<PAGE>

--------------------------------------------------------------------------------
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                   FOR THE FISCAL QUARTER ENDED JUNE 30, 2002

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

        FOR THE TRANSITION PERIOD FROM                TO

                         COMMISSION FILE NUMBER 0-27559

                            ------------------------

                         TEXTRON FINANCIAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                            ------------------------

<Table>
<S>                                            <C>
                  DELAWARE                                      05-6008768
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</Table>

       40 WESTMINSTER STREET, P.O. BOX 6687, PROVIDENCE, R.I. 02940-6687
                                 (401) 621-4200
         (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

                            ------------------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
                               Yes [X]     No [ ]

     All of the shares of common stock of the registrant are owned by Textron
Inc.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                         TEXTRON FINANCIAL CORPORATION

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

  Condensed Consolidated Statements of Income for the three
     and six months ended June 30, 2002 and 2001
     (unaudited)............................................    2

  Condensed Consolidated Balance Sheets at June 30, 2002 and
     December 29, 2001 (unaudited)..........................    3

  Condensed Consolidated Statements of Cash Flows for the
     six months ended June 30, 2002 and 2001 (unaudited)....    4

  Condensed Consolidated Statements of Changes in
     Shareholder's Equity through June 30, 2002
     (unaudited)............................................    5

  Notes to Condensed Consolidated Financial Statements
     (unaudited)............................................    6

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.................   14

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
  MARKET RISK...............................................   21

PART II. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................   22
</Table>

                                        1
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                         TEXTRON FINANCIAL CORPORATION

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)

<Table>
<Caption>
                                                     THREE MONTHS ENDED     SIX MONTHS ENDED
                                                          JUNE 30,              JUNE 30,
                                                     -------------------   -------------------
                                                       2002       2001       2002       2001
                                                     --------   --------   --------   --------
                                                                  (IN THOUSANDS)
<S>                                                  <C>        <C>        <C>        <C>
REVENUES
  Finance charges and discounts....................  $105,488   $129,511   $210,633   $268,772
  Rental revenues on operating leases..............     7,141      4,620     14,205      9,376
  Other income.....................................    36,393     29,855     68,260     56,540
                                                     --------   --------   --------   --------
                                                      149,022    163,986    293,098    334,688
EXPENSES
  Interest.........................................    48,858     69,994     95,156    147,758
  Selling and administrative.......................    42,549     38,922     83,525     72,815
  Provision for losses.............................    25,011     11,708     55,386     22,889
  Depreciation of equipment on operating leases....     3,419      1,895      6,964      3,724
  Special charges..................................        --      1,853         --      1,853
                                                     --------   --------   --------   --------
                                                      119,837    124,372    241,031    249,039
                                                     --------   --------   --------   --------
INCOME BEFORE INCOME TAXES, DISTRIBUTIONS ON
  PREFERRED SECURITIES AND CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE...................    29,185     39,614     52,067     85,649
Income taxes.......................................    10,281     14,825     18,630     32,083
Distributions on preferred securities (net of tax
  benefits of $190, $207, $391 and $414,
  respectively)....................................       368        355        725        706
                                                     --------   --------   --------   --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE.............................    18,536     24,434     32,712     52,860
Cumulative effect of change in accounting principle
  (net of tax benefit of $8,278)...................        --         --     15,372         --
                                                     --------   --------   --------   --------
NET INCOME.........................................  $ 18,536   $ 24,434   $ 17,340   $ 52,860
                                                     ========   ========   ========   ========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        2
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                               JUNE 30,     DECEMBER 29,
                                                                 2002           2001
                                                              ----------    ------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
ASSETS
Cash and equivalents........................................  $   20,575     $   18,489
Finance receivables, net of unearned income:
  Installment contracts.....................................   2,094,763      2,047,088
  Revolving loans...........................................   1,420,380      1,578,922
  Golf course and resort mortgages..........................     878,702        811,951
  Floorplan receivables.....................................     749,109        474,391
  Finance leases............................................     432,303        318,859
  Leveraged leases..........................................     412,744        404,423
                                                              ----------     ----------
          Total finance receivables.........................   5,988,001      5,635,634
  Allowance for losses on receivables.......................    (151,811)      (143,756)
                                                              ----------     ----------
          Finance receivables -- net........................   5,836,190      5,491,878
Equipment on operating leases -- net........................     192,714        201,060
Goodwill....................................................     180,843        203,564
Other assets................................................     564,425        548,967
                                                              ----------     ----------
          Total assets......................................  $6,794,747     $6,463,958
                                                              ==========     ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Accrued interest and other liabilities......................  $  352,509     $  341,394
Amounts due to Textron Inc. ................................      24,920         29,985
Deferred income taxes.......................................     382,605        357,324
Note payable to Textron Inc. ...............................          --        510,000
Other debt..................................................   5,036,462      4,188,420
                                                              ----------     ----------
          Total liabilities.................................   5,796,496      5,427,123
                                                              ----------     ----------
Textron Financial and Litchfield obligated mandatory
  redeemable preferred securities of trust subsidiary
  holding solely Litchfield junior subordinated
  debentures................................................      27,215         27,480
SHAREHOLDER'S EQUITY
Common stock ($100 par value, 4,000 shares authorized; 2,500
  shares issued and outstanding)............................         250            250
Capital surplus.............................................     573,676        573,676
Investment in parent company preferred stock................     (25,000)       (25,000)
Accumulated other comprehensive loss........................     (21,452)       (18,793)
Retained earnings...........................................     443,562        479,222
                                                              ----------     ----------
          Total shareholder's equity........................     971,036      1,009,355
                                                              ----------     ----------
          Total liabilities and shareholder's equity........  $6,794,747     $6,463,958
                                                              ==========     ==========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        3
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                    SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 2002          2001
                                                              -----------   -----------
                                                                   (IN THOUSANDS)
<S>                                                           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $    17,340   $    52,860
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Cumulative effect of change in accounting principle, net
     of tax benefit.........................................       15,372            --
  Provision for losses......................................       55,386        22,889
  Deferred income tax provision.............................       25,765         9,777
  Depreciation..............................................       14,338         9,379
  Amortization..............................................        4,942         9,774
  Gains on securitizations..................................      (19,238)      (13,561)
  Decrease in accrued interest and other liabilities........      (44,431)       (2,994)
  Other.....................................................        5,324       (21,739)
                                                              -----------   -----------
          Net cash provided by operating activities.........       74,798        66,385
CASH FLOWS FROM INVESTING ACTIVITIES:
Finance receivables originated or purchased.................   (4,300,740)   (3,654,760)
Finance receivables repaid..................................    3,632,522     2,790,170
Proceeds from receivable sales, including securitizations...      355,633       818,097
Acquisitions, net of cash acquired..........................           --      (387,524)
Proceeds from disposition of operating leases and other
  assets....................................................       32,677         9,386
Purchase of assets for operating leases.....................      (31,294)       (7,728)
Proceeds from real estate owned.............................        3,594            --
Other capital expenditures..................................      (12,616)       (6,737)
Other investments...........................................       20,727        (4,263)
                                                              -----------   -----------
          Net cash used in investing activities.............     (299,497)     (443,359)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................    1,294,829       548,440
Principal payments on long-term debt........................     (737,900)     (594,642)
Net increase in commercial paper............................      319,863       430,940
Net (decrease) increase in other short-term debt............     (546,841)       11,530
Proceeds from issuance of nonrecourse debt..................           --        60,177
Principal payments on nonrecourse debt......................      (43,624)      (78,414)
Net (decrease) increase in amounts due to Textron Inc.......       (5,065)        1,693
Capital contributions from Textron Inc......................        4,505        44,504
Dividends paid to Textron Inc...............................      (57,505)      (29,804)
                                                              -----------   -----------
          Net cash provided by financing activities.........      228,262       394,424
Effect of exchange rate changes on cash.....................       (1,477)           --
                                                              -----------   -----------
NET INCREASE IN CASH........................................        2,086        17,450
Cash and equivalents at beginning of period.................       18,489         6,498
                                                              -----------   -----------
Cash and equivalents at end of period.......................  $    20,575   $    23,948
                                                              ===========   ===========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        4
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)

