to $1.6 billion in 2007, compared with 2006. This increase is primarily due to the following factors, which were partially offset by inflation of $240 million:
• Higher pricing of $320 million, with $212 million at Cessna, $87 million in Bell's commercial business and $22 million in the Industrial segment;

• Favorable cost performance of $152 million, which includes net charges in 2007 for the ARH Low Rate Initial Production (LRIP) program of $50 million, the $32 million favorable impact of the recovery of ARH System Development and Demonstration (SDD) launch-related costs written off in 2006 and lower charges related to the H-1 LRIP program of $43 million;

• A $146 million net benefit from higher volume, partially offset by unfavorable product mix; and

• Profit from newly acquired businesses of $20 million.

Special Charges
Special charges for the year ended January 3, 2009, include an initial mark-to-market adjustment of $293 million that was made when we reclassified certain finance receivables from held for investment to held for sale, a goodwill impairment charge in the Finance segment of $169 million and restructuring charges of $64 million. There were no special charges in fiscal 2007 or 2006.
As a result of the volatility and disruption in the credit markets, and in order to reduce our reliance on short-term funding, on October 13, 2008, our Board of Directors approved the recommendation of management to downsize the Finance segment. The plan approved at that time entailed exiting the Finance group's Asset-Based Lending and Structured Capital businesses, as well as several additional product lines, and limiting new originations in the Distribution Finance, Golf Finance and Resort Finance businesses. On December 22, 2008, our Board of Directors approved a plan to exit all of the commercial finance business of the Finance segment, other than that portion of the business supporting customer purchases of Textron-manufactured products. We made the decision to exit this business due to continued weakness in the economy and in order to address our long-term liquidity position in light of continuing disruption and instability in the capital markets. In total, these actions will impact approximately $7.3 billion of the Finance segment's $10.8 billion managed receivable portfolio as of the end of 2008. The exit plan will be effected through a combination of orderly liquidation and selected sales and is expected to be substantially complete over the next two to four years. We recorded a pre-tax mark-to-market adjustment of $293 million against owned receivables held for sale due to the exit plan. At January 3, 2009, approximately $2.9 billion of the liquidating receivables were designated for sale or transfer, of which about $1.2 billion represent securitized receivables managed by the Finance segment, and $1.7 billion represent owned receivables classified as held for sale. Based on current market conditions and the plan to downsize the Finance segment, we recorded a $169 million pre-tax impairment charge in the fourth quarter of 2008 to eliminate all goodwill at the Finance segment.
In October 2008, we initiated a restructuring program to reduce overhead cost and improve productivity across the company. On December 22, 2008, the Textron Board of Directors approved an expansion of this previously announced plan, which includes corporate and segment direct and indirect workforce reductions and streamlining of administrative overhead. The program, along with other volume-related reductions in workforce during the fourth quarter of 2008 and in January 2009, eliminates approximately 6,300 positions worldwide, representing approximately 15% of our global workforce.
We recorded pre-tax restructuring costs of $64 million in the fourth quarter of 2008 related to this restructuring program and the Finance segment exit plan, excluding volume-related direct labor reductions, which are recorded in segment profit. In the first half of 2009, we estimate that we will incur an additional $40 million in pre-tax restructuring costs, largely related to workforce reductions at Cessna. We may have additional restructuring costs as a result of further headcount reductions and other actions; however, an estimate of additional charges cannot be made at this time.

Special charges by segment for the year ended January 3, 2009 are as follows:

                                                           Restructuring Charges
                                                                                                                                       Total
                                Severance            Contract               Asset                 Total               Other           Special
(In millions)                     Costs            Terminations          Impairments          Restructuring          Charges          Charges
Cessna                         $         5         $           -        $           -        $             5        $       -        $       5
Textron Systems                          1                     -                    -                      1                -                1
Industrial                              16                     -                    9                     25                -               25
Finance                                 15                     1                   11                     27              462              489
Corporate                                6                     -                    -                      6                -                6

                               $        43         $           1        $          20        $            64        $     462        $     526

Corporate Expenses and Other, net
Corporate expenses and other, net decreased $86 million in 2008, compared with 2007, primarily due to lower compensation expenses, largely caused by stock depreciation.
Corporate expenses and other, net increased $50 million in 2007, compared with 2006, primarily due to $26 million of higher compensation expenses, largely related to stock appreciation, $14 million of higher professional and consulting fees for corporate initiatives, $11 million of increased costs for divested operations, primarily due to higher pension costs and other retained liabilities, and a $6 million increase in our contribution to the Textron Charitable Trust, partially offset by an $8 million gain on an insurance settlement.
Interest Expense
Interest expense for the Manufacturing group increased $38 million to $125 million in 2008, compared with 2007, primarily due to higher borrowing costs associated with our commercial paper borrowing in 2008. Income Taxes
The following table reconciles the federal statutory income tax rate to our effective income tax rate:

                                                       2008       2007       2006
       Federal statutory income tax rate                35.0 %     35.0 %     35.0 %
       Increase (decrease) in taxes resulting from:
       State income taxes                                2.1        1.0        2.3
       Goodwill impairment                               8.0          -          -
       Favorable tax settlements                           -       (1.1 )     (2.4 )
       Canadian dollar functional currency                 -       (0.1 )     (1.2 )
       Non-U.S. tax rate differential                   (5.6 )     (0.5 )     (2.4 )
       Manufacturing deduction                          (2.7 )     (1.6 )     (0.5 )
       Equity hedge loss (income)                        5.9       (1.5 )     (0.8 )
       Tax contingencies and related interest            3.3        1.2        0.7
       Change in status of non-U.S. subsidiary           4.8          -          -
       Research credit                                  (1.8 )     (0.8 )     (0.6 )
       Other, net                                       (1.3 )     (1.8 )     (2.5 )

       Effective income tax rate                        47.7 %     29.8 %     27.6 %

In 2008, the effective income tax rate was significantly impacted by the plan announced in the fourth quarter of 2008 to exit portions of the Finance segment's business. This plan resulted in the impairment of all of the Finance segment's goodwill, of which only a small portion was deductible for tax purposes. In addition, due to the change in the investment status of the Finance segment's Canadian subsidiary, we incurred $31 million in additional tax expense.
Discontinued Operations
In November 2008, we completed the sale of our Fluid & Power business unit to Clyde Blowers Limited, a U.K.-based worldwide leader in the areas of power, materials handling, intermodal transport and logistics, and pump technologies. This sale included our Gear Technologies, Hydraulics, Maag Pump and Union Pump product lines, along with each of their respective brands. We received approximately $527 million in cash, a six-year note with a face value of $28 million and up to $50 million based on final 2008 operating results that will be determined by the

end of the first quarter of 2009, which will be primarily payable in a six-year note. We recorded an after-tax gain of $111 million for this sale. After taxes and other deal-related expenses are paid, we expect total net after-tax proceeds for the sale to be approximately $380 million, excluding any payments due to us related to the 2008 operating results.
In August 2006, we completed the sale of our Fastening Systems business to Platinum Equity, a private equity investment firm, for approximately $613 million in cash and the assumption of $16 million of net indebtedness and certain liabilities. There was no gain or loss recorded upon completion of the sale. Prior to the consummation of the sale of the Fastening Systems business, we recorded an impairment charge of $120 million in 2006 to record the business at the estimated fair value less cost to sell.
The Fluid & Power and Fastening Systems businesses met the discontinued operations criteria and have been included in discontinued operations for all periods presented in our Consolidated Financial Statements. The results of the Fluid & Power business were previously reported in the Industrial segment. Revenue, results of operations and gains on disposal for our discontinued businesses are as follows:

(In millions)                                            2008          2007          2006
Revenue                                                 $  560        $  610        $ 1,618

Income (loss) from discontinued operations before
income taxes                                                34            51            (76 )
Income taxes                                                 3            15             16

Operating income (loss) from discontinued
operations, net of income taxes                             31            36            (92 )
Gains on disposal, net of income taxes                     111             2              -

Income (loss) from discontinued operations, net of
income taxes                                            $  142        $   38        $   (92 )

Segment Analysis
Effective at the beginning of fiscal 2008, we operate in, and report financial information for, the following five business segments: Cessna, Bell, Textron Systems, Industrial and Finance. Prior to 2008, we reported segment financial results within four segments: Bell, Cessna, Industrial and Finance. We changed our segment reporting to separate Textron Systems into a new segment, initially named "Defense & Intelligence," and to report Bell Helicopter as its own segment, Bell, to reflect the manner in which we now manage these businesses. All periods presented herein have been recast to reflect the 2008 segment reporting structure.
Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses and special charges. The measurement for the Finance segment includes interest income and expense and excludes special charges.