                         TEXTRON FINANCIAL CORPORATION

      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
                                  (UNAUDITED)

<Table>
<Caption>
                                                    INVESTMENT    ACCUMULATED
                                                     IN PARENT       OTHER
                                COMMON   CAPITAL      COMPANY       COMPRE-      RETAINED
                                STOCK    SURPLUS    PREF. STOCK   HENSIVE LOSS   EARNINGS     TOTAL
                                ------   --------   -----------   ------------   --------   ----------
<S>                             <C>      <C>        <C>           <C>            <C>        <C>
BALANCE DECEMBER 30, 2000.....   $250    $533,676    $(25,000)            --     $400,751   $  909,677
Comprehensive income:
  Net income..................     --          --          --             --      120,571      120,571
  Other comprehensive income
     (loss), net of income
     taxes:
  Unrealized net losses on
     hedge contracts..........     --          --          --       $(19,359)          --      (19,359)
  Unrealized net gains on
     interest-only
     securities...............     --          --          --            566           --          566
                                                                    --------                ----------
  Other comprehensive loss....     --          --          --        (18,793)          --      (18,793)
                                                                                            ----------
Comprehensive income..........     --          --          --             --           --      101,778
Capital contributions from
  Textron Inc.................     --      49,010          --             --           --       49,010
Dividends to Textron Inc......     --      (9,010)         --             --      (42,100)     (51,110)
                                 ----    --------    --------       --------     --------   ----------
BALANCE DECEMBER 29, 2001.....    250     573,676     (25,000)       (18,793)     479,222    1,009,355
Comprehensive income:
  Net income..................     --          --          --             --       17,340       17,340
  Other comprehensive income
     (loss), net of income
     taxes:
  Foreign currency translation
     adjustments..............     --          --          --         (3,375)          --       (3,375)
  Unrealized net gains on
     hedge contracts..........     --          --          --          2,452           --        2,452
  Unrealized net losses on
     interest-only
     securities...............     --          --          --         (1,736)          --       (1,736)
                                                                    --------                ----------
  Other comprehensive loss....     --          --          --         (2,659)          --       (2,659)
                                                                                            ----------
Comprehensive income..........     --          --          --             --           --       14,681
Capital contributions to
  Textron Inc.................     --       4,505          --             --           --        4,505
Dividends to Textron Inc......     --      (4,505)         --             --      (53,000)     (57,505)
                                 ----    --------    --------       --------     --------   ----------
BALANCE JUNE 30, 2002.........   $250    $573,676    $(25,000)      $(21,452)    $443,562   $  971,036
                                 ====    ========    ========       ========     ========   ==========
</Table>

     See notes to condensed consolidated financial statements (unaudited).
                                        5
<PAGE>

ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

     The financial statements should be read in conjunction with the financial
statements included in Textron Financial Corporation's Annual Report on Form
10-K for the year ended December 29, 2001. The accompanying unaudited
consolidated financial statements include the accounts of Textron Financial
Corporation (Textron Financial or the Company) and its subsidiaries. All
significant intercompany transactions are eliminated. The consolidated financial
statements are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of Textron Financial's consolidated financial position at June
30, 2002 and December 29, 2001, and its consolidated results of operations and
cash flows for each of the respective three- and six-month periods ended June
30, 2002 and 2001. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. Certain
prior year balances have been reclassified to conform to the current year
presentation.

NOTE 2. OTHER INCOME

<Table>
<Caption>
                                       THREE MONTHS ENDED       SIX MONTHS ENDED
                                      --------------------    --------------------
                                      JUNE 30,    JUNE 30,    JUNE 30,    JUNE 30,
                                        2002        2001        2002        2001
                                      --------    --------    --------    --------
<S>                                   <C>         <C>         <C>         <C>
Securitization gains..............    $11,643     $ 8,391     $19,238     $13,561
Servicing fees....................      6,982       4,754      12,498       7,041
Investment income.................      5,920       3,706      10,385       7,457
Late charges......................      2,743       2,692       5,018       4,883
Prepayment gains..................      3,157       2,089       4,868       5,091
Syndication gains.................      2,423       2,000       3,918       6,394
Other.............................      3,525       6,223      12,335      12,113
                                      -------     -------     -------     -------
          Total other income......    $36,393     $29,855     $68,260     $56,540
                                      =======     =======     =======     =======
</Table>

     The Other component of Other income includes custodial fees, commitment
fees, residual gains, insurance fees and other miscellaneous fees, which are
primarily recognized as income when received.

     Cash collections on current and prior period securitization gains were
$10.2 million and $2.4 million for the three-month periods ended June 30, 2002
and June 30, 2001, respectively, and $23.1 million and $5.8 million for the
six-month periods ended June 30, 2002 and June 30, 2001, respectively.

                                        6
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 3. MANAGED FINANCE RECEIVABLES

     Textron Financial manages finance receivables for a variety of investors,
participants and third-party portfolio owners.

<Table>
<Caption>
                                                       JUNE 30,    DECEMBER 29,
                                                         2002          2001
                                                      ----------   ------------
                                                           (IN THOUSANDS)
<S>                                                   <C>          <C>
Owned receivables...................................  $5,988,001    $5,635,634
Securitized receivables.............................   2,395,844     2,332,025
                                                      ----------    ----------
                                                       8,383,845     7,967,659
Nonrecourse participations..........................     478,185       591,853
Third-party portfolio servicing.....................     559,782       740,246
SBA sales agreements................................      56,505        49,338
                                                      ----------    ----------
  Total managed finance receivables.................  $9,478,317    $9,349,096
                                                      ==========    ==========
</Table>

     Nonrecourse participations consist of undivided interests in loans
originated by Textron Financial, primarily in vacation interval resorts and golf
finance, which are sold to independent investors.

     The third-party portfolio servicing amounts largely represent finance
receivable portfolios of resort developers and third-party securitizations as
well as banks and leasing companies.

     Owned receivables include approximately $60 million of noncash finance
receivables additions, which were unfunded at June 30, 2002, primarily holdback
arrangements. The corresponding liability is included in Accrued interest and
other liabilities on the Condensed Consolidated Balance Sheets.

NOTE 4. LOAN IMPAIRMENT

     Textron Financial periodically assesses finance receivables, excluding
homogeneous loan portfolios and finance leases, for impairment. The Company
considers a loan to be impaired if the fair value of the loan is less than its
carrying amount and establishes a reserve based on this difference. Fair value
is based on the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price or, if the
loan is collaterally dependent, at the fair value of the collateral. This
evaluation is inherently subjective, as it requires estimates including the
amount and timing of future cash flows expected to be received on impaired loans
that may differ from actual results.

     The Company suspends the accrual of interest income for accounts that are
contractually delinquent by more than three months, unless collection is not
doubtful. In addition, detailed reviews of loans may result in earlier
suspension if collection is doubtful. Cash payments on nonaccrual accounts,
including finance charges, generally are applied to reduce loan principal. The
Company had $173.5 million of nonaccrual finance receivables at June 30, 2002,
compared to $113.8 million at December 29, 2001. Nonaccrual loans resulted in
Textron Financial's revenues being reduced by approximately $7.4 million and
$4.7 million for the first six months of 2002 and 2001, respectively. No
interest income was recognized using the cash basis method. Excluding
homogeneous loan portfolios and finance leases, the Company had $111.6 million
of nonaccrual finance receivables at June 30, 2002, compared to $53.9 million at
December 29, 2001, which were considered impaired. The allowance for losses on
receivables related to impaired loans was $22.3 million at June 30, 2002, and
$10.9 million at December 29, 2001. The average recorded investment in impaired
loans during the first six months of 2002 was $84.2 million, compared to $64.6
million in the corresponding period in 2001.

                                        7
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 5. GOODWILL

     On December 30, 2001, Textron Financial adopted SFAS No. 142, "Goodwill and
Other Intangible Assets", which requires companies to stop amortizing goodwill
and certain intangible assets with indefinite useful lives, and requires an
annual review for impairment. Upon adoption, Textron Financial has discontinued
the amortization of goodwill. Goodwill amortization expense for the three- and
six-month periods ended June 30, 2001, was $2.8 million and $5.6 million,
respectively, net of income taxes.

     Under SFAS No. 142, Textron Financial was required to test all existing
goodwill for impairment as of December 30, 2001, on a "reporting unit" basis.
The reporting unit represents the operating segment unless, at businesses one
level below that operating segment, discrete financial information is prepared
that is reviewed by management, in which case such component is the reporting
unit. Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. Fair values were established
using a discounted cash flow methodology.

     As a result of this impairment review of goodwill, Textron Financial
recorded an after-tax transitional impairment charge of $15.4 million ($23.7
million, pre-tax), which is reported in the caption "Cumulative effect of change
in accounting principle." This charge relates to the Franchise Finance division
within the Specialty Finance segment and is primarily the result of decreasing
loan volumes and an unfavorable securitization market. No impairment charge was
appropriate for this reporting unit under the previous goodwill impairment
accounting standard, which was based on undiscounted cash flows.

     Textron Financial also adopted the remaining provisions of SFAS No. 141,
"Business Combinations" on December 30, 2001. For goodwill and intangible assets
reported in connection with acquisitions made prior to July 1, 2001, these
provisions broaden the criteria for recording intangible assets separate from
goodwill and require that certain intangible assets that do not meet the new
criteria, such as workforce, be reclassified into goodwill. Upon adoption of
these provisions, intangible assets totaling $0.9 million were reclassified into
goodwill within the Specialty Finance segment.

     Goodwill totaled $110.0 million in the Specialty Finance segment, $40.6
million in the Structured Capital segment, $16.6 million in the Aircraft Finance
segment and $13.6 million in the Revolving Credit segment at June 30, 2002.

     The impact of discontinuing the amortization of goodwill is presented
below:

<Table>
<Caption>
                                         THREE MONTHS ENDED     SIX MONTHS ENDED
                                         -------------------   -------------------
                                         JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,
                                           2002       2001       2002       2001
                                         --------   --------   --------   --------
                                                      (IN THOUSANDS)
<S>                                      <C>        <C>        <C>        <C>
Reported net income....................  $18,536    $24,434    $17,340    $52,860
Add back: amortization, net of taxes...       --      2,796         --      5,593
                                         -------    -------    -------    -------
Adjusted net income....................  $18,536    $27,230    $17,340    $58,453
                                         =======    =======    =======    =======
</Table>

                                        8
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 6. OTHER ASSETS

<Table>
<Caption>
                                                        JUNE 30,   DECEMBER 29,
                                                          2002         2001
                                                        --------   ------------
                                                            (IN THOUSANDS)
<S>                                                     <C>        <C>
Retained interests in securitizations.................  $240,407     $178,599
Investment in equipment residuals.....................   106,343      112,804
Interest-only securities..............................    82,084       78,939
Fixed assets -- net...................................    49,922       44,680
Repossessed assets and properties.....................    30,677       23,235
Other long-term investments...........................    26,592       24,723
Short-term investments................................        --       63,819
Other.................................................    28,400       22,168
                                                        --------     --------
          Total other assets..........................  $564,425     $548,967
                                                        ========     ========
</Table>

     The Investment in equipment residuals represents the remaining equipment
residual values associated with aircraft and Textron golf and turf equipment
lease payments that were securitized in 2002, 2001 and 2000. The cost of fixed
assets is being depreciated using the straight-line method based on the
estimated useful lives of the assets.

NOTE 7. DEBT AND CREDIT FACILITIES

<Table>
<Caption>
                                                       JUNE 30,    DECEMBER 29,
                                                         2002          2001
                                                      ----------   ------------
                                                           (IN THOUSANDS)
<S>                                                   <C>          <C>
Short-term debt:
  Commercial paper..................................  $  943,115    $  623,252
  Other short-term debt.............................      27,614        64,455
  Note payable to Textron Inc.......................          --       510,000
                                                      ----------    ----------
          Total short-term debt.....................     970,729     1,197,707
Long-term debt:
  5.65% -- 5.95% notes; due 2003 to 2007............   1,153,824       399,503
  6.28% -- 6.84% notes; due 2003 to 2007............      99,026        31,637
  7.13% -- 7.37% notes; due 2002 to 2004............   1,107,667     1,081,223
  Variable rate notes; due 2002 to 2007.............   1,705,216     1,988,350
                                                      ----------    ----------
          Total long-term debt......................   4,065,733     3,500,713
                                                      ----------    ----------
          Total debt................................  $5,036,462    $4,698,420
                                                      ==========    ==========
</Table>

     The weighted average interest rates on short-term borrowings have been
determined by relating the annualized interest cost to the daily average dollar
amounts outstanding. The combined weighted average interest rate was 2.20%
during the six months ended June 30, 2002, and 2.21% at June 30, 2002.

     Interest on Textron Financial's variable rate notes is predominately tied
to the three-month LIBOR for U.S. dollar deposits. The weighted average interest
rate on these notes, before consideration of the effect of interest rate
exchange agreements, was 2.46% at June 30, 2002.