Cessna

                (Dollars in millions)     2008         2007        2006
                Revenues                $  5,662     $  5,000     $ 4,156
                Segment profit          $    905     $    865     $   645
                Profit margin                 16 %         17 %        16 %
                Backlog                 $ 14,530     $ 12,583     $ 8,467

Cessna Revenues
Cessna's revenues increased $662 million in 2008, compared with 2007, due to higher volume of $341 million, higher pricing of $252 million and a benefit from a newly acquired business of $69 million. The higher volume primarily reflects higher jet and Caravan deliveries of $481 million, partially offset by lower used aircraft sales of $98 million and lower single engine sales of $56 million. Citation business jets are the largest component of Cessna's revenues. We delivered 467, 387 and 307 Citation business jets in 2008, 2007 and 2006, respectively. However, we do not expect the level of revenue growth we have experienced over the last three years to continue in the near future. Due to recent deferrals

from 2009 deliveries and cancellations, as discussed in the Backlog section on page 5, Cessna has reduced its 2009 production plan from 2008 levels. As a result of reduced production levels, Cessna announced reductions in workforce by approximately 750 employees in the fourth quarter of 2008 and an additional 4,100 employees in January 2009.
Cessna's backlog increased $1.9 billion, primarily due to $2.3 billion in orders received for the wide-body, long-range Citation Columbus jet, which began a multi-year development period in 2008.
In 2007, Cessna's revenues increased $844 million, compared with 2006, due to higher volume of $631 million, primarily due to higher Citation business jet deliveries, and improved pricing of $212 million. Cessna Segment Profit
Cessna's segment profit increased $40 million in 2008, compared with 2007, primarily due to the impact of higher volume of $110 million, pricing in excess of inflation of $82 million and favorable warranty performance of $14 million, partially offset by increased engineering and product development expense of $45 million, which includes costs related to the development of new Citation models, CJ4 and Columbus, inventory writedowns of $51 million, largely related to used aircraft, and increased overhead costs of $19 million. Favorable warranty performance is primarily related to lower estimated warranty costs for aircraft sold in 2008. Segment profit also includes other favorable warranty performance of $28 million in both 2008 and 2007.
In 2007, Cessna's segment profit increased $220 million, compared with 2006, primarily due to improved pricing of $212 million, along with the $139 million impact of higher volume and favorable warranty performance of $14 million, partially offset by inflation of $106 million and increased engineering and product development expense of $41 million. Favorable warranty performance included the $19 million impact of lower estimated warranty costs for aircraft sold in 2007 related to initial model launches as discussed below, partially offset by a lower benefit of $5 million from other favorable warranty performance (a $28 million benefit in 2007, compared with $33 million in 2006). During initial model launches, Cessna typically incurs higher warranty-related costs until the production process matures, at which point warranty costs generally moderate. For the Sovereign and CJ3 models, production lines had reached this maturity level based on historical production and warranty patterns, resulting in lower estimated warranty costs than earlier production aircraft. Accordingly, Cessna has had favorable warranty performance in the past three years primarily due to the lower point-of-sale warranty costs for Sovereign and CJ3 aircraft sold.

Bell

                 (Dollars in millions)    2008        2007        2006
                 Revenues                $ 2,827     $ 2,581     $ 2,347
                 Segment profit          $   278     $   144     $   108
                 Profit margin               10%          6%          5%
                 Backlog                 $ 6,192     $ 3,809     $ 3,119

Bell Revenues
Bell's revenues increased $246 million in 2008, compared with 2007, primarily due to higher volume of $134 million, higher pricing of $87 million and revenues from newly acquired businesses of $26 million. The increase in volume relates primarily to higher V-22 volume of $125 million (largely due to delivery of 18 aircraft in 2008, compared with 14 in 2007), higher H-1 volume of $47 million (principally due to delivery of 12 aircraft in 2008, compared with 10 in 2007), and an increase in spares and service sales volume of $28 million. These volume increases were partially offset by lower commercial helicopter volume of $54 million and lower ARH program revenues of $19 million as a result of the program's termination in October 2008.
Backlog at Bell increased $2.4 billion in 2008, largely due to funding under the V-22 multi-year contract approved in March 2008.
Bell's revenues increased $234 million in 2007, compared with 2006, primarily due to higher volume and mix of $141 million and higher pricing of $90 million. The increase in volume relates primarily to an increase in H-1 program revenues of $161 million, principally due to delivery of the first 10 production units, an increase in V-22 program revenues of $70 million, primarily due to higher spares revenues, and higher commercial helicopter deliveries of $50 million. These increases were partially offset by $92 million in lower spares and service sales for aircraft other than the V-22 and $44 million in lower Huey II kit deliveries.

Bell Segment Profit
Bell's segment profit increased $134 million in 2008, compared with 2007, primarily due to favorable cost performance of $78 million, higher pricing in excess of inflation of $32 million and $21 million in increased royalty revenues, primarily related to the Model A139. Cost performance includes:
• Improved performance for the H-1 LRIP program of $46 million, primarily resulting from a $30 million net charge recorded in the fourth quarter of 2007 and $6 million in favorability in 2008, as discussed in more detail below;

• $32 million in lower net charges for the ARH program, as discussed in more detail below;

• $26 million in costs incurred in 2007 related to our exit of certain commercial models;

. . .