                                        9
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

     Textron Financial has bank line of credit agreements of $1.5 billion, of
which $500 million will expire in 2003 and $1.0 billion will expire in 2006.
Textron Financial's lines of credit, including the $100 million line of credit
with Textron, not used or reserved as support for commercial paper at June 30,
2002, were $657 million. The Company also maintains a C$50 million committed
facility, under which it can borrow an additional C$50 million on an uncommitted
basis. At June 30, 2002, the Company had used C$46 million of the committed
portion of the facility. Textron Financial also has a $25 million UK facility,
of which $18 million remains unused at June 30, 2002. Both the Canadian and UK
facilities expire in 2002, however, Textron Financial expects to extend the
maturity of both facilities to 2003. Textron Financial generally pays fees in
support of these lines.

     Through its subsidiary, Textron Financial Canada Funding Corp. (Textron
Canada Funding), the Company may periodically issue debt securities. Textron
Financial owns 100% of the common stock of Textron Canada Funding. Textron
Canada Funding is a financing subsidiary of Textron Financial with no
operations, revenues or cash flows other than those related to the issuance,
administration and repayment of debt securities that are or will be fully and
unconditionally guaranteed by Textron Financial.

     Securitizations are an important source of liquidity for Textron Financial
and involve the periodic transfer of finance receivables to securitization
trusts. At June 30, 2002 and December 29, 2001, the amount of debt related to
these securitization trusts was $2.1 billion and $1.4 billion, respectively.

     The terms of certain of the Company's loan agreements and credit
facilities, under the most restrictive covenant, limit the payment of dividends
to $358.7 million at June 30, 2002. In the first six months of 2002, Textron
Financial declared and paid dividends of $57.5 million.

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

     Textron Financial has entered into interest rate exchange agreements to
mitigate its exposure to interest rate changes by converting certain of its
fixed rate receivables and debt issues to floating rates. The agreements require
the Company to make periodic fixed rate payments in exchange for floating rate
receipts and vice versa based on specified notional amounts. In the first six
months of 2002, the Company also entered into foreign currency exchange
agreements to convert a Y6.0 billion fixed rate note to a $44.8 million variable
rate note. The agreement requires the Company to make U.S. dollar payments based
on LIBOR in exchange for fixed receipts of Yen at specified notional amounts.
The Company has designated these agreements fair value hedges. The Company does
not hold or issue derivative financial instruments for trading or speculative
purposes.

     Textron Financial has also entered into interest rate exchange, cap and
floor agreements to mitigate its exposure on interest-only securities resulting
from securitizations. The exchange agreements require the Company to make
periodic variable payments in exchange for periodic fixed rate receipts and vice
versa based on specified notional amounts. The interest rate cap and floor
agreements require the Company to make periodic variable rate payments based on
specified notional amounts if interest rates exceed or fall below specified
rates. The Company has designated these agreements cash flow hedges.

     In the first six months of 2002, the Company also entered into foreign
currency exchange agreements to convert $107.0 million of variable rate notes
receivable to C$170.0 million of fixed rate notes receivable to manage foreign
currency exposure by matching to Canadian denominated debt. The agreements
require the Company to make U.S. dollar payments based on LIBOR in exchange for
fixed receipts of Canadian dollars at specified notional amounts. The Company
has designated these agreements cash flow hedges.

                                        10
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

     As of June 30, 2002, Textron Financial has not incurred or recognized any
gains or losses in earnings as the result of the ineffectiveness or the
exclusion from its assessment of hedge effectiveness of its fair value or cash
flow hedges.

NOTE 9. TEXTRON FINANCIAL AND LITCHFIELD OBLIGATED MANDATORY REDEEMABLE
        PREFERRED SECURITIES OF TRUST SUBSIDIARY HOLDING SOLELY LITCHFIELD
        JUNIOR SUBORDINATED DEBENTURES

     Prior to Textron Financial's acquisition of Litchfield on November 3, 1999,
a trust, sponsored and wholly-owned by Litchfield, issued to the public $26.2
million of mandatory redeemable preferred securities (Preferred Securities). The
trust subsequently invested in $26.2 million aggregate principal amount of
Litchfield 10% Series A Junior Subordinated Debentures (Series A Debentures),
due 2029. The Series A Debentures are the sole asset of the trust. The amounts
due to the trust under the Series A Debentures and the related income statement
amounts have been eliminated in Textron Financial's consolidated financial
statements.

     The Preferred Securities were recorded by Textron Financial at the fair
value of $28.6 million as of the acquisition date and the fair value adjustment
is being amortized through June 2004.

     The Preferred Securities accrue and pay cash distributions quarterly at a
rate of 10% per annum. The trust's obligation under the Preferred Securities are
fully and unconditionally guaranteed by Litchfield, including, without
limitation, all obligations arising under the Declaration Trust, the Trust
Preferred Securities, the Indenture, the Debentures and the ancillary agreements
entered into in connection with the foregoing. The trust will redeem all of the
outstanding Preferred Securities when the Series A Debentures are paid at
maturity on June 30, 2029, or otherwise become due. Litchfield will have the
right to redeem 100% of the principal plus accrued and unpaid interest on or
after June 30, 2004.

     As a result of the acquisition, Textron Financial has agreed to make
payments to the holders of the Preferred Securities, when due, to the extent not
paid by or on behalf of the trust or the subsidiary.

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS AND COMPREHENSIVE INCOME

     Accumulated other comprehensive loss is as follows:

<Table>
<Caption>
                                                           SIX MONTHS ENDED
                                                          -------------------
                                                          JUNE 30,   JUNE 30,
                                                            2002       2001
                                                          --------   --------
                                                            (IN THOUSANDS)
<S>                                                       <C>        <C>
Beginning of period.....................................  $(18,793)        --
Foreign currency translation adjustments................    (3,375)        --
Transition adjustment due to change in accounting for
  derivative instruments and hedging activities, net of
  income tax benefit of $6,948..........................        --   $(11,580)
Net deferred gain (loss) on hedge contracts, net of
  income taxes of $647 and income tax benefit of $2,086,
  respectively..........................................     1,079     (3,477)
Amortization of deferred loss on terminated hedge
  contracts, net of income taxes of $824 and $281,
  respectively..........................................     1,373        469
Net deferred loss on interest-only securities, net of
  income tax benefit of $1,042..........................    (1,736)        --
                                                          --------   --------
End of period...........................................  $(21,452)  $(14,588)
                                                          ========   ========
</Table>

                                        11
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

     Comprehensive income is summarized below:

<Table>
<Caption>
                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                        -------------------   -------------------
                                        JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,
                                          2002       2001       2002       2001
                                        --------   --------   --------   --------
                                                     (IN THOUSANDS)
<S>                                     <C>        <C>        <C>        <C>
Net income............................  $18,536    $24,434    $17,340    $ 52,860
Other comprehensive loss..............   (4,188)      (635)    (2,659)    (14,588)
                                        -------    -------    -------    --------
Comprehensive income..................  $14,348    $23,799    $14,681    $ 38,272
                                        =======    =======    =======    ========
</Table>

NOTE 11. CONTINGENCIES

     There are pending or threatened lawsuits and other proceedings against
Textron Financial and its subsidiaries. Some of these suits and proceedings seek
compensatory, treble or punitive damages in substantial amounts. These suits and
proceedings are being defended by, or contested on behalf of, Textron Financial
and its subsidiaries. On the basis of information presently available, Textron
Financial believes any such liability would not have a material effect on
Textron Financial's financial position or results of operations.

NOTE 12. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

     The Company's reportable segments are strategically aligned on the markets
served and the products offered. During 2001, the Company decided to exit
certain of its businesses and product lines and to realign its remaining
businesses in four operating segments: Specialty Finance, Revolving Credit,
Structured Capital and Aircraft Finance. In order to manage the orderly
liquidation of the portfolios relating to the exited businesses and to segregate
their results from its ongoing businesses, the Company has grouped their results
in the Other segment. As a result of these changes, the financial information
for the three- and six-month periods ended June 30, 2001, has been restated
reflecting the realignment of the segments.

<Table>
<Caption>
                                             THREE MONTHS ENDED     SIX MONTHS ENDED
                                             -------------------   -------------------
                                             JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,
                                               2002       2001       2002       2001
                                             --------   --------   --------   --------
                                                          (IN THOUSANDS)
<S>                                          <C>        <C>        <C>        <C>
Revenues
  Specialty Finance........................  $ 50,446   $ 56,893   $ 98,658   $114,396
  Revolving Credit.........................    44,637     32,266     85,501     70,633
  Structured Capital.......................    26,835     27,851     51,176     54,979
  Aircraft Finance.........................    20,078     29,539     43,286     59,942
  Other....................................     7,026     17,437     14,477     34,738
                                             --------   --------   --------   --------
Total revenues.............................  $149,022   $163,986   $293,098   $334,688
                                             ========   ========   ========   ========
</Table>

                                        12
<PAGE>
ITEM 1.  FINANCIAL STATEMENTS (CONTINUED)
                         TEXTRON FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

<Table>
<Caption>
                                             THREE MONTHS ENDED     SIX MONTHS ENDED
                                             -------------------   -------------------
                                             JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,
                                               2002       2001       2002       2001
                                             --------   --------   --------   --------
                                                          (IN THOUSANDS)
<S>                                          <C>        <C>        <C>        <C>
Income (loss) before special charges,
  income taxes, distributions on preferred
  securities and cumulative effect of
  change in accounting principle (1)(2)
  Specialty Finance........................  $ 17,750   $ 19,014   $ 33,315   $ 37,196
  Revolving Credit.........................    10,369      8,500     20,836     20,982
  Structured Capital.......................     7,564      9,747     11,406     18,529
  Aircraft Finance.........................       361      6,309      2,745     14,971
  Other....................................    (6,859)    (2,103)   (16,235)    (4,176)
                                             --------   --------   --------   --------
Total income before special charges, income
  taxes, distributions on preferred
  securities and cumulative effect of
  change in accounting principle...........  $ 29,185   $ 41,467   $ 52,067   $ 87,502
  Special charges..........................        --     (1,853)        --     (1,853)
                                             --------   --------   --------   --------
Total income before income taxes,
  distributions on preferred securities and
  cumulative effect of change in accounting
  principle................................  $ 29,185   $ 39,614   $ 52,067   $ 85,649
                                             ========   ========   ========   ========
</Table>

<Table>
<Caption>
                                                               JUNE 30,    DECEMBER 29,
                                                                 2002          2001
                                                              ----------   ------------
                                                                   (IN THOUSANDS)
<S>                                                           <C>          <C>
Finance assets (3)
  Specialty Finance.........................................  $2,584,539    $2,434,318
  Revolving Credit..........................................   1,391,196     1,221,751
  Structured Capital........................................   1,166,340     1,152,360
  Aircraft Finance..........................................   1,327,196     1,248,305
  Other.....................................................     197,547       251,499
                                                              ----------    ----------
Total finance assets........................................  $6,666,818    $6,308,233
                                                              ==========    ==========
</Table>

---------------

(1) Interest expense is allocated to each segment in proportion to its net
    investment in finance assets. Net investment in finance assets includes
    deferred income taxes, security deposits and other specifically identified
    liabilities. The interest allocated matches, to the extent possible,
    variable rate debt with variable rate financing assets and fixed rate debt
    with fixed rate financing assets.

(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; retained interests in
    securitizations; investment in equipment residuals and long-term investments
    (some of which are classified in Other assets on Textron Financial's
    Condensed Consolidated Balance Sheets).

                                        13
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                         TEXTRON FINANCIAL CORPORATION

FINANCIAL CONDITION

Liquidity and Capital Resources

     Textron Financial Corporation (Textron Financial or the Company) uses a
broad base of financial resources for its liquidity and capital needs. Cash is
provided from operations and several sources of borrowings, including the
issuance of commercial paper and short-term debt, sales of medium and long-term
debt in the U.S. and foreign financial markets and junior subordinated borrowing
under a $100 million line of credit with Textron Inc. (Textron). For liquidity
purposes, Textron Financial has a policy of maintaining sufficient unused lines
of credit to support its outstanding commercial paper. Textron Financial has
bank line of credit agreements of $1.5 billion, of which $500 million will
expire in 2003 and $1.0 billion will expire in 2006. The $500 million facility
includes a one-year term out option. None of these lines of credit were used at
June 30, 2002 or December 29, 2001. Textron Financial also maintains a C$50
million committed facility, under which it can borrow an additional C$50 million
on an uncommitted basis. At June 30, 2002, Textron Financial had used C$46
million of the committed portion of the facility. Textron Financial also has a
$25 million UK facility, of which $18 million remains unused at June 30, 2002.
Both the Canadian and UK facilities expire in 2002, however, Textron Financial
expects to extend the maturity of both facilities to 2003. Unused lines of
credit, including the $100 million line of credit with Textron, not reserved as
support for commercial paper, were $657 million at June 30, 2002, compared to
$975 million at December 29, 2001. The decrease in the unused lines of credit is
attributable to the pay down and termination of a short-term revolving note
agreement with Textron.

     Under a shelf registration statement filed with the Securities and Exchange
Commission, Textron Financial may issue public debt securities in one or more
offerings up to a total maximum offering of $3.0 billion. Under this facility,
Textron Financial issued $1.2 billion of term notes in the first six months of
2002, primarily in the U.S. and Canadian markets, that mature in 2003 through
2007. The proceeds from the issuances were used to refinance maturing commercial
paper and long-term debt. At June 30, 2002, Textron Financial had $1.8 billion
available under this facility.

     During the first six months of 2002, Textron Financial received net
proceeds from securitizations of $169 million of small business finance
receivables (on a revolving basis), $75 million of floorplan finance receivables
(on a revolving basis), $38 million of captive golf and turf finance
receivables, $45 million of resort receivables and $5 million of land finance
receivables. These securitizations provided Textron Financial with an alternate
source of liquidity while maintaining desired debt-to-equity ratios. Textron
Financial used the proceeds from the securitizations to retire commercial paper.
In connection with a $220 million revolving securitization, Textron Financial is
obligated to repurchase a certain class of loans if Textron Financial's credit
rating drops below BBB. Such loans amounted to $41 million at June 30, 2002.
Textron Financial has no other repurchase obligations in connection with any
other securitization transactions. Textron Financial anticipates that it will
enter into additional securitization transactions during the remainder of 2002.

     During the fourth quarter of 2001, certain of Textron Financial's
commercial paper and long-term debt credit ratings were downgraded. Although
Textron Financial's borrowing spreads have increased as a result of the
downgrades, Textron Financial continues to have access to the commercial paper,
long-term debt and securitization markets. Further downgrades in Textron
Financial's ratings could increase borrowing spreads or limit its access to the
commercial paper, long-term debt and securitization markets. In addition,
Textron Financial's $1.5 billion revolving bank line of credit agreements
contain certain financial covenants with which Textron Financial must comply in
order to maintain its ability to borrow under the facilities. Textron Financial
was in full compliance with such covenants at June 30, 2002. Textron Financial
believes that is has adequate credit facilities and access to credit markets to
meet its long-term financing needs.

     Cash flows provided by operations were $75 million during the first six
months of 2002, compared to $66 million in the corresponding period last year.
The increase was due principally to the timing of income tax

                                        14
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

payments and a 3% increase in net income before depreciation, amortization,
provision for losses and the cumulative effect of change in accounting
principle. Cash flows used in investing activities were funded primarily from
the collection of receivables, the syndication and securitization of receivables
and through the issuance of debt.

     Textron Financial declared and paid dividends to Textron of $57.5 million
during the first six months of 2002, compared to $29.8 million of dividends
declared and paid during the corresponding period of 2001. The increase in 2002
was due to excess capital that resulted from slower than anticipated receivable
growth in the first six months of 2002 and the return of capital to Textron
associated with the sale of a finance receivable portfolio.

     Because the finance business involves the purchase and carrying of
receivables, a relatively high ratio of borrowings to net worth is customary.
Debt as a percentage of total capitalization was 84% at June 30, 2002, up from
82% at December 29, 2001. Textron Financial's ratio of earnings to fixed charges
was 1.54x for the six months ended June 30, 2002, compared to 1.57x for the
corresponding six months in 2001. Total short-term debt as a percentage of total
debt was 19% at June 30, 2002, compared to 25% at December 29, 2001. Relative
changes in short and long-term debt primarily depend on matching the duration of
assets and liabilities.

Finance Assets

     Textron Financial's financing activities are confined almost exclusively to
secured lending and leasing to commercial markets. Management believes that the
portfolio avoids excessive concentration of risk through diversification across
geographic regions, industries and types of collateral and among borrowers.

     Total finance assets were $6.7 billion at June 30, 2002, up from $6.3
billion at December 29, 2001. The increase in finance assets was mostly due to
increases in floorplan finance receivables net of revolving securitization
conduit ($291 million), golf finance receivables ($97 million), aircraft finance
receivables, including operating lease assets ($79 million), and land finance
receivables ($35 million), partially offset by a decrease in small business
financing due to a revolving securitization conduit and the continued
liquidation of the portfolios related to certain exited businesses in the Other
segment.

     Finance receivable additions for the first six months of 2002 were $4.3
billion, compared to $3.7 billion in the corresponding period last year.
Floorplan finance receivable additions increased $875 million, including
portfolio purchases of $241 million. This increase was partially offset by
decreases in other portfolios due to a weaker economic environment.

Nonperforming Assets

     Nonperforming assets, which includes independent and nonrecourse captive
finance assets, as a percentage of finance assets, increased to 3.06% ($204
million) at June 30, 2002, compared to 2.97% ($193 million) at March 31, 2002
and 2.13% ($134 million) at December 29, 2001. The $70 million increase in
nonperforming assets at June 30, 2002, as compared to December 29, 2001, was
largely due to increases in syndicated bank loans ($37 million), the Aircraft
Finance segment ($32 million), media finance ($16 million), floorplan finance
($6 million) and franchise finance ($5 million), partially offset by decreases
in asset-based lending ($23 million) and exited businesses ($4 million). The
increase in nonperforming assets in syndicated bank loans is primarily related
to loans to the telecommunications industry, which has experienced economic
weakness. Current economic conditions will likely put continued pressure on
Textron Financial's overall portfolio quality. The allowance for losses on
receivables as a percentage of nonperforming assets decreased to 74% at June 30,
2002, compared to 77% at March 31, 2002 and 107% at December 29, 2001. The
decrease in the percentage reflects management's assessment of adequate
collateral value supporting the increase in nonperforming assets at June 30,
2002.

                                        15
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

Interest Rate Sensitivity

     The Company's mix of fixed and floating rate debt is continuously monitored
by management and is adjusted, as necessary, based on evaluations of internal
and external factors.

     Management's strategy of matching interest-sensitive assets with
interest-sensitive liabilities limits Textron Financial's risk to changes in
interest rates and includes entering into interest rate exchange agreements as
part of this strategy. At June 30, 2002, interest-sensitive assets in excess of
interest-sensitive liabilities were $588 million, net of $1.0 billion of
variable rate interest rate exchange agreements relating to debt and $95 million
of variable rate interest rate exchange agreements on finance receivables,
compared to interest-sensitive assets in excess of interest-sensitive
liabilities of $410 million, net of $370 million of interest rate exchange
agreements relating to debt and $97 million of interest rate exchange agreements
on finance receivables at December 29, 2001. The increase in interest rate
exchange agreements was directly related to the conversion of fixed rate debt to
variable rate debt at the time of issuance. The Company's net position does not
reflect a change in management's match funding strategy, which is consistent
with year-end.

     Management believes that its asset management policy provides adequate
protection against interest rate risks. Increases or decreases in interest
rates, however, could have an adverse effect on interest margin. Variable rate
receivables are generally tied to changes in the prime rate offered by major
U.S. banks or LIBOR. Changes in short-term borrowing costs generally precede
changes in variable rate receivable yields. From a quantitative perspective,
Textron Financial assesses its exposure to interest rate changes using an
analysis that measure the potential loss in net income, over a twelve-month
period, resulting from a hypothetical change in interest rates of 100 basis
points across all maturities occurring at the outset of the measurement period
(sometimes referred to as a "shock test"). Textron Financial also assumes in its
analysis that prospective receivable additions will be match funded, existing
portfolios will not prepay and all other relevant factors will remain constant.
This shock test model, when applied to Textron Financial's asset and liability
position at June 30, 2002, indicated no material effect on Textron Financial's
net income and cash flows for the following twelve-month period.

Financial Risk Management

     Textron Financial's results are affected by changes in U.S. and to a lesser
extent, foreign interest rates. As part of managing this risk, Textron Financial
enters into interest rate exchange agreements. Textron Financial's objective of
entering into such agreements is not to speculate for profit, but generally to
convert variable rate debt into fixed rate debt and vice versa. The overall
objective of Textron Financial's interest rate risk management is to achieve a
prudent balance between floating and fixed rate debt. These agreements do not
involve a high degree of complexity or risk. Textron Financial does not trade in
interest rate exchange agreements or enter into leveraged interest rate exchange
agreements.

     Textron Financial manages its foreign currency exposure by funding most
foreign currency denominated assets with liabilities in the same currency. The
Company may enter into foreign currency exchange agreements to convert foreign
currency denominated assets and liabilities into functional currency denominated
assets and liabilities. In addition, as part of managing its foreign currency
exposure, Textron Financial may enter into foreign currency forward exchange
contracts. The objective of such agreements is to manage any remaining exposure
to changes in currency rates. The notional amounts of outstanding foreign
currency forward exchange contracts are not material.

                                        16
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

RESULTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001

REVENUES

Three months ended June 30, 2002 vs. June 30, 2001

     Second quarter 2002 revenues decreased by $15.0 million, or 9.1%, compared
to the corresponding period in 2001. The decrease in revenues reflects lower
finance charges and discounts of $24.0 million from a lower average yield (7.60%
versus 9.46% in 2001), primarily due to a lower interest rate environment,
partially offset by higher fee income of $6.5 million, principally
securitization gains, investment income and servicing income and higher
operating lease revenue of $2.5 million. Operating lease rental revenue
increased due to a higher level of average operating lease assets, primarily in
the Aircraft Finance segment.

Six months ended June 30, 2002 vs. June 30, 2001

     Revenues for the first six months of 2002 decreased by $41.6 million, or
12.4%, compared to the corresponding period in 2001. The decrease in revenues
reflects lower finance charges and discounts of $58.1 million from a lower
average yield (7.68% versus 9.82% in 2001), primarily due to a lower interest
rate environment, partially offset by higher fee income of $11.7 million,
principally securitization gains, servicing income and investment income and
higher operating lease rental revenue of $4.8 million. Operating lease rental
revenue increased due to a higher level of average operating lease assets,
primarily in the Aircraft Finance segment.

INTEREST EXPENSE

Three months ended June 30, 2002 vs. June 30, 2001

     Second quarter 2002 interest expense decreased by $21.1 million, or 30.2%,
on 4.9% higher average debt outstanding. The lower interest expense reflects a
decrease in the average borrowing rate to 3.92% from 5.87%, attributable to a
lower interest rate environment.

Six months ended June 30, 2002 vs. June 30, 2001

     Interest expense for the first six months of 2002 decreased by $52.6
million, or 35.6%, on 3.4% higher average debt outstanding. The lower interest
expense reflects a decrease in the average borrowing rate to 3.88% from 6.20%,
attributable to a lower interest rate environment.

INTEREST MARGIN

     Textron Financial's earnings are influenced by the interest margin earned
on finance receivables (i.e., the excess of revenues over interest expense on
borrowings).

Three months ended June 30, 2002 vs. June 30, 2001

     Interest margin for the second quarter of 2002 increased $6.2 million, or
15 basis points (6.93% versus 6.78% on average net investment), compared to the
corresponding period in 2001. The increase in interest margin primarily reflects
higher fee income, principally securitization gains, investment income and
servicing income.

Six months ended June 30, 2002 vs. June 30, 2001

     Interest margin increased $11.0 million, or 42 basis points (6.92% versus
6.50% on average net investment), for the first six months of 2002, compared to
the corresponding period in 2001. The increase in

                                        17
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

interest margin primarily reflects higher fee income, principally securitization
gains, servicing income and investment income.

SELLING AND ADMINISTRATIVE EXPENSES

Three months ended June 30, 2002 vs. June 30, 2001

     Selling and administrative expenses of $42.5 million increased $3.6 million
in the second quarter of 2002, compared to the corresponding period in 2001. The
increase in 2002 principally reflects $4.6 million of higher legal and
collection expenses and $1.7 million due to growth in managed receivables,
partially offset by a reduction in goodwill amortization of $3.1 million
(reflecting the change in accounting principle). Selling and administrative
expenses as a percentage of average managed receivables were 1.81% (on an
annualized basis) in the second quarter of 2002, compared to 1.73% in 2001.

Six months ended June 30, 2002 vs. June 30, 2001

     Selling and administrative expenses of $83.5 million increased $10.7
million in the first six months of 2002, compared to the corresponding period in
2001. The increase in 2002 principally reflects $8.1 million of higher legal and
collection expenses and $5.9 million due to growth in managed receivables,
partially offset by a reduction in goodwill amortization of $6.2 million
(reflecting the change in accounting principle). Selling and administrative
expenses as a percentage of average managed receivables were 1.79% (on an
annualized basis) in the first six months of 2002, compared to 1.70% in 2001.

PROVISION FOR LOSSES

Three months ended June 30, 2002 vs. June 30, 2001

     The provision for losses of $25.0 million for the second quarter of 2002
increased from $11.7 million for the corresponding period in 2001. The increase
reflects higher net charge-offs and a strengthening of the allowance for loan
losses. Net charge-offs were $22.1 million in the second quarter of 2002,
compared to $10.8 million in the corresponding period of 2001. The increase in
net charge-offs was primarily related to the small business finance division
within the Revolving Credit segment and the exited businesses within the Other
segment. Net charge-offs in the small business finance division and the exited
businesses reflect the continued weak economic conditions.

Six months ended June 30, 2002 vs. June 30, 2001

     The provision for losses of $55.4 million in the first six months of 2002
increased from $22.9 million for the corresponding period in 2001. The increase
reflects higher net charge-offs and a strengthening of the allowance for loan
losses. Net charge-offs were $49.8 million in the first six months of 2002,
compared to $27.2 million in the corresponding period of 2001. The increase in
higher net charge-offs was primarily related to exited businesses within the
Other segment, Structured Capital segment, small business finance division
within the Revolving Credit segment and the Aircraft Finance segment.

     Although management believes it has made adequate provision for anticipated
losses, realization of finance assets remains subject to uncertainties.
Subsequent evaluations of nonperforming assets, in light of factors then
prevailing, including economic conditions, may require additional increases in
the allowance for losses for such assets.

OPERATING RESULTS BY SEGMENT

     Effective December 30, 2001, Textron Financial adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". Under this Statement, goodwill and certain assets with indefinite lives
are no longer amortized and must be tested for impairment annually. Textron
Financial also adopted the remaining provisions of SFAS No. 141 "Business
Combinations" on December 30, 2001,

                                        18
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

which requires intangible assets that do not meet the new criteria set by this
statement to be classified as goodwill upon adoption. Amortization will continue
to be recorded on other intangible assets not classified as goodwill. In the
second quarter 2001, pro forma net income excluding amortization of goodwill was
$27.2 million.

     During the second quarter 2002, Textron Financial recorded an after-tax
transitional goodwill impairment charge of $15.4 million, which is reported in
the caption "Cumulative effect of change in accounting principle, net of income
taxes" retroactive to the beginning of fiscal year 2002. This after tax charge
relates to the Franchise Finance division within the Specialty Finance segment.
The impairment charge in the Franchise Finance division is primarily the result
of decreasing loan volumes and an unfavorable securitization market. No
impairment charge was appropriate for this reporting unit under the previous
goodwill impairment accounting standard, which was based on undiscounted cash
flows.

Six months ended June 30, 2002 vs. June 30, 2001

     Specialty Finance income before income taxes, distributions on preferred
securities and cumulative effect of change in accounting principle decreased by
$3.9 million despite $309 million higher average finance assets and higher
interest margin ($1.8 million). The increase in interest margin was principally
offset by higher provision for losses ($3.1 million), higher operating expenses
($1.5 million) and higher operating lease depreciation ($1.1 million).

     Revolving Credit income before income taxes, distributions on preferred
securities and cumulative effect of change in accounting principle decreased
$0.1 million despite $140 million higher average finance assets and higher
interest margin ($28.0 million). The interest margin increase was offset by
higher provision for losses ($16.5 million) and higher operating expenses ($11.6
million) due to growth in managed receivables.

     Structured Capital income before income taxes, distributions on preferred
securities and cumulative effect of change in accounting principle decreased
$7.1 million despite higher average finance assets of $190 million. The decrease
was principally due to higher provision for losses ($4.7 million), lower
interest margin ($1.8 million) and higher operating expenses ($0.6 million).

     Aircraft Finance income before income taxes, distributions on preferred
securities and cumulative effect of change in accounting principle decreased by
$12.2 million reflecting lower interest margin ($6.0 million) despite a $169
million of higher average finance assets, a write-down of retained interests in
securitized assets ($4.5 million) reflecting lower expected realization on
defaulted assets and higher provision for losses ($3.2 million). The lower
interest margin is due to competitive pressures inhibiting the ability to pass
on higher interest rate spreads to benchmark borrowing rates such as U.S.
Treasury rates and LIBOR.

     The Other segment's income before income taxes, distributions on preferred
securities and cumulative effect of change in accounting principle decreased
$12.1 million, primarily due to lower interest margin ($6.3 million) and higher
provision for losses ($5.0 million). The lower net interest margin is due to
lower average net receivables reflecting the orderly liquidation of portfolios
relating to the exited businesses.

NET INCOME

Three Months ended June 30, 2002 vs. June 30, 2001

     Second quarter 2002 net income was $18.5 million, $5.9 million or 24.1%
lower than the corresponding period in 2001. The decrease principally reflects a
higher provision for losses and higher operating expenses, partially offset by
higher interest margin.

Six months ended June 30, 2002 vs. June 30, 2001

     Net income for the first six months of 2002 was $17.3 million, $35.5
million or 67.2% lower than the corresponding period in 2001. The decrease
principally reflects the cumulative effect of change in accounting

                                        19
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

principle of $15.4 million, net of tax benefit, a higher provision for losses
and higher operating expenses, partially offset by higher interest margin.

SELECTED FINANCIAL RATIOS

<Table>
<Caption>
                                                    THREE MONTHS ENDED     SIX MONTHS ENDED
                                                   --------------------   -------------------
                                                   JUNE 30,    JUNE 30,   JUNE 30,   JUNE 30,
                                                     2002        2001       2002       2001
                                                   --------    --------   --------   --------
<S>                                                <C>         <C>        <C>        <C>
Net interest margin as a percentage of average
  net investment (1).............................    6.93%       6.78%      6.92%      6.50%
Return on average equity.........................    7.55%      10.50%      6.63%     11.46%
Return on average assets (2).....................    1.10%       1.55%      0.52%      1.68%
Ratio of earnings to fixed charges...............    1.59x       1.56x      1.54x      1.57x
Selling and administrative expenses as a
  percentage of average managed receivables
  (3)............................................    1.81%       1.73%      1.79%      1.70%
Operating efficiency ratio (4)...................    42.7%       41.6%      42.4%      39.2%
Net charge-offs as a percentage of average
  finance receivables............................    1.51%       0.76%      1.73%      0.95%
</Table>

<Table>
<Caption>
                                                              JUNE 30,   DECEMBER 29,
                                                                2002         2001
                                                              --------   ------------
<S>                                                           <C>        <C>
60+ days contractual delinquency as a percentage of finance
  receivables (5)...........................................    2.58%        2.24%
Nonperforming assets as a percentage of finance assets
  (6).......................................................    3.06%        2.13%
Allowance of losses on receivables as a percentage of
  finance receivables.......................................    2.54%        2.55%
Total debt to tangible shareholder's equity (7).............   6.21x         5.70x
</Table>

---------------

(1) Represents revenues earned less interest expense on borrowings as a
    percentage of average net investment. Average net investment includes
    finance receivables plus operating leases less deferred taxes on leveraged
    leases.

(2) Average assets include finance receivables, less allowance for loan losses,
    operating leases and other assets. Investments in leveraged leases are not
    net of deferred taxes.

(3) Average managed receivables include owned receivables plus receivables
    serviced under securitizations, participations and third-party portfolio
    servicing agreements.

(4) Operating efficiency ratio is selling and administrative expenses divided by
    net interest margin (including other income).

(5) Delinquency excludes captive receivables with recourse to Textron. Captive
    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.

(6) Finance assets include: finance receivables; equipment on operating leases,
    net of accumulated depreciation; repossessed assets; retained interests in
    securitizations; investment in equipment residuals; 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.

(7) Tangible shareholder's equity equals Shareholder's equity excluding
    Accumulated other comprehensive income or loss, less Goodwill.

Forward-looking Statements

     Certain statements in this 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

                                        20
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (CONTINUED)

other nonhistorical matters; or project revenues, income, returns or other
financial measures. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially from those
contained in the statements, including the following: (a) the extent to which
Textron Financial is able to successfully integrate acquisitions; (b) changes in
worldwide economic and political conditions and associated impact on interest
and foreign exchange rates; (c) the level of sales of Textron products for which
Textron Financial offers financing; (d) the ability to maintain credit quality
and control costs when entering new markets; (e) the actions of our competitors
and our ability to respond; (f) our ability to attract and retain qualified and
experienced personnel; (g) Textron Financial's access to debt financing at
competitive rates; and (h) access to equity in the form of retained earnings and
capital contributions from Textron.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     For information regarding Textron Financial's Quantitative and Qualitative
Disclosures About Market Risk, see "Interest Rate Sensitivity" and "Financial
Risk Management" in Item 2 of this Form 10-Q.

                                        21
<PAGE>

                          PART II.  OTHER INFORMATION

                         TEXTRON FINANCIAL CORPORATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

<Table>
<Caption>
EXHIBITS
--------
<C>       <S>
  4.1     Indenture dated as of December 9, 1999, between Textron
          Financial Corporation and SunTrust Bank (formerly known as
          Sun Trust Bank, Atlanta), (including form of debt
          securities). Incorporated by reference to Exhibit 4.1 to
          Amendment No. 2 to Textron Financial Corporation's
          Registration Statement on Form S-3 (No. 333-88509).
  4.2     Indenture dated as of November 30, 2001, between Textron
          Financial Canada Funding Corp. and SunTrust Bank, guaranteed
          by Textron Financial Corporation. Incorporated by reference
          to Exhibit 4.2 to amendment No. 1 to Textron Financial
          Corporation's Registration Statement on Form S-3 (No.
          333-72676).
 12       Computation of Ratios of Earnings to Fixed Charges
 99.1     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 99.2     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
          Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</Table>

REPORTS ON FORM 8-K

     The Company filed a report on Form 8-K on June 4, 2002, reporting under
Item 5 of Form 8-K the Company's public offering under its shelf registration
statement on Form S-3 authorizing the sale of medium-term notes.

                                        22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: August 12, 2002                     TEXTRON FINANCIAL CORPORATION

                                          /s/ THOMAS J. CULLEN
                                          --------------------------------------
                                          Thomas J. Cullen
                                          Executive Vice President and Chief
                                          Financial Officer
                                          (Principal Financial Officer)

                                        